UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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X Annual Report Pursuant to Section 13 OR 15(d) of the Securities
--- Exchange Act of 1934 for the fiscal year ended Sept. 30, 2001
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 (IRS Employer
incorporation or organization) Identification No.)
28001 DOROTHY DR., AGOURA HILLS, CALIFORNIA 91301-2697
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(818) 706-8999, fax number: (818) 707-9354
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on December
10, 2001 as reported on the NASDAQ National Market, was approximately
$15,347,862. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of December 10, 2001, Registrant had outstanding 5,769,873 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
ELECTRONIC CLEARING HOUSE, INC.
2000 FORM 10-K ANNUAL REPORT
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TABLE OF CONTENTS
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PART I. Page
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Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . . . 15
PART II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Security Matters. . . . . . . . . . . . . . . . 16
Item 6. Selected Consolidated Financial Data. . . . . . . . . . . . 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 25
Item 8. Financial Statements and Supplemental Data. . . . . . . . . 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures. . . . . . . . . . . . 25
PART III
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Item 10. Directors and Executive Officers of the Registrant . . . . 26
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . 29
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . 31
Item 13. Certain Relationships and Related Transactions . . . . . . 33
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 34
2
PART 1
ITEM 1. BUSINESS
GENERAL
Electronic Clearing House, Inc., ("ECHO" or the "Company") derives its primary
income from being an electronic payments and transaction processor for over
60,000 merchants nationally. In support of its processing services, ECHO
maintains the status of a third-party processor with both Visa and MasterCard
for credit card processing and a licensed collection agency in 48 states. ECHO
also operates the National Check Network ("NCN"), a negative database of over 15
million check writer records accumulated and maintained through ECHO's
association with over 260 collection agencies. ECHO maintains a terminal
management subsidiary and a leasing subsidiary to support the equipment needs of
its base of merchants.
Electronic Payment Processing
ECHO processes electronic payments in the form of: Visa, MasterCard, Discover,
American Express, Carte Blanche, and Diners credit cards; Star/Honor, Interlink,
Maestro and Pulse debit cards; checks that are processed using electronic check
conversion equipment at a merchant's point of sale; paper checks that are
represented for payment electronically; and paper and/or electronic checks that
are guaranteed by ECHO.
Transaction Processing
ECHO's NCN service is recognized as the sixth largest provider of check
verification services in the nation. ECHO also processes inventory, credit card,
and/or check transactions for over 15,000 U-Haul dealers, under a contract with
U-Haul International, to track the utilization of U-Haul dealer inventory and
payment activity. ECHO's U-Haul system calculates dealer compensation,
distributes all rental information hourly to the point of final destination and
summarizes all dealer activity to U-Haul corporate on a daily basis.
Equipment and Leasing Services
ECHO provides point-of-sale ("POS") software and hardware management services.
ECHO also operates and provides a POS depot replacement and repair service to
its merchants on a national basis. If the merchant's software program in the POS
terminal malfunctions or fails, ECHO will coordinate a download of a new program
immediately through its 24/7/365 Customer Service facility. If the merchant's
POS equipment fails, ECHO will send a loaner piece of equipment, via overnight
mail, and either replace or repair the faulty unit. If a merchant chooses to
lease their POS equipment, ECHO also provides leasing terms that are very
attractive in comparison to the market.
Connectivity to ECHO
ECHO has developed and maintains a variety of methods through which a merchant
may gain access to the services of the Company. For the larger users, a
mainframe-to-mainframe connection can be established. For smaller users, several
options are possible: a PC over the internet, using various types of POS
terminals, using a fax machine and using either a cellular or a touch-tone
telephone (see "Point-of-Interaction").
The Company currently operates four wholly-owned active subsidiaries, to
coordinate its business activities.
1) MERCHANTAMERICA ("MA") (The corporate name as of September 2001, was National
Credit Card Reserve Corporation and plans are underway to change it to
MERCHANTAMERICA. For clarity purposes, the name MERCHANTAMERICA or MA will be
used). MERCHANTAMERICA is ECHO's retail provider of processing services to both
the merchant and bank markets. MERCHANTAMERICA operates the primary corporate
data center and a 24/7/365 customer service center located in Agoura Hills,
California, relating to transaction processing services which include electronic
credit card and debit card authorizations, electronic fund transfers, inventory
tracking, electronic deposits utilizing the Automated Clearing House ("ACH") for
merchants, banks and other customers. Additionally, MA manages and develops
Internet software and related communication networks that are involved in
providing transaction processing services. MERCHANTAMERICA.COM is the Company's
financial portal that allows its merchants to receive detailed transaction
histories online, access to their bank account, and many other services,
including setting up an online storefront with full e-commerce capability and
representation in the MERCHANTAMERICA.COM Directory.
3
2) ECHO PAYMENT SERVICES, INC. ("EPS") leases, rents and sells POS systems and
related equipment to merchants who utilize the ECHO network.
3) COMPUTER BASED CONTROLS, INC. ("CBC") provides system management services,
including depot repair and/or replacement of various POS terminals, printers and
check reading equipment to merchants who utilize the ECHO network.
4) XPRESSCHEX, INC. ("XCX") is the company resulting from the combination of two
check companies ECHO acquired in the past two years, Magic Software Development,
Inc. (renamed XPRESSCHEX, Inc.) and Rocky Mountain Retail Systems, Inc. (RMRS).
XCX, located in Albuquerque, New Mexico, provides a secondary corporate data
center service to the primary one located in Agoura Hills, California, and it is
the primary data center for processing check guarantee, check conversion, check
collection and National Check Network's ("NCN") verification transactions.
HISTORY OF THE COMPANY
The Company was incorporated in Nevada in 1981 under the name Bio Recovery
Technology, Inc. In January 1986, the Company changed its name to Electronic
Clearing House, Inc. and acquired Electronic Financial Systems, Inc., which was
then engaged in credit card processing. In 1986, ECHO developed the capability,
utilizing the Federal Reserve System's Automated Clearing House ("ACH"), to
deposit funds into any U.S. bank of the merchant's choice. This development
made it possible for remote banks and processors to provide the same processing
services previously available only through the merchant's local bank.
In 1985, the Company purchased CBC, a company that had expertise in computer
control systems. CBC subsequently developed a series of high performance
terminals and secure printers that have been used primarily in the money order
dispensing market by American Express, Comdata, U-Haul, the United States Postal
Service and innoVentry.
In 1995, a system utilizing CBC's terminal, ECHO's data center, and customer
support services was developed and deployed to 2,000 U-Haul dealers for the
real-time credit card authorization and management of rental equipment for
U-Haul International. The number of active dealers under the system grew to more
than 15,000 by fiscal year 2001 (see "U-Haul International"). With regard to
proprietary issues, three patent applications involved with the Company's
printer methodology have been granted (see "Patents").
In early 1996, the Company purchased Xynet, a business with specialties in the
Internet, Windows NT programming and worldwide communications networks. Through
this acquisition, the Company was able to expand its scope of acceptable
transaction input devices beyond the traditional POS systems to include
transactions submitted over the Internet and over a common telephone. Through
the expertise of the programming and management personnel resulting from this
acquisition, the Company also expanded the tools it makes available to specific
industries to utilize its services.
In 1999, ECHO acquired Magic Software Development, Inc., located in Albuquerque,
New Mexico, a check processing company. Since 1986, the Company maintained
XPRESSCHEX ("XCX"), a check guarantee service that only served California
merchants, but, with the addition of Magic's check processing capabilities, the
services provided by XCX were expanded and are now being offered on a national
basis. In fiscal 2000, Magic's corporate name was changed to XPRESSCHEX and all
XPRESSCHEX activity was moved to the new XCX entity. XCX provides and promotes
its check and electronic funds transfer ("EFT") services to other processors and
sales organizations in addition to ECHO.
In November of 1999, the Company acquired Peak Collection Services, a collection
agency in Albuquerque, New Mexico, and incorporated Peak as the Collection
Division into the XCX operation in December of 1999. Through filings and
individual testing, the XCX Collection Division has completed registration as a
collection agency in 48 of 50 states to date. Having a fully integrated,
nationally approved collection service adds considerable value to the XCX suite
of check services and allows XCX to operate as a central check clearing facility
for NCN's 260 collection agencies without each agency having to authorize such
activity.
4
In January 2000, the Company acquired RMRS located in Boulder, Colorado, which
provided a national check verification service utilizing a check database that
contained over 12 million check writer records.
In December 2000, the Company signed an agreement with Visa, U.S.A. to
participate in a POS check processing pilot program as a "Third-Party, Acquiring
Processor". Under the pilot, any one of over 14,000 Visa member banks who
choose to participate ("Participating Member") can offer check conversion
(converting a paper check to an electronic transaction at the point of sale),
check conversion with check verification and/or check conversion with check
guarantee to their merchants and utilize Visa's dedicated communications network
and banking relationships to clear check activity using direct debits from the
check writer's account.
Under the terms of the agreement, checks from financial institutions that have
chosen the Company as their third-party processor will be routed to the
Company's ACH processing system and the NCN database, which will provide the
critical infrastructure to enable electronic conversion, verification and
guarantee of such checks. Starting in July 2001, several major financial
institutions that have chosen the Company as their third-party processor will
initiate their participation in the pilot program for Visa's POS Check Service.
The POS Check Service represents a major new initiative by Visa to enable
merchants to receive direct online authorization for checks written against
consumer demand deposit accounts, similar to the authorizations provided for
credit and debit card transactions. A merchant will be able to convert a paper
check automatically to an electronic transaction and will have the option of
either verifying availability of funds or guaranteeing payment on the check.
Once authorization is obtained, the customer is required to sign a separate
sales receipt authorizing the conversion of the check transaction to an
electronic transaction. The merchant then voids the paper check and returns it
to the customer along with his or her signed sales receipt.
Visa's processing system, VisaNet, currently processes transactions for about 5
million U.S. merchants and has access to 90% of the demand deposit accounts in
the country. In the case of checks written on an account at a financial
institution participating in the POS Check Service pilot, the check will be
authorized directly by that bank. However, for financial institutions that have
chosen the Company as their third-party processor and where the check is written
on an account at a non-participating bank, the check will be verified against 48
million known checking accounts stored in the Company's NCN database.
Visa predicts that participating banks will cover 40% of the checking accounts
in America by the third quarter of 2002 and 75% by the third quarter of 2003. It
has long been the retailer's desire to verify a check against the actual bank
balance and the Company is helping make this a reality.
In May 2001, the Company acquired the assets of NCN and started to combine NCN's
3 million check writer records with the 12 million records in the RMRS database.
The combined database of 15 million records will be referred to as the NCN
database and marketed accordingly.
GENERAL SUMMARY
In management's opinion, the Company's core competency and profitability is
realized by providing merchants and banks (to offer to their merchants) with
electronic connectivity to various financial services in the credit card, debit
card and check-related markets. The Company has focused on developing the
highest number of methods of access to the Company, believing such flexibility
is key to meeting the specific needs of merchants in different stages of growth.
Due to the technical capability of the Company, new avenues of transmission and
communication have been integrated with the transaction processing services to
generate a distinctive, one-stop provider of services to the merchant
marketplace. The Company has additional expertise in designing both hardware and
software systems to integrate the Company's financially-based services into
customers' information systems. Such services have been performed for and/or
sold to customers such as U-Haul International, American Express, and the United
States Postal Service.
The Company believes that merchants will increasingly want to have their
financial information aggregated into one source rather than monitor many
providers. The Company believes the Internet offers the most logical, low-cost
method of reporting such integrated services in one location. In addition, the
Company anticipates that almost every merchant will see the need to be
represented on the Internet for marketing purposes alone and, for some, to
accommodate direct purchase activity over the Internet, commonly referred to as
"e-commerce". Based upon this belief, the Company developed and released
MERCHANTAMERICA.COM in May of 2001.
5
MERCHANTAMERICA.COM is the combination of many corporate disciplines and
desirable merchant features. It contains a national Merchant Directory of over
1.4 million merchants that is free to any merchant in the USA, whether they use
ECHO or not to process activity. It also provides any merchant in the USA with
the ability to edit and enhance their directory listing. In addition to the
Merchant Directory, an ECHO merchant can access all his transactional history,
all of his bank information, significant business and office-related services
and even build an online store and accept payment in the form of credit card or
checks with a minimum of time invested. While the Company believes that
MERCHANTAMERICA.COM is a great value to any merchant, it also provides the
Company with a low-cost method of keeping its merchants informed and involved
with the Company.
CREDIT CARD PROCESSING REVIEW
The Company is a registered Independent Service Organization and Merchant
Service Provider with Visa and MasterCard, respectively. To engage in Visa and
MasterCard processing, a cooperative relationship is required with a bank that
provides necessary sponsorship of Visa and MasterCard transactions. The Company
currently has two primary processing bank relationships (see "Banking Activity
and Relationships").
For the year ended September 30, 2001, MA accounted for approximately 83% of the
Company's revenues. MA presently provides 24-hour daily credit card processing
capability, "800" number access to customer service personnel and, as needed,
various field support services.
MA earns a steady stream of transaction and processing fees while the multiple
computers in its processing center communicate continuously with merchant
terminals, and the databases of Visa, MasterCard, American Express, Diner's
Club, Carte Blanche and Discover. Utilizing one of the numerous methods of
access to the Company, the merchants' systems dial the Company's host computers
and receive credit card authorizations for accounts, which have been
electronically verified for credit validation and other security considerations.
Electronic files are then transmitted daily by MA to the major credit card
organizations which subsequently transfer funds from the card-issuing banks to
one of MA's processing banks. At MA's direction, funds are then electronically
moved from MA's processing banks and deposited into the bank of the merchant's
choice. On a typical day, MA will make deposits to over 600 banks across the
nation on behalf of its merchant base.
In addition to electronic authorizations and deposits into the merchant's bank
of choice, the Company's software programs capture transactions, retain data and
enable merchants to review, reconcile and edit (i.e., "correct") transactions
from their business location. MA has been successful in providing various
services which include a terminal loaner program to minimize downtime, frequent
sales reports and information containing reconciliations of a merchant's
business activity and sophisticated security services utilizing the merchant's
terminal, the Company's host computers and field activity. MA utilizes several
advanced telecommunications capabilities involving manageable network design,
robust communications protocols, circuit troubleshooting, and packet switching,
in order to provide consistent and reliable services to its merchants.
MA's compensation for credit card processing is derived primarily from three
sources, the merchant's discount rate, the merchant's transaction fee and set
monthly fees. The discount rate is expressed as a percentage of the amount being
processed. Once set, this percentage is deducted from the amount of each
transaction submitted by the merchant and the net amount is deposited into the
merchant's bank account. Discount rates range between 1.5% and 3.3% and,
overall, the Company's average discount rate is 2.1%. Depending upon the
discount rate charged and the cost of clearing interchange, from 75% to 90% of
the discount rate revenue is paid to card-issuing banks, the card-issuing
organizations, and the sponsoring bank.
The transaction fee is charged for each transaction processed and the Company's
average transaction revenue is $0.17 per transaction. The Company maintains a
range from $.15 up to $0.32 per transaction, depending on the merchant/customer
interface. Both Visa and MasterCard have instituted $.05 to $.10 transaction
fees on each transaction processed that diminishes the benefit the Company
historically might see from such charges. Due to lower costs of communications
and negotiated contracts, the Company's direct costs have been lowered to a
range between $.03 and $.05 per transaction, depending upon duration and method
of transmission.
6
Over the past several years, industry consolidation has been occurring and
impressive growth in recent years in the credit card processing market has
occurred by firms through portfolio acquisitions. Such a strategy raises special
challenges that may involve supporting and integrating numerous processing
methodologies, initiating quality customer support and field support services
and, probably most difficult, maintaining merchant relationships. Merchant
portfolios can be purchased but the merchants are under no obligation to
continue to utilize the services of the new owner.
The Company's data center reliability and the costs associated with
communication activities of MA are presently favorable but no assurance or
guarantee can be made that such conditions will continue. Conversely, both Visa
and MasterCard have historically increased their interchange fees and
transaction fees to the point that building a profitable transaction business
solely based upon credit card activity has become an increasingly difficult
task. Fortunately, the Company has a base of processing activity that is
profitable and the Company has added other forms of transaction processing
(checks) that are not affected by such changes. Material changes in these areas,
such as interchange fees, could reduce the profitability expected to be seen
from MA operations in the future.
CHECK PROCESSING REVIEW
In 1987, the Company initiated its check guarantee services to merchants located
in California so a merchant could accept a customer's check with impunity. To
support merchants in other states, the Company has historically supported
alternative check verification and guarantee services to operate concurrently
with the Company's credit card software in the merchant's terminal. In 1999, the
Company acquired Magic Software Development, Inc. (renamed "XPRESSCHEX") that
provided ACH settlement services and supported a membership-based national
verification service for collection agencies. In November of 1999, the Company
acquired Peak Services, a collection agency, and integrated its operation into
the XPRESSCHEX group location in Albuquerque, New Mexico. In January 2000, the
Company acquired Rocky Mountain Retail Systems, Inc. ("RMRS"), another provider
of national check verification services. RMRS also originated and maintained
National Check Information Service ("NCIS"), a database of bad-check writers
that was available to merchants and collection agencies across the nation on a
fee per transaction basis. In May 2001, the Company acquired the assets of
National Check Network ("NCN"). In September 2001, the Company combined its
check services all into one corporate entity under the name of XPRESSCHEX, Inc.,
combined the negative and positive databases of NCN and NCIS, and decided to
promote its check verification services using only the NCN name in the future.
The combination of the Company's check services, XPRESSCHEX's ACH set of
services, XPRESSCHEX's collection capabilities and the verification services
through the NCN database, constitute the basis of a fully integrated national
check service company. The merchant pays either a fixed fee for each transaction
or a fee based on the amount of the check for each transaction. The following
services are either being offered or will be offered in the near term by the
Company.
Check Verification
For this fee, the Company will search NCN, its proprietary database of bad-check
writers, attempting to match a specific piece of information (driver's license
number, Magnetic Ink Character Recognition ["MICR"] number, etc.) provided by
the merchant. A match identifies the check writer as an individual (or
business) known to the provider to have current, delinquent check-related debts.
Upon notification of this match (via a coded response from the provider), the
merchant decides whether to accept (at his own risk) or decline the check. The
provider offers no guarantee that the check will be honored by the check
writer's bank and makes no promise of reimbursement if the check is dishonored
by the bank.
Check Guarantee
For this fee, the Company will search NCN for the piece of identifying
information provided by the merchant. If the identifying information is
matched, the Company issues a coded response instructing the merchant to refuse
to accept the check. If the identifying information is not matched, a coded
response advises the merchant that the Company has guaranteed payment on that
item. If that check is subsequently dishonored by the check writer's bank, the
merchant is reimbursed by the Company.
7
Electronic Check Conversion ("ECC")
The most recent new check service to be announced nationally is called "check
conversion". The merchant slips a customer's check either through a check reader
that reads the MICR line on the check or a check imager that records the total
image of the face of the check and the merchant enters the amount of the check
into the system. The merchant then returns the check to the customer and the
electronic image, captured by the reader, allows the Company to settle the check
transaction electronically. This new system is finding quick acceptance by
customers and banks but slow acceptance by merchants generally. Customers like
it because they get their check back immediately and still have their hard copy
of the transaction. Banks like it because no paper has to be handled by the bank
to settle the transaction. Merchants are adopting it only if their check volume
justifies the capital investment in equipment, an investment of around $600. One
of the key advantages a merchant sees is that an electronic record is settled in
priority to paper-based transactions, which assures an electronic record first
access to limited funds in a customer's account.
Accounts Receivable Check Truncation ("ARCT/Lockbox")
For companies that receive large volumes of checks in the mail, such as utility
companies and ISP's, a need exists to convert these checks to an electronic
settlement process to speed processing and lower costs. In order to provide
such services, a full tracking methodology must exist to assure all rejected
items are ultimately settled. Utilizing the Internet, XPRESSCHEX has developed
a fully integrated reporting and tracking system that addresses the
informational needs of companies who wish to automate check processing in this
manner.
RCK (Check Re-presentment)
XPRESSCHEX is presently providing a service to merchants that allows the
merchant to advise its bank that a returned check should be sent to the
XPRESSCHEX data processing center in Albuquerque, New Mexico, rather than return
it to the merchant. Upon receipt, XPRESSCHEX converts the check to an electronic
ACH transaction for resubmission through the ACH network and images the check
for possible collection activity, should it become necessary. The full face
value of the check is returned to the merchant upon collection and a collection
fee charged to the check writer, usually in the range of $15 to $25, is retained
by XPRESSCHEX as payment for its RCK services.
XPRESSCHEXONLINEsm and XPRESSCHEXPLUSsm
A check can be presented as a form of payment over the Internet.
XPRESSCHEXONLINE allows any e-commerce site to accept a check as payment. The
service includes full reporting of all such activity. XPRESSCHEXPLUS allows a
batch of check data to be sent to XPRESSCHEX for processing and is commonly used
by mail order or phone order type of businesses.
The direct costs of providing check services varies based upon transaction
communication timeframes, data file size, banking fees for access to the ACH and
reserve allocations for potential losses, etc. Gross margins in check-related
services can routinely exceed 50% over external costs. The Company is actively
promoting these services to its national base of merchants.
RISK OF PROCESSING CREDIT CARD AND CHECK TRANSACTIONS
The Company assumes the financial liability for any merchant-based fraudulent
use of credit card and/or check information. To address this potential
liability, the Company has developed and deployed the ECHODETECT system that
performs electronic surveillance and monitoring of fraudulent credit card or
check use by merchant. Despite this effective tool, the Company could incur
losses as the result of the unauthorized or fraudulent use of credit cards or
checks by unscrupulous merchants, which could, depending on the size of the
losses, have a materially adverse effect on the Company. The Company does not
maintain any insurance to protect it against any such losses and is not aware of
any insurance that could be acquired at a reasonable cost. Historically, the
Company has allocated ten basis points (.001) of daily processing activity to
serve as a reserve against any losses that it may sustain due to such activity.
The Company has approximately $253,000 and $336,000 in reserve against
chargeback receivables for the fiscal years ended 2001 and 2000, respectively.
The Company sustained chargeback losses of $272,000 and $528,000 for the fiscal
years ended 2001 and 2000, respectively. Over the past 16 years that the
Company has made automatic reserve contributions, no merchant loss has exceeded
the reserve during the period such losses were realized. Based upon this fact,
the Company believes this mechanism of allocating daily from processing revenues
to a reserve to address these obligations when they arise will be adequate to
address the inherent risks associated with merchant processing.
8
BANKING ACTIVITIES AND RELATIONSHIPS
To engage in Visa and MasterCard processing, a cooperative relationship is
required with a bank, which provides necessary sponsorship for the merchants to
process Visa and MasterCard transactions. From 1997 to 1999, the Company had
four processing bank relationships: Imperial Bank, Los Angeles, California;
First Charter Bank, Beverly Hills, California; First Regional Bank, Los Angeles,
California; and The Berkshire Bank, New York, New York. In 1999, the Company
acquired the merchant portfolio previously processed through Imperial Bank and
moved merchants from the sponsorship of Imperial Bank to First Regional Bank.
Multiple bank relationships are desirable due to potential changes that can
occur in the banking market wherein one of the Company's banks might be acquired
and the new owner not desire to continue the relationship for any reason.
In October 2000, the Company terminated its processing relationship with First
Charter Bank. The Company also initiated legal proceedings to recover processing
fees from First Charter Bank that the Company believes have been erroneously
charged.
The Company filed a bank application with the FCC in January 2000 and
subsequently withdrew the application in April 2001, mainly due to the
uncertainty of the market condition and the Company's stock price. The Company
has no plan to re-file another application at the present time.
U-HAUL INTERNATIONAL
The U-Haul program began in 1995 after a year of development of special software
by the Company. The software operates on CBC's EB920 terminal, provides credit
card authorization, and keeps track of available inventory at the dealer's site.
The system also prepares the rental contract between the dealer and the customer
and reports the activity electronically to the corporate office, thereby
eliminating the need for a U-Haul dealer to manually prepare weekly summary
reports of rental activity. The system tracks all financial data and forwards
both rental and financial data daily to ECHO's data center. ECHO distributes the
rental data on an hourly basis around the nation to the points of destination.
This allows a receiving dealer to accept reservations for rental of the specific
equipment prior to the equipment's actual arrival.
Revenues are derived from equipment sales to U-Haul and income resulting from
daily transaction processing services provided to dealers and U-Haul Corporate.
U-Haul transaction activity constitutes a significant portion of the Company's
growing profitability. During fiscal year 2001, the Company entered into a
revised three-year contract with U-Haul International, which covers processing
services, software development, data distribution, equipment purchases/warranty,
customer support, and consulting. The contract has renewal provisions for
extending the term. The Company presently serves approximately 15,000 U-Haul
dealers.
INTERNET
The Internet continues to be one of the most widely discussed technologies in
the market today. Although recent newspaper and magazine headlines have
announced the "demise of the dot com," Internet-based merchants and electronic
stores continue to constitute a significant portion of the Company's loyal
customer base, and continue to play a strong role in our ongoing business.
The Company provides three primary services based on Internet technologies,
ECHONLINE, ECHONLINE Batch and MERCHANTAMERICA.COM. Using the Internet as a
transmission medium, the ECHONLINE service allows merchants to submit individual
credit card and electronic check transactions for processing in real time, while
the ECHONLINE Batch service allows merchants to submit these same types of
transactions as batch files. The Company markets a number of branded products,
all of which use one or the other of these services as the underlying mechanism.
MERCHANTAMERICA.COM is the Company's direct reporting tool to its merchants and
also provides many additional services to the merchants that neither ECHONLINE
or ECHONLINE Batch were designed to provide.
9
During the fiscal years 1997-2001, the Company's Internet transaction volume
increased at a consistent rate of approximately 400% per year. Numerous
developers and development partners have contributed to this success. In the
time since the initial beta release of ECHONLINE in 1996, dozens of interfaces
to ECHONLINE and ECHONLINE Batch have been developed and have been installed on
a wide variety of operating system platforms. Interfaces have been developed as
PHP Classes, Java Classes, Windows COM objects, Allaire Cold Fusion tags, Perl
scripts, and Miva payment modules. The Company has assembled the best of these
interfaces on the www.openECHO.com Web site and has made them available as
downloads free of charge to developers. Merchants and developers who have
acquired this software have been able to process transactions with ECHO within a
day of acquisition.
Security
Despite the growing acceptance of Internet-based transactions, there are still
lingering questions among consumers regarding the actual safety of their
transactions. The Company's Internet offerings are based on Secure Socket Layer
(SSL), which has become a de-facto standard among the industry. In addition,
the Company closely monitors and accommodates, where possible, developing
programs, such as the Verified by Visa program, that provide additional levels
of cardholder security.
POINT-OF-INTERACTION
One of the Company's core beliefs is that the Company must accommodate as many
different "point-of-interaction" entry methods as possible in order to build the
credit card and check processing services business, while concentrating on those
methods and techniques that will provide the most leverage for the Company. To
these ends, the Company has developed the following programs and services:
Third-Party Applications
Many industries (e.g. restaurants, hotels) rely on third-party-developed
applications running on PC-compatibles and other equipment to support their
point-of-interaction needs. To support these clients, the Company formalized
and published POS interface specifications on its host computers, developed a
conformance certification service/process, and widely encouraged third-party
developers to use this free certification service and associated materials to
build the Company's point-of-interaction interfaces into the third-party
products.
XPRESSCHEXPLUS
The XPRESSCHEXPLUS system is an electronic process whereby a mail
order/telephone order-based merchant may collect checking account data from
numerous customers and submit the file to ECHO in order to electronically move
funds from the customer's checking account into the merchant's account. This
service eliminates the need for paper checks to be received and processed by the
merchant.
ECHOTEL(R)
Historically, the Company has utilized a POS terminal located at the merchant's
place of business, the industry standard method of data entry. The purchase of
an electronic terminal is sometimes not economically feasible to a merchant with
low monthly credit card volume or to a business that performs services at their
customer's site (e.g., appliance repair, etc.). To address the needs of these
retail business segments and provide access to electronic authorization and
deposit services without the obligation to purchase equipment, the Company
developed and deployed the ECHOTEL program permitting a merchant to submit POS
transactions via any touch-tone telephone. This service utilizes Interactive
Voice Response ("IVR") to prompt such merchants through the POS process,
providing them with immediate credit card authorizations.
ECHOTERM(R)
The Company maintains compatibility with the most common POS terminals in the
nation built by VeriFone. It also maintains compatibility with its own series of
systems sold over the past years. As a group, these POS terminals are referred
to as the ECHOTERM program.
ECHOLINK(R)
In 1998, the Company announced the ECHOLINK program, an Internet-based service
that allowed any merchant to review their processing activity in a secure manner
over the Internet. This service was a precursor to MERCHANTAMERICA.COM that has
added significant features to the ECHOLINK service. Based upon that fact,
ECHOLINK will not be a continuing product offering in the future.
10
ECHONET(R)
In 1999, the Company announced ECHONET, an Internet browser-based service that
allows a merchant to enter credit card data either manually or through a card
reader and receive an immediate authorization from the Company. ECHONET meets
the needs of retail merchants who have Internet access and also call center type
of businesses that desire operators to have immediate access to credit card
authorization capability while on the phone with a caller.
MERCHANTAMERICA.COM
The Company announced the release of MERCHANTAMERICA.COM in March 2001.
MERCHANTAMERICA.COM combines three common portals into one for ECHO merchants:
1) E-commerce portal: this allows the merchant to set up a store on the
Internet and to accept credit card or check payment through that
store.
2) Financial portal: this provides detailed transaction history of all
financial activity including credit card, check and collection
transactions.
3) Business service portal: this provides online access to hundreds of
key business relationships (airlines, shipping services, hotel, car
rentals, etc.), presented in a simple, easy-to-use fashion.
Equipment Design and Manufacture
Through the years, the Company has developed software that enables the Company's
host computer to interface with the largest POS manufacturer, VeriFone
International, who is estimated to have a 65% share of the POS terminal market.
The acquisitions of the check services companies in 1999 and 2000 significantly
expanded the number of terminal manufacturers that connect to the Company for
check-related services. The Company is currently developing credit card
processing software to be used on these new POS platforms so that all of the
Company's services can be accessed by merchants who own such systems. In
addition, the Company is reviewing Internet capable POS systems (TCP/IP) and
plans to adopt a standard equipment package around which it can design a
merchant processing service that is fully Internet-based.
Patents
The Company presently has three patents with respect to certain of its
proprietary technology in operating printers and reading financial documents.
The Company has obtained a patent on its method of electronically sensing the
serial number of a document. This method relies on the use of its patented
ECHOSYMBOLOGYTM bar code. The patent describes a unique method of illuminating
a form from one side while resolving the bar code image from the opposite side.
No additional optical components are required beyond the basic illumination
source and the CCD image array.
The Company developed and obtained a patent to a proprietary type of bar code
reading technology, designated as font of machine-readable patterns.
The Company has also obtained a financial document dispensing apparatus and
method patent for particular printing techniques and reporting presentations
used in the preparation and tracking of financial documents. This patent
provides an opportunity for promotion of its financial document dispensing
devices as the issuance of financial documents becomes more common in non-bank
environments.
The Company has filed for a patent related to Internet-based check submission
and subsequent re-presentment methodologies but no assurance can be given that
such patent filing will be granted.
There can be no assurance that, if challenged, these patents can be judicially
sustained. In the absence of such protection, competitors would be able to
duplicate the Company's products. Furthermore, even though the Company has
patents, there can be no assurances that the Company's competitors will not
independently develop or patent technologies that are substantially equivalent
or superior to the Company's technologies.
The Company has expended considerable time and resources to develop information
systems to serve its merchant base. There is no intellectual property
protection on the computer equipment and database that comprise these systems.
Additionally, although the Company believes that its products and technologies
do not infringe upon the proprietary rights of any third parties, there can be
no assurance that third parties will not assert infringement claims against the
Company. Similarly, infringement claims could be asserted against products and
technologies which the Company licenses, or has the rights to use from third
parties. Any such claims, if proven, could materially and adversely affect the
Company's business and results of operations.
11
LEASING
The Company sells and leases terminals and printers to retail merchants through
its subsidiary, ECHO Payment Services, Inc. ("EPS"). EPS cultivates
relationships with independent sales organizations, agent banks, and trade
associations and has formed strategic alliances with other marketing groups to
increase equipment sales and leases. Servicing and collection is performed by
the Company.
REAL ESTATE
The Company presently owns undeveloped land in seven western states. The
Company has held all of its land properties for over ten years and does not have
current appraisals nor title insurance on its real estate holdings. Some of the
properties are held pursuant to quitclaim deeds. The real estate holdings are
carried on the Company's books at the lower of cost or estimated fair value less
estimated costs to sell.
MARKETING
Since 1997, the Company has slowed its reliance on a single Independent Sales
Organization (ISO) that it had utilized for the prior five years to acquire new
merchant accounts. The Company has set up several referral programs with several
ISO's and, over the past year, approximately 20% of new accounts were generated
by the ISO referral program. The balance of the Company's new merchant accounts
were generated through the Internet, the ECHOTEL program, the ECHONET program
and direct merchant referrals by existing merchants to the Company.
The acquisitions of Magic Software Development, Inc. and Rocky Mountain Retail
Systems Inc., in 1999 and 2000, respectively, have broadened the number of sales
channels available to the Company. Additionally, cross-selling of check services
to ECHO's existing base of merchants and U-Haul dealers is believed to be a
significant opportunity for the Company to maximize earnings with a minimum
marketing expense.
Management believes the Company is unique in the number of methods of access it
allows, the combination of transaction types that it manages directly, its
ability to integrate additional services, based upon customer needs, and in its
ability to support each merchant through one vertically integrated source. In
most competitive instances, such services are performed by different parties
and, as a consequence, merchants become frustrated trying to solve a problem,
not knowing which party to call. The Company believes its commitment to
maintaining a common Customer Support group serving ECHO, XPRESSCHEX and NCN
merchants and members on a 24/7/365 basis will become a distinctive advantage to
merchants in choosing ECHO over its competitors.
The Company's marketing strategy is as follows:
1) To maximize its cross-selling activities to its existing base of
merchants. Including all its transaction processing subsidiaries, the
Company serves over 60,000 merchants.
2) To sell its integrated suite of check, credit and debit card-related
processing services to small banks. The Company believes it has a
combination of services that makes it a very attractive partner to
small banks who will never develop or have access to these set of
services from a single provider.
3) To enhance and market MERCHANTAMERICA.COM. The Company believes a
centralized portal wherein all financial and informational data can be
accessed by merchants provides a marketing tool to its sales channels
and becomes a sales advantage that the Company's sales channels can
use to generate additional merchant referrals.
4) Visa POS Check Service. Since signing the agreement with Visa in
December 2000, the Company has launched several Visa POS Check
Programs as a Third-Party Processing Agent. The launch of the Visa POS
Check Program for Cincinnati, Ohio-based Provident Bank is scheduled
for the first quarter of 2002. The Company is the dominant Third-Party
Processing Agent for Visa POS Check services and the Company is only
aware of BankServ (San Francisco, CA) as the only other certified
"Third-Party Processor" to date.
12
The Company was certified as an "Acquirer Processor" in January of
2001 and currently, the Company is aware that Vital Processing
Services (based in Tempe, AZ) is the only other Acquirer Processor for
the Visa POS Check program. The Company's significant advantages
offered to banks would include the value of the NCN database, the
Company's flexible point-of-sale applications and its proven Web-based
merchant reporting service.
The Company, through its association with First Regional Bank, will
introduce Visa POS Check Service as a direct product to new and
existing customers in 2002. This is expected to give the Company a
significant "first to market" advantage and provide its existing
customer base with the latest technology for check acceptance.
5) Private Label program. The Company's Private Label ACH program is
currently available to several banks/acquirers and ISO's. The Private
Label ACH program allows a bank or ISO to private label the Company's
electronic check conversion ("ECC") services and/or XPRESSCHEXONLINE
and XPRESSCHEXPLUS products under their own brand name for selling
either alone or part of a combination of services. The Private Label
ACH program greatly extends the Company's ACH Check product reach
nationwide, powered by the bank's or the ISO's own marketing and sales
initiatives with the Company's processing strength underneath.
Markets can change for numerous reasons, e.g., new technology, economic factors,
regulatory requirements, etc., many of which are not within the control of the
Company so it can not be assured that the marketing efforts of the Company will
be or continue to be effective or that the Company will see or continue to see
an increase in processing volume in the future.
COMPETITION
The Company enjoyed the distinction of being listed as the sixth largest
provider of check verification services in the USA in the June 2001 issue of The
Nilson Report, a monthly financial subscription-based newsletter. The five
providers of verification services in higher volume than ECHO were SCAN,
TeleCheck, Equifax, IPS and NDC (Global Payment Services). In management's
opinion, the provider who the Company most parallels in terms of range of
processing services is TeleCheck.
The industries in which the Company operates are highly competitive and are
characterized by rapid technological change, rapid rates of product obsolescence
and introductions of competitive products often at lower prices and/or with
greater functionality than those currently on the market. The Company currently
is not a major player in the industries in which it competes, and, in
management's opinion, the Company's share of the markets in which it competes is
relatively small in comparison to most of its competitors. Many of the
Company's competitors have substantially greater financial and marketing
resources than the Company. As a result, they may be better able to respond
more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products and services than is the Company.
Furthermore, in the future, the Company may encounter substantial additional
competition. There can be no assurance that the Company's current products and
services will not become obsolete, or that the Company will have the financial
resources, technical expertise, marketing capabilities or manufacturing and
support facilities to compete successfully in the future.
The introduction of products and services embodying new technologies and the
emergence of new industry standards can, in a relatively short period of time,
render existing products obsolete and unmarketable. The Company believes that
its success will depend upon its ability continuously to develop new products
and services and to enhance its current products and to introduce them promptly
into the market. There can be no assurance that the Company will be successful
in developing and marketing new product enhancements, new products or services
that respond to technological change or evolving industry standards. There can
be no assurance that the Company will not experience difficulties that could
delay or prevent the success or development, introduction and marketing of these
products, enhancements and services, or that any new product, product
enhancement and services it may introduce will achieve market acceptance.
Failure to develop and introduce new products, product enhancements or services,
or to gain customer acceptance of such products, product enhancements or
services in a timely fashion could harm the Company's competitive position and
materially adversely affect it.
13
EMPLOYEES
The Company employed 162 persons at September 30, 2001, none of whom are
represented by a labor union. The Company's headquarters are based in Agoura
Hills, California, with offices in Westlake Village, California; Albuquerque,
New Mexico; Boulder, Colorado; and Kansas City, Kansas. Management believes
that its employee relations are good at the present time.
FORWARD LOOKING STATEMENTS
When used in the Business section (Item 1.) or elsewhere in this document, the
words "believes", "anticipates", "expects", "contemplates", and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Those risks and
uncertainties included changes in economic conditions locally and nationally,
and changes in laws and regulations affecting the Company's primary lines of
business. The Company undertakes no obligation to publicly release the results
of any revisions to those forward-looking statements, which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
ITEM 2. PROPERTIES
In October 1994, the Company purchased the three-story, 13,500 square foot
building in Agoura Hills, California it currently occupies for $880,000. The
Company currently has a note collateralized by this building. The current
monthly debt service is approximately $7,000. This building houses the
Company's headquarters and computer facilities.
The Company leases real property in Agoura Hills and Westlake Village,
California; Albuquerque, New Mexico; Boulder, Colorado; and Kansas City, Kansas,
under various agreements, which expire at various times over the next two years.
The total lease payments are approximately $14,000 per month.
The Company owns several pieces of raw land for investment consisting of four
noncontiguous parcels in Missouri totaling approximately five acres, two
noncontiguous parcels in Texas totaling approximately forty-four acres, one acre
in Castilla County, Colorado, one-third acre in Eureka County, Nevada, a single
lot in Arrowhead County, Washington, a single lot in Ventura County, California,
three acres in Independence County, Arkansas, and 498 acres in San Bernardino
County, California. The Company has entered into an agreement with a party to
represent and sell its properties.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various lawsuits arising in the ordinary course of
business.
On May 8, 1998, the Company and Premiere Lifestyles International Corporation
executed a document entitled "Letter of Commitment" which contemplated the
possible formation of a joint venture between the parties. On May 26, 2000,
Premiere filed a complaint against the Company in the Superior Court of the
State of California, Los Angeles County alleging that the Letter of Commitment
was a binding contract creating the joint venture and that the Company had
breached its obligations under that contract, misappropriated trade secrets,
conducted unfair business practices and interfered with Premiere's contractual
and business relationship with other businesses and as a result Premiere
suffered $10,000,000 in lost revenues and profits. Premiere is seeking monetary
damages for each of the causes of action in its complaint, including lost
revenue and profits of $10,000,000.
On March 13, 2001, the Company filed an answer and a cross-complaint against
Premiere and individuals Richard G. Stewart and Richard J. Stewart alleging
among other things intentional and negligent misrepresentation, unfair business
practices, breach of fiduciary duty, breach of covenant of good faith and fair
dealing. The Company is seeking damages representing recovery of out of pocket
advances to Premiere of $30,000 and the value of software development and
consultation requested by Premiere in excess of $250,000. The matter went to
trial in October of 2001 and is currently under submission by the court.
Although the Company believes that these claims are without merit there is no
assurance that the ultimate resolutions of these claims will not result in
material liability to the Company.
14
The Company is also involved in a collections lawsuit filed by the Company
against First Charter Bank ("FCB") for amounts owed to the Company. Based upon
current information, management, after consultation with legal counsel, believes
that the collections suit against FCB will also have no material effect upon
either the Company's results of operations or its financial positions
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Two matters were submitted to a vote of Security Holders during the fiscal year
ended September 30, 2001 at the Annual Shareholders' Meeting held on February 2,
2001. A majority of shareholders' votes approved two issues: (1) election of
one director; and (2) ratification and approval of auditors. One matter was
submitted to a vote of Security Holders during the fiscal year ended September
30, 2001 at a Special Meeting of Stockholders held on September 7, 2001. A
majority of shareholders' votes approved the adoption and approval of an
amendment to the Amended and Restated Articles of Incorporation, which provides
for a one-for-four (1:4) reverse stock split of the issued and outstanding
shares of the Company's common stock.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Position
--------------------------- -------------------------
Joel M. Barry Chairman of the Board,
Chief Executive Officer
Alice L. Cheung Chief Financial Officer,
Treasurer
Lawrence M. Brown Vice President, Chief
Information Officer
Jesse Fong Vice President,
Information Systems
David Griffin Vice President,
Check Services
Geoffrey Masaki Vice President,
Special Programs
Rick Slater Vice President, Chief
Technology Officer
Patricia M. Williams Vice President, Corporate
Program Management
Jack Wilson Vice President, Credit
Card Services
Donna L. Rehman Corporate Secretary
R. Marshall Frost Counsel
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
SECURITY MATTERS
Since January 17, 1986, the Company has been trading on the over-the-counter
market under the name Electronic Clearing House, Inc. On October 2, 1989, the
Company was accepted for listing on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") and trades under the symbol of
"ECHO". The following table sets forth the range of high and low prices for the
Company's Common Stock during the fiscal periods indicated. The prices set
forth below represent quotations between dealers and do not include retail
markups, markdowns or commissions and may not represent actual transactions.
The prices below also reflect the effect of a one-for-four (1:4) reverse split
of common stock in September 2001. Moreover, due to the lack of an established
trading market for the Company's common stock, such quotations may bear no
relationship to the fair market value of the Company's common stock and may not
indicate prices at which the Company's common stock would trade in an
established public trading market.
FISCAL YEAR ENDED
SEPTEMBER 30 High Low
2001
----
First Quarter $ 6.25 $2.00
Second Quarter $ 5.25 $2.19
Third Quarter $ 4.12 $2.28
Fourth Quarter $ 3.64 $1.24
2000
----
First Quarter $14.75 $4.00
Second Quarter $27.00 $9.88
Third Quarter $15.88 $7.25
Fourth Quarter $ 9.50 $5.75
The prices set forth above are not necessarily indicative of liquidity of the
trading market. Trading in the Company's common stock is limited and sporadic,
as indicated by the average monthly trading volume of 2,665,969 shares for the
period from October 2000 to September 2001. On December 10, 2001, the closing
representative price per share of the Company's common stock, as reported
through Nasdaq in the over-the-counter market, was $2.66.
HOLDERS OF COMMON STOCK
As of September 30, 2001, there were approximately 880 record holders and 4,900
beneficial holders of the Company's Common Stock, with 5,769,873 shares
outstanding. The number of holders of record is based on the actual number of
holders registered on the books of the Company's transfer agent and does not
reflect holders of shares in "street name" or persons, partnerships,
associations, corporations or other entities identified in security position
listings maintained by depository trust companies.
DIVIDEND POLICY
The Company has not paid any dividends in the past and has no current plan to
pay any dividends. The Company intends to devote all funds to the operation of
its businesses.
16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data,
which should be read in conjunction with the Consolidated Financial Statements
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included at items 7 and 8 below. The following data, insofar as they
relate to each of the five years ended September 30, have been derived from
annual financial statements, including the consolidated balance sheet at
September 30, 2001 and 2000 and the related consolidated statement of operations
and of cash flows for the three years ended September 30, 2001, and notes
thereto appearing elsewhere herein.
Year Ended September 30
---------------------------
2001 2000 1999 1998 1997
-------- -------- ------- -------- --------
( ----- AMOUNTS IN THOUSANDS, EXCEPT PER SHARE ----- )
STATEMENT OF OPERATIONS DATA:
- -----------------------------
Revenues . . . . . . . . . . . . . . . . . . $29,943 $28,340 $23,828 $21,063 $18,623
Costs and expenses . . . . . . . . . . . . . 29,380 28,324 22,636 19,852 18,103
-------- -------- ------- -------- --------
Income from operations . . . . . . . . . . . 563 16 1,192 1,211 520
Interest income (expense), net . . . . . . . 106 196 95 14 (138)
Other income (expense), net. . . . . . . . . 350 312 -0 (35) (50)
-------- -------- ------- -------- --------
Income before income tax
(provision) benefit . . . . . . . . . . . . 1,019 524 1,287 1,190 332
(Provision) benefit for income taxes . . . . (585) (233) 1,331 (36) (4)
-------- -------- ------- -------- --------
Net Income . . . . . . . . . . . . . . . . . $ 434 $ 291 $ 2,618 $ 1,154 $ 328
======== ======== ======= ======== ========
Net Income per share-basic . . . . . . . . . $ 0.07 $ 0.06 $ 0.58 $ 0.31 $ 0.10
Net Income per share-diluted . . . . . . . . $ 0.07 $ 0.05 $ 0.45 $ 0.21 $ 0.07
Weighted average number of common
shares and equivalents outstanding-basic. . 5,797 5,257 4,536 3,744 3,334
Weighted average number of common
shares and equivalents outstanding-diluted. 5,964 5,825 5,825 5,459 4,963
BALANCE SHEET DATA:
- -------------------
Working capital. . . . . . . . . . . . . . . $ 5,693 $ 6,029 $ 5,010 $ 3,611 $ 2,054
Current assets . . . . . . . . . . . . . . . 8,131 7,595 6,159 5,154 3,047
Total assets . . . . . . . . . . . . . . . . 18,921 17,013 12,932 8,025 6,084
Current liabilities. . . . . . . . . . . . . 2,438 1,566 1,149 1,543 993
Long-term debt, and payable to
stockholders and related parties,
less current portion. . . . . . . . . . . . 744 767 599 639 681
Total stockholders' equity . . . . . . . . . $15,739 $14,680 $11,184 $ 5,843 $ 4,410
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion of the financial condition and results of operations of
Electronic Clearing House, Inc. ("ECHO" or the "Company") should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere herein. This discussion contains forward-looking statements,
including statements regarding the Company's strategy, financial performance and
revenue sources, which involve risks and uncertainties. The Company's actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those
set forth elsewhere herein.
OVERVIEW
ECHO provides credit card authorizations, debit card authorizations, electronic
deposit services, check guarantee, check verification, check conversion,
accounts receivable check truncation (ARCT/Lockbox), check collection, RCK
(check re-presentment), inventory tracking services and various Internet
services to retail and wholesale merchants and U-Haul dealers across the nation.
In addition, the Company develops and sells and leases electronic terminals for
use by its customers and other processing companies.
RESULT OF OPERATIONS
FISCAL YEARS 2001 AND 2000
NET INCOME. Electronic Clearing House, Inc. recorded income of $1,019,000 before
income tax provision for fiscal year 2001, as compared to $524,000 in fiscal
year 2000, an increase of 94.5%. Net income after tax provision for fiscal year
2001 was $434,000, as compared to $291,000 in net income for fiscal year 2000,
an increase of 49.1%. Earnings for both basic and diluted shares were $.07 in
fiscal year 2001, as compared to $.06 per basic share and $.05 per diluted share
for fiscal year 2000.
REVENUE. Total revenues for fiscal year 2001 were $29,943,000, an increase of
5.7% over revenues of $28,340,000 for fiscal year 2000.
Revenues derived from the electronic processing of transactions are recognized
at the time the transactions are processed by the merchant. Bankcard and
transaction processing revenue increased 4.7%, from $23,902,000 in fiscal year
2000 to $25,017,000 for fiscal year 2001. This increase was primarily the result
of a 4.0% increase in bankcard processing volume year-over-year and a 14.3%
increase in U-Haul transaction processing revenue due to additional dealers
being added over the prior year. These increases were partially offset by the
reduction in processing revenue from the innoVentry bankcard processing joint
venture, which was terminated in September 2000.
The Company entered into an amended contract with U-Haul in September 2001 and
thereby extended the contract for another three-year term. The Company currently
serves approximately 15,000 U-Haul dealers nationwide.
Check related revenues increased from $1,979,000 for fiscal year 2000 to
$4,479,000 in fiscal 2001, a 126.3% increase. This was attributable to the
additional check services being offered to the merchants in the current fiscal
year and the continued higher growth experienced in the check-related business
segment. Management believes that the growth in check related activities will
continue to outpace the growth in the bankcard processing activities.
The Company has fully integrated the check services, such as check verification,
check conversion, check guarantee, check re-presentment, along with debit and
credit card transactions through a VeriFone terminal platform. This is one of
the first terminal applications available in the market today that includes
check conversion and captures check images with a scanner. The new terminals
and their applications are being offered to all existing merchants and all
U-Haul dealers. Management believes that combining both the credit card and
check services onto one platform would reduce the merchant's churn rate. The
Company is also marketing these check services through various sales channels.
In July 2001, U-Haul awarded the Company a bid for the U-Haul Check Fee Saver
Program for its independent dealers who participate in the U-Haul Preferred
Dealer Program. U-Haul had previously awarded the Company a bid to offer credit
card processing to its independent dealers. At the present time, approximately
1,100 U-Haul dealers had chosen the Company to be their third-party credit card
processor.
18
Overall, total processing and transaction revenue increased from $25,677,000 for
fiscal 2000 to $29,096,000 for fiscal 2001, an increase of 13.3%.
Revenue related to terminal sales is recognized when the equipment is shipped
and title transferred to the customer. Terminal sales revenue for fiscal
2001was $447,000, which represented a decrease of 81.8%, as compared to
$2,459,000 for fiscal 2000. This decrease was attributable to the delivery of a
large order to the U-Haul dealers during fiscal year 2000. Comparatively, no
significant equipment was sold to U-Haul in fiscal year 2001.
Other revenue increased from $204,000 in fiscal year 2000 to $400,000 in fiscal
2001, an increase of 96.1% due to more billable software development work
completed during the current year.
OTHER INCOME. In June 2001, the Company sold a merchant list to a financial
institution for cash proceeds of $350,000.
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 based on a fixed rate applied to the transactions processed.
Processing-related expenses, consisting of bankcard processing expense and
transaction expense, increased from $18,128,000 for fiscal year 2000 to
$19,239,000 in the current fiscal year, an increase of 6.1%. This was in direct
relation to the 13.3% increase in processing and transaction revenues for the
current fiscal year. Gross margin from processing and transaction revenue
improved from $7,549,000 to $9,857,000, a 30.6% increase. The increase in gross
margin was attributable to the increase in check services revenue, which
normally yield a higher gross margin. Additionally, the Company was able to
lower its communications costs and chargeback losses during fiscal year 2001.
Cost of terminals sold and leased decreased from $1,790,000 in fiscal year 2000
to $419,000 in fiscal year 2001, a decrease of 76.6%. This is attributable to
the 81.8% decrease in terminal sales revenue for the year. However, the gross
margin decreased from 27.2% in fiscal 2000 to 6.3% in fiscal 2001. This was due
to the Company's decision to lower small quantity equipment pricing in fiscal
2001.
Other operating costs increased from $3,231,000 in fiscal year 2000 to
$3,538,000 in fiscal year 2001, an increase of 9.5%. This increase was
reflective of the 13.3% increase in processing and transaction revenue and the
significant operating expenses attributable to the development of the various
check services programs as discussed herein.
Selling and general and administrative expenses increased from $4,816,000 in
fiscal year 2000 to $5,760,000 in fiscal year 2001, an increase of 19.6%.
Approximately $600,000 of this increase was attributable to the legal and
consulting fees related to the ongoing litigation, which is continuing into the
first fiscal quarter of 2002. Additionally, the Company continues to invest in
higher personnel costs required to support the growth and management of the
various check services and the rollout of MERCHANTAMERICA.COM, an Internet
website designed to promote the products and services of the Company and to
enhance merchant reporting functions. As a percentage of total revenue, selling,
general and administrative expenses increased from 17.0% of total revenue in
fiscal year 2000 to 19.2% of total revenue in fiscal year 2001.
Amortization of goodwill expense remained relatively constant, from $359,000 in
fiscal 2000 to $424,000 in fiscal 2001.
INCOME TAXES. Income tax expense was $585,000 for fiscal year 2001, $233,000
for fiscal year 2000 and an income tax benefit of $1,331,000 for fiscal year
1999. The Company's effective tax rate was 57.4% for fiscal 2001 and 44.5% for
fiscal 2000. See Notes to Consolidate Financial Statements included elsewhere
herein for further explanation of the income tax expense and a reconciliation of
reported income taxes to the amount utilizing the statutory rate.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, the Company had available cash of $4,147,000,
restricted cash of $1,410,000 in reserve with its primary processing banks and a
working capital of $5,693,000.
Accounts receivable net of allowance for doubtful accounts decreased slightly
from $1,911,000 at September 30, 2000 to $1,864,000 at September 30, 2001.
Inventory level remained relatively constant from $594,000 at September 30, 2000
to $573,000 at September 30, 2001.
19
Net cash provided by operating activities increased from $788,000 in fiscal year
ended 2000 to $2,349,000 for the current fiscal year.
For the year, the Company used $1,404,000 for the purchase of equipment and
capitalized software costs. In addition, the Company used $368,000 as a down
payment toward the purchase of certain computer software in its effort to
replace its legacy credit card processing systems. This software license will
cost approximately $1,116,000 and the Company is currently evaluating several
leasing options with different lessors. The Company expects this software to be
fully installed and implemented by the third quarter of fiscal 2002.
In May 2001, the Company used $169,000 for the acquisition of certain National
Check Network assets. Total net cash used in investing activities was
$1,681,000 for the current fiscal year as compared to $332,000 for fiscal year
2000.
In March 2001, the Company's Board of Directors authorized up to 1,000,000
shares (pre-split) of the Company's common stock to be repurchased in open
market transactions at market and as business conditions warrant through
September 2001. The stock repurchase program was extended in September 2001
through December 15, 2001. Accordingly, the Company used $332,000 for the
repurchase of common stock during this fiscal year. Overall, the total net cash
used in financing activities was $462,000 as compared to $585,000 of net cash
provided by financing activities for fiscal year 2000.
At the present, management believes that the Company's cash flows from
operations are sufficient to support the current level of development costs and
to adequately support and become a primary "Third-Party Processor" for the Visa
POS check program.
FISCAL YEARS 2000 AND 1999
NET INCOME. Electronic Clearing House, Inc. recorded income of $524,000 before
income tax provision for fiscal year 2000, as compared to $1,287,000 in fiscal
year 1999, a decrease of 59.3%. Net income after tax provision for fiscal year
2000 was $291,000, as compared to $2,618,000 in net income for fiscal year 1999
after a tax benefit of $1,331,000. Earnings per both basic and diluted shares
were $.01 in fiscal year 2000, as compared to $.14 per basic share and $.11 per
diluted share for fiscal year 1999.
REVENUE. Total revenues for fiscal year 2000 were $28,340,000, an 18.9%
increase over revenues of $23,828,000 for fiscal year 1999.
Revenues derived from the electronic processing of transactions are recognized
at the time the transactions are processed by the merchant. Bankcard and
transaction processing revenue increased 13.3%, from $21,089,000 in fiscal year
1999 to $23,902,000 for fiscal year 2000. This increase was primarily the
results of a 16.3% increase in bankcard processing volume year-over-year. Check
related revenues increased from $308,000 for fiscal year 1999 to $1,979,000 in
fiscal 2000, a 542.5% increase. This was mainly attributable to the acquisition
of RMRS, which was completed in January 2000, and the inclusion of a full year
of operations for XPRESSCHEX, which was acquired in April 1999. Total
processing and transaction revenue increased from $21,323,000 for fiscal 1999 to
$25,677,000 for fiscal 2000, an increase of 20.4%.
Transaction revenues generated from one of our major customers, U-Haul
International, increased 12.5% from the prior year as a result of the additional
terminal deployed during the last two fiscal years.
Revenue related to terminal sales is recognized when the equipment is shipped.
Terminal sales revenue for fiscal 2000 were $2,459,000, which represented a
16.8% increase over $2,106,000 for fiscal 1999. This increase reflected the
delivery of approximately 4,100 terminals to the U-Haul dealers during this
fiscal year as compared to 2,500 terminals delivered in fiscal 1999. The
increase was partially offset by fewer terminals sold to the merchants through
various sales channels during fiscal 2000. The total U-Haul dealer base served
by the Company nationwide has now grown to approximately 15,000 as a result of
these latest terminal deployments. The Company believes that the U-Haul
transaction revenue will continue to increase as a result of these additional
units deployed.
Other revenue decreased from $399,000 in fiscal year 1999 to $204,000 in fiscal
2000, a 48.9% decrease due to fewer billable software development work completed
during the current year.
20
XPRESSCHEX, Inc., a wholly-owned subsidiary of the Company, initiated its new
ACH backbone service in May 2000. With a benchmark throughput in excess of 5.6
million transactions per day, a tenfold system processing improvement, this ACH
system was designed with redundancy and scalability to allow multiple benchmark
levels to be implemented and sustained simultaneously. This backbone will be
used for check conversion (POP), check re-presentment (RCK), accounts receivable
truncated check (ARTC/lockbox), online check acceptance, and batch processing.
This system is completely configurable by merchant. Some of the features
include automated sales commission tracing, multiple re-initiation of items and
service fees, fully automated funds distribution of all fees and payments,
integrated fraud protection, and automated return matching.
In November 1999, the Company acquired Peak Services, a collection agency, and
successfully integrated its operations into the XPRESSCHEX group location in
Albuquerque, New Mexico. XPRESSCHEX also has initiated a full ACH standard
collection service with Internet-based reporting and check imaging. This
collection service has grown from processing 500 checks a month to over 4,000
checks in the first few months of operations.
In September 1999, the Company entered into a five-year strategic alliance
agreement with innoVentry, a company jointly owned by Wells Fargo and Cash
America International, Inc., to provide credit card transactions in innoVentry's
casino business. In August 2000, the two companies agreed to discontinue this
relationship and the Company subsequently sold its interest to innoVentry for
$1,000,000. As a result, the Company recognized $312,000 of gain.
COST AND EXPENSES. Bankcard processing expenses should always reflect the
changes in processing revenue. A majority of the Company's bankcard processing
expenses are fixed as a percentage of each transaction amount, with the
remaining costs being based on a fixed rate applied to the transactions
processed. Processing-related expenses, consisting of bankcard processing
expense and transaction expense, increased from $14,778,000 for fiscal year 1999
to $18,128,000 in 2000, a 22.7% increase. This was in direct relation to the
20.4% increase in processing and transaction revenues for fiscal year 2000. The
decrease in gross margin was attributable to the marketing efforts being made to
the retail sectors, which traditionally carries a lower risk and therefore
generates a smaller gross margin to the processor.
Cost of terminals sold and leased increased from $1,166,000 in fiscal year 1999
to $1,790,000 in fiscal year 2000, an increase of 53.5%. This is attributable
to the 16.8% increase in terminal sales and lease revenue for the year.
Additionally, the Company reduced the terminal price for the 4,100 U-Haul
systems sold during 2000.
Other operating costs increased from $2,424,000 in fiscal year 1999 to
$3,231,000 in fiscal year 2000, an increase of 33.3%. This increase was mainly
attributable to the XPRESSCHEX and the RMRS acquisitions and the significant
integration expenses related to the various check products and services.
Selling and general and administrative expenses increased from $4,176,000 in
fiscal year 1999 to $4,816,000 in fiscal year 2000, an increase of 15.3%. As a
percentage of total revenue, selling, general and administrative expenses
decreased slightly from 17.5% of total revenue in fiscal year 1999 to 17.0% of
total revenue in fiscal year 2000. This decrease was partially offset by the
bank organization costs incurred during fiscal year 2000.
Amortization of goodwill expense increased from $92,000 in fiscal 1999 to
$359,000 in fiscal 2000 as a result of the XPRESSCHEX and the RMRS acquisitions.
Overall, the Company invested substantially and made significant progress in
enhancing and integrating a suite of new check services during fiscal year 2000.
The Company expanded its sources of revenue from one transaction type, credit
card processing, to five different types of transactions, i.e., credit cards,
debit cards, check verifications, ACH settlement and collections. Management
believes that the overall effect of this enhanced transaction capability will be
positive on both revenues and earnings in the future.
In December 1999, the Company filed an application to start an Internet-based
bank with the Office of the Controller of the Currency (OCC) and also filed an
application with the Federal Deposit Insurance Corporation (FDIC) in January
2000. The bank would provide services exclusively to merchants and is,
therefore, being considered a "special purpose" bank by both the OCC and the
FDIC. The Company withdrew this application in April 2001, mainly due to the
uncertainty of the market conditions and the Company's stock price.
21
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations".
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company does not believe that the adoption of SFAS 141 will have a
significant impact on its financial statements and the results of its
operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS"), "Goodwill and Other Intangible Assets", which is effective for
fiscal years beginning after December 15, 2001. SFAS 142 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.
In August 2001, FASB issued Statement of Financial Accounting Standards No. 144
("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets."
This Statement supersedes FASB Statement No. 121, ("SFAS 121") Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of,
and the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business (as previously defined
in that Opinion). This statement establishes a single accounting model for
long-lived asset impairment, based on the framework established in SFAS 121, for
long-lived assets to be disposed of by sale, and resolves significant
implementation issues related to SFAS 121. The Company is currently evaluating
the impact that SFAS 144 will have on its financial statements and the results
of its operations.
RISK FACTORS
The Company is subject to a number of risks, which could affect operating
results and liquidity, including, among others, the following:
DEPENDENCY ON BANK RELATIONSHIPS.
The Company currently relies on cooperative relationships with, and sponsorship
by, banks in order to process its Visa, MasterCard and other bankcard
transactions. The Company's banking relationships are currently with smaller
banks (with assets of less than $500,000,000). Even though smaller banks tend
to be more unstable, these banks find the programs more attractive and the
Company believes that it cannot obtain similar relationships with larger banks
at this time. A bank could at any time curtail or place restrictions on the
processing volume. A bank might do this because of its internal business
policies or due to other adverse circumstances. If a volume restriction is
placed on the Company, it could materially adversely affect the business
operations by restricting the Company's ability to process credit card
transactions and receive the related revenue. The Company's relationships with
its customers and merchants would also be adversely affected by its inability to
process these transactions. To limit this problem, the Company currently
maintains relationships with two banks. However, the Company cannot assure that
these banks will not restrict its processing volume or that the Company will
always be able to maintain its present banking relationships or establish new
banking relationships. Even if new banking relationships are available, they
may not be on terms acceptable to the Company. The Company's failure to
maintain these banking relationships and sponsorships would have a material
adverse effect on the business and results of operations.
BUSINESS RELATIONSHIP WITH U-HAUL INTERNATIONAL.
The business relationship with U-Haul is very important to the Company. In
2001, 80% of the equipment manufactured by the Company was sold to U-Haul.
U-Haul accounted for approximately 8% of ECHO's revenue in 2001 and 14% of the
revenue in 2000. There can be no assurance that the Company will be able to
maintain the business relationship with U-Haul, or that sales to U-Haul will
continue at the same levels as previous years. Any decrease could have a
material adverse effect on ECHO.
22
BANKCARD FRAUD.
The Company significantly relies on the processing of bankcard transactions. If
any merchants were to submit or process unauthorized or fraudulent bankcard
transactions, depending on the dollar amount, ECHO could incur significant
losses which could have a material adverse effect on the business and results of
operations. These types of losses are handled by the sponsoring banks as
follows:
- First Regional Bank - ECHO assumes and is compensated for bearing the
risk of these types of losses.
- The Berkshire Bank - ECHO assumes and is compensated for bearing the
risk of these types of losses.
The Company has implemented systems and software for the electronic surveillance
and monitoring of fraudulent bankcard use. The Company cannot guarantee that
these systems will prevent fraudulent transactions from being submitted and
processed. The Company does not have insurance to protect it from these losses,
but the Company does allocate ten basis points (.001) of daily processing
activity as a reserve against these types of losses. There is no assurance that
this reserve will be adequate to offset against any unauthorized or fraudulent
processing losses that the Company may incur. Depending on the size of such
losses the Company's results of operations could be immediately and materially
adversely affected.
DEPENDENCE ON KEY EMPLOYEES.
ECHO's success has been and will continue to be dependent on the services of key
technical and managerial personnel such as Joel M. Barry, our chairman of the
board and chief executive officer. The loss of Mr. Barry could have a
materially adverse impact on the Company's business. The Company believes that
its success also depends on its ability to continue to be able to attract,
retain and motivate highly skilled technical and management employees and
consultants who are in great demand. There can be no assurance that the Company
will be able to attract and retain such employees and its failure to do so could
adversely affect its business.
RISK OF NOT REMAINING LISTED ON NASDAQ.
ECHO is currently listed on the Nasdaq SmallCap market. There is no assurance
that the listing of the Company's common stock will, in the future, always
continue to satisfy the Nasdaq listing requirements. If the Company was
delisted from Nasdaq, this would have a material adverse effect on the price and
the liquidity of the Company's common stock.
COMPETITION.
ECHO is in the business of processing transactions and designing and
implementing integrated systems for its customers so that they can better use
ECHO's services. This business is highly competitive and is characterized by
rapid technological change, rapid rates of product obsolescence, and rapid rates
of new products introduction. The Company's market share is relatively small as
compared to most of its competitors and most of these competitors have
substantially more financial and marketing resources to run their businesses.
This enables the Company's competitors to better and more quickly respond to new
and emerging technologies, changes in customers needs, and to devote more
resources to product and services development and marketing. The Company may
face increased competition in the future and there is no assurance that current
or new competition will allow the Company to keep its customers. If the Company
loses customers, its business operations may be materially adversely affected,
which could cause it to cease its business or curtail its business to a point
where the Company is no longer able to generate sufficient revenues to fund
operations. There is no assurance that the Company's current products and
services will stay competitive with those of the Company's competitors or that
the Company will be able to introduce new products and services to compete
successfully in the future.
RAPID TECHNOLOGY CHANGES.
The Company's business industry involves rapidly changing technology. Recently,
the Company has observed rapid changes in technology as evident by the Internet
and Internet-related services and applications, new and better software, and
faster computers and modems. As technology changes, ECHO's customers desire and
expect better products and services. The Company's success depends on its
ability to improve its existing products and services and to develop and market
new products and services. The costs and expenses associated with such an
effort could be significant to the Company. There is no assurance that the
23
Company will be able to find the funds necessary to keep up with new technology
or that if such funds are available that the Company can successfully improve
its existing products and services or successfully develop new products and
services. The Company's failure to provide improved products and services to
its customers or any delay in providing such products and services could cause
it to lose customers to its competitors. Loss of customers could have a
material adverse effect on ECHO.
DEPENDENCE ON TECHNOLOGY AND RELATED PATENTS.
The Company currently owns three patents that relate to unique aspects of its
products or services. Even though the Company has these patents, there can be
no assurance the Company's competitors will not be able to develop a better
product or a better way of providing the Company's services to its current or
potential new customers. The Company's patents have not been tested in the
courts so the Company is unable to determine if they will be sustained in the
Company's favor. If ECHO's patents are not sustained in its favor, the
Company's competitors could determine its business methods and then develop and
market competing products and services. Such an outcome could cause the Company
to lose customers, which could materially adversely affect its results of
operations. The Company has expended considerable time and money in the
development of ideas and seeking patent protection for them. If the Company
seeks additional patents in the future, or if the Company is required to
prosecute or defend its patents, the expenses associated with such
patent-related activities could be substantial and could have a material adverse
effect on the results of operations.
CERTAIN OF THE COMPANY'S INTELLECTUAL PROPERTY IS NOT PROTECTED.
The Company has expended a considerable amount of time and money to develop
information systems for its merchants. The Company has not obtained any
intellectual property protection or other protection on these information
systems. The Company also believes that these information systems do not
infringe upon the rights of any third parties, however, there is no assurance
that third parties will not bring infringement claims against the Company. The
Company also has the right to use certain technology of others through various
license agreements. If a third party claimed these licenses were infringing
their technology, the Company could face additional infringement claims and
potential negative results. The Company is aware that a third party has claimed
that the Company's United States Postal Service money order distribution system
violates their patents. This third party has not taken any action with respect
to their claim to date. The Company believes that it is not infringing their
patents. If an infringement claim is brought against the Company and the
Company loses, it could be required to stop using that type of product, system
or service as well as pay monetary damages to the person or entity making the
claim. This result could materially adversely affect results of operations and
manner in which the Company could do business. If the Company was not able to
implement another method its business could fail. If the Company is required to
continuously defend infringement claims, the costs and expenses associated with
such a defense could be very expensive to the Company and could materially
adversely affect the results of operations.
DELAY IN THE COMPANY'S GROWTH STRATEGIES.
The Company continues to enter into transactions, which may assist the Company
in its efforts to stay competitive. Some of the Company's newer subsidiaries,
such as XPRESSCHEX and Rocky Mountain Retail Systems, Inc., started to work on
additional check products, so that the Company can deliver a more comprehensive
suite of services to its customers. Although the Company believes that its
investment in these subsidiaries will ultimately increase earnings at this time
some of their products are still in the development phase and there is no
assurance as to when the new products will show profitability.
NEED FOR ADDITIONAL FUNDS.
The Company uses funds generated from operations to finance its operations. The
Company currently believes that the cash flow from operations is sufficient to
support its business activities, including research, development and marketing
costs. Future growth will depend on the Company's ability to raise additional
funds, either through operations, bank borrowings, or equity or debt financings.
There is no assurance that the Company will be able to raise the funds necessary
to finance growth or continue to generate the funds necessary to finance
operations, and even if such funds are available, that the terms will be
acceptable. The inability to generate the necessary funds from operations or
from third parties could force the Company to cut back its operations by
limiting research, development and growth opportunities, which could have a
material adverse effect on ECHO.
24
UNDERWRITER/MARKET MAKER.
Trading markets for ECHO's common stock were maintained on Nasdaq by the
underwriter who took the Company public in its initial public offering in
November 1990 and various other broker/dealers who are members of the National
Association of Securities Dealers. This underwriter, which had been the
Company's principal market maker, went out of business in June 1992. None of
the remaining market makers are under any legal obligation to maintain a market
in the Company's common stock and may discontinue such activities at any time.
If these other market makers choose not to maintain a market in the Company's
common stock, such a discontinuance could have a material adverse effect on the
price and liquidity of the Company's common stock.
LACK OF INSURANCE PROTECTION FOR THE COMPANY'S PRODUCTS AND SERVICES.
The Company does not have insurance protection against claims for product
liability or errors and omissions for the products and services sold by the
Company. If claims are brought by the Company's customers or other third
parties, the Company could be required to pay the required claim or make
significant expenditures to defend against such claims. There is no assurance
that the Company will have the money to pay such claims if they arise. If the
Company does have the money to pay the claims, such a payment could have a
material adverse effect upon on the Company.
RISK OF LOSSES FROM REAL ESTATE PURCHASES.
The Company currently holds several real estate properties. The Company's
business activities no longer include the purchase or investment in real estate.
Sale of the Company's current real estate holdings could result in a loss to the
Company. The Company has provided a reserve account to reflect the estimated
market value less disposition cost of its properties, but any difference could
result in a loss. The Company does not maintain title insurance on its real
estate holdings and could incur substantial losses from title defects.
Depending on the size of any loss, such loss could have a materially adversely
affected on the Company.
COST OF DEFENDING LAWSUITS.
The Company is involved in various lawsuits arising in the ordinary course of
business. Although the Company believes that the claims asserted in such
lawsuits are without merit, the cost to the Company for the fees and expenses to
defend such lawsuits could have a material adverse effect on the Company's
financial condition, results of operations or cash flow. In addition, although
the Company has not experienced any material liability relating to these claims
to date, there can be no assurance that the Company will not at some time in the
future experience significant liability in connection with such claims (see
Item 3. "Legal Proceedings.").
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is currently not exposed to any significant financial market risks
from changes in foreign currency exchange rates or changes in interest rates and
do not use derivative financial instruments. All of our revenue and capital
spending is transacted in U.S. dollars. However, in the future, the Company may
enter into transactions in other currencies. An adverse change in exchange
rates would result in a decline in income before taxes, assuming that each
exchange rate would change in the same direction relative to the U.S. dollar.
In addition to the direct effects of changes in exchange rates, such changes
typically affect the volume of sales or foreign currency sales price as
competitors' products become more or less attractive.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Financial Statements and Supplementary Data are listed under "Item 14.
Exhibits, Financial Statement Schedules and Reports on Form 8K".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The officers and directors of the Company are:
Date first became
Name Position Officer or Director
- ------------------------------------- ------------------------- -------------------
Joel M. Barry [1][3] Chairman of the Board, 1986
Chief Executive Officer
Alice L. Cheung Chief Financial Officer, 1996
Treasurer
Lawrence M. Brown Vice President, Chief 1999
Information Officer
Jesse Fong Vice President, 1994
Information Systems
David Griffin Vice President, 1990
Check Services
Geoffrey Masaki Vice President, 2000
Special Programs
Rick Slater Vice President, Chief 1998
Technology Officer
Patricia M. Williams Vice President, Corporate 1997
Program Management
Jack Wilson Vice President, Credit 1994
Card Services
Donna L. Rehman Corporate Secretary 1990
R. Marshall Frost Counsel 1994
Aristides W. Georgantas[1][2][3][4] Director 1999
Carl W. Schafer [1][2][3][4] Director 1986
Herbert L. Lucas [1][2][3][4] Director 1991
[1] Member, Finance Committee
[2] Member, Audit Committee
[3] Member, Nominating Committee
[4] Member, Executive Compensation Committee
26
JOEL M. BARRY, age 51, has been a Director of the Company since July 1986, and
Chairman of the Board since December 1986. Mr. Barry served as Chief Financial
Officer from May 1987 to June 1990, and Executive Vice President from October
1987 to June 1990, when he was designated Chief Executive Officer of the
Company. Mr. Barry is also a Director and Chief Executive Officer of the MA,
CBC, EPS and XCX, Inc. wholly-owned subsidiaries. From August 1981 to June
1991, Mr. Barry was a lecturer and investment counselor for Dynamic Seminars, a
firm he founded in 1981, and Basics Financial Planning and Investments, a firm
he founded in 1983. From 1972 to 1974, Mr. Barry owned and operated a recording
business and from 1975 to 1981 was employed as the Director of Marketing and
Sales with Financial Dynamics, a financial planning firm located in Covina,
California. Mr. Barry attended Oklahoma State University from 1969 to 1970,
majoring in Accounting and Ozark Bible College from 1970 to 1972, majoring in
music.
ALICE L. CHEUNG, age 44, has served as Treasurer and Chief Financial Officer
since July 1996. Ms. Cheung received her BS degree in business
administration/accounting from California State University in Long Beach,
California and became a Certified Public Accountant in May 1982. Prior to
joining the Company, Ms. Cheung was the Treasurer and Chief Financial Officer of
American Mobile Systems from February 1988 to January 1996, prior to its merger
with Nextel Communications, Inc. Ms. Cheung is an active member of the American
Institute of Certified Public Accountants and Financial Executive Institute.
LAWRENCE M. BROWN, age 50, joined the Company in 1997 and was appointed Vice
President and Chief Information Officer in 1999. Prior to joining the Company,
Mr. Brown was founder and sole proprietor of Cypress Productivity Systems, an
educational consultancy focused on software engineering processes and project
management methodologies. Mr. Brown served Unisys Corporation for eighteen
years in various roles in Professional Services, Engineering, and Marketing,
with his last position as Director of Software Engineering. Mr. Brown holds a
BA degree in English and a BS degree in physics from Rhodes College in Memphis,
Tennessee, as well as an MDiv from Claremont School of Theology in Claremont,
California.
JESSE FONG, age 50, has served as Vice President of Information Systems since
September 1994. Mr. Fong joined the Company in 1984 and has served as
programmer, Data Processing manager and MIS director. He received a degree
major in M.E. and minor in Computer Science in 1972, received an International
Marketing certificate in 1975 and a Business Administration certificate in 1976.
Mr. Fong worked as Marketing manager, Sales manager and Trainer with the Xerox
Corporation in Taiwan from 1974 to 1978. After that, he joined Abbott
Laboratory as Country manager for two years. After immigrating to the United
States in 1980, he worked as International Marketing manager in a trading firm
for four years.
DAVID GRIFFIN, age 53, has served as Vice President of Check Services since June
1990. Previous to this capacity, he was Vice President of Operations for the
Company from January 1986 until September 1989, at which time he became a
consultant to the Company. Mr. Griffin has served as Senior Vice President and
General Manager for TeleCheck, Los Angeles and TeleCheck, San Diego, from May
1983 to August 1985. Prior to these appointments, he was Regional Manager of
TeleCheck Services, a franchiser of check guarantee services, a division of
Tymshare Corporation, which was subsequently acquired by McDonnell Douglas
Corporation. Mr. Griffin holds a business administration degree with a major in
accounting from the University of Houston.
GEOFFREY MASAKI, age 54, joined the Company in July 1997 and was appointed Vice
President of Special Programs in December 2000. He has also served the Company
as Senior Project Leader, Terminal Software Development and as Director of
Special Programs, managing web-based projects. Mr. Masaki received a BA degree
in mathematics from Occidental College in Los Angeles in 1968 and an MS degree
in Computer Science from the University of Maryland in 1975. Mr. Masaki has
been performing technical and management duties in the computer industry since
1969, most recently as Senior Systems Analyst at Software Dynamics, Inc. from
1992 to 1997.
RICK SLATER, age 41, joined the Company in May 1995 as Vice President of
Computer Based Controls, Inc. (CBC). Mr. Slater was appointed President of CBC
in December 1995, Vice President of ECHO in November 1998 and Chief Technology
Officer in October 1999. Prior to joining the Company, Mr. Slater was President
of Slater Research, which provided contract engineering services to various
institutions. During this time, Mr. Slater directly participated in the U.S.
Coast Guard COMSTA upgrade project including site surveys, systems design and
system upgrade integration in a number of sites within the U.S. While a group
27
leader at Aiken Advanced Systems, Mr. Slater held a TS/SCI security clearance
and developed numerous military signal collection systems installed throughout
the world. Mr. Slater holds a BS degree in electrical engineering technology
from Old Dominion University, Norfolk, Virginia.
PATRICIA M. WILLIAMS, age 36, joined the Company in September 1996, serving as
Director of Program Management and was appointed Vice President of Corporate
Program Management in October 1997. Prior to joining ECHO, Ms. Williams was an
Operations Manager for Bank of America Systems Engineering in San Francisco. Ms.
Williams has also served as a Senior Program manager for the Los Angeles office
of LANSystems, Inc., a nationwide systems integrator as well as a Senior Project
Manager and Systems Engineer for Bank of America Systems Engineering in Los
Angeles. Ms. Williams holds a B.A. degree in communications from the University
of California, Los Angeles.
JACK WILSON, age 57, has served as Vice President of Credit Card Services since
June 1994 and was Director of Bankcard Relations for the Company from October
1992 until May 1994. Mr. Wilson served as Vice President for Truckee River Bank
from August 1989 until September 1992. Previously, he was Senior Vice
President/Cashier of Sunrise Bancorp and a Vice President of First Interstate
Bank. Mr. Wilson holds a teaching credential from the California Community
College System in business and finance.
DONNA L. REHMAN, age 52, joined the Company in 1988 and has served as Corporate
Secretary since 1990. For three years prior thereto, she was self-employed in
Woodland Hills, California in educational books and toys. She attended Southern
Illinois University in Carbondale and was employed as an administrative
assistant in Chicago for 4 years and Los Angeles for 5 years.
R. MARSHALL FROST, age 54, has served the Company in varying capacities since
1987 and is currently In-House Counsel. Mr. Frost received his BA degree in
business administration with emphasis in accounting from California State
University at Fullerton, his AA degree in pre-med from Fullerton College, his JD
degree from Ventura College of Law, and his MBA degree from the University of
Redlands. Mr. Frost is an active member of the California Bar and a certified
broker with the California Department of Real Estate.
ARISTIDES W. GEORGANTAS, age 57, has served as a Director since February 1999.
Mr. Georgantas was Executive Vice President and Chief Operating Officer, Global
Asset Management/Private Banking, and Chairman and Chief Executive Officer of
Chemical Bank New Jersey, NA. He had also served as President and Chief
Operating Officer of Horizon Bancorp and subsidiaries and Princeton Bank. His
affiliations include Director of Blue Cross Blue Shield of New Jersey; Director
of Glenmede Trust Company; Director of the Foundation for New Jersey Public
Broadcasting; and Director of Mathematica Policy Research, Inc. Mr. Georgantas
is a graduate of the University of Massachusetts and the Columbia University
Graduate School of Business.
CARL W. SCHAFER, age 65, has been a Director since July 1986. Mr. Schafer was
Financial Vice President and Treasurer (Chief Financial Officer) of Princeton
University from July 1976 to October 1987. From October 1987 to April 1990, Mr.
Schafer was a Principal of Rockefeller & Co., Inc. of New York, an investment
management firm. He is a Director of The Atlantic Foundation and Harbor Branch
Institution and became President of the Atlantic Foundation in April 1990. Mr.
Schafer also holds the following positions: Director/Trustee of the Paine
Webber and Guardian Families of Mutual Funds; Director of Roadway Express, Inc.,
a trucking company; Director of Frontier Oil Corporation, an oil refiner;
Director of Nutraceutix, Inc., a bio technology company; Director of Labor
Ready, Inc., a provider of temporary labor; and Chairman of The Johnson Atelier
and School Of Sculpture. He graduated from the University of Rochester in 1958,
and served with the U.S. Bureau of the Budget, successively, as Budget Examiner,
Legislative Analyst, Deputy Director and Director of Budget Preparation. He
resides in Princeton, New Jersey.
HERBERT L. LUCAS, age 75, has been a Director since 1991. Mr. Lucas received a
BA degree in History in 1950 from Princeton University and an MBA degree in 1952
from Harvard University Graduate School of Business Administration. He served
as President from 1972 to 1981 of Carnation International in Los Angeles and as
a member of the Board of Directors of the Carnation Company. Since 1982, Mr.
Lucas has managed his family investment business. He has served on the Board of
Directors of various financial and business institutions including Wellington
Trust Company, Arctic Alaska Fisheries, Inc., Nutraceutix, and Sunworld
International Airways, Inc. Mr. Lucas has served as a Trustee of The J. Paul
Getty Trust, the Los Angeles County Museum of Art, and Winrock International
Institute for Agricultural Research and Development. He was formerly a member
of the Board of Trustees of Princeton University.
28
All directors are to be elected to specific terms, from one year to three years,
by the stockholders and serve until the next annual meeting or until their terms
have expired. The annual meeting of stockholders was held on February 2, 2001,
and the election of directors was held at that time.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid and stock options
offered by the Company to its Chief Executive Officer and to each of its most
highly compensated executive officers, other than the Chief Executive Officer,
whose compensation exceeded $100,000 during the fiscal years ended September 30,
2001, 2000 and 1999.
Annual Long Term
Compensation Compensation
------------------- -------------
Securities
Capacities in Underlying
Name Which Served Year Salary[1] Bonus Options[2]
- ----------------------- --------------- ---------- ---------- ------- -------------
Joel M. Barry Chairman/Chief 2001 $ 203,000 $25,000 12,500
Executive Officer 2000 190,000 50,000 12,500
1999 159,166 52,500 75,000
Alice L. Cheung Chief Financial 2001 $ 104,750 10,000 5,000
Officer/Treasurer 2000 99,500 14,250 2,500
1999 94,416 12,000 5,000
Rick Slater Vice President 2001 $ 117,850 7,000 2,500
2000 113,300 13,200 5,000
1999 110,000 10,000 5,000
Lawrence Brown Vice President 2001 $ 103,750 10,000 7,500
2000 100,000 12,750 10,000
1999 88,600 -0- 5,000
Jack Wilson Vice President 2001 $ 91,250 10,000 7,500
2000 83,750 9,600 5,000
1999 75,791 7,500 5,000
Patricia M. Williams Vice President 2001 $ 96,500 10,000 10,000
2000 84,500 12,000 5,000
1999 72,083 -0- 5,000
_______________________
[1] The Company provides Mr. Barry and Mr. Wilson with an automobile. Mr.
Barry, Ms. Cheung, Mr. Slater, Mr. Brown, Mr. Wilson and Ms. Williams are
participants of a Company sponsored 401(K) plan. There has been no
compensation paid other than that indicated in the above table.
[2] None of these options have been exercised (see "Stock Option Plan").
29
FISCAL 2001 OPTION GRANTS TABLE
The following table sets forth the stock options granted to the Company's Chief
Executive Officer and each of its executive officers, other than the Chief
Executive Officer, whose compensation exceeded $100,000 during fiscal 2001.
Under applicable Securities and Exchange Commission regulations, companies are
required to project an estimate of appreciation of the underlying shares of
stock during the option term. The Company has chosen to project this estimate
using the potential realizable value at assumed annual rates of stock price
appreciation for the option term at assumed rates of appreciation of 5% and 10%.
However, the ultimate value will depend upon the market value of the Company's
stock at a future date, which may or may not correspond to projections below.
Potential Realization
Value at Assumed
Annual Rates of
Stock Price
Percent of Appreciation for
Total Granted Exercise Option Term
Options to Employees in Price Expiration --------------------------------
Name Granted Fiscal Year per share Date 5% 10%
- -------------------- ------- ----------------- ---------- ---------- --------------- ---------------
Joel M. Barry 12,500 14.84% $ 2.84 12/20/10 $ 9,750 $ 21,625
Alice L. Cheung 5,000 5.93% $ 2.84 12/20/10 $ 3,900 $ 8,650
Rick Slater 2,500 2.97% $ 2.84 12/20/10 $ 1,950 $ 4,325
Lawrence M. Brown 7,500 8.90% $ 2.84 12/20/10 $ 5,850 $ 12,975
Jack Wilson 7,500 8.90% $ 2.84 12/20/10 $ 5,850 $ 12,975
Patricia M. Williams 10,000 11.87% $ 2.84 12/20/10 $ 7,800 $ 17,300
The following table sets forth the number of unexercised options held by the
Company's Chief Executive Officer and each of its executive officers, other than
the Chief Executive Officer, whose compensation exceeded $100,000 during fiscal
2001. No options have been exercised.
AGGREGATED OPTION/SAR EXERCISES AND FISCAL-YEAR OPTION/SAR VALUE TABLE
Value of
Number of unexercised
Shares unexercised in-the-money
acquired on Value options/SARS Options/SARS
Name exercise # realized $ FY-end # at FY-end $[1]
- -------------------- ----------- ---------- ------------ ---------------
Joel M. Barry -0- $ -0- 197,500 $ 53,625
Alice L. Cheung -0- $ -0- 50,000 $ -0-
Rick Slater -0- $ -0- 58,000 $ 6,825
Lawrence M. Brown -0- $ -0- 32,500 $ -0-
Jack Wilson 2,500 $ 5,000 40,000 $ 3,375
Patricia M. Williams -0- $ -0- 35,000 $ -0-
[1] Based on the closing sales price of the Common Stock on September 30, 2001
of $2.15 per share, less the option exercise price.
30
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the Company's Board of Directors or
Executive Officers Compensation Committee and the board of directors or
compensation committee of any other company.
DIRECTOR COMPENSATION
Each outside director received $15,000 and 3,750 shares of Common Stock in
fiscal 2001; $15,000 and 1,465 shares of Common Stock in fiscal 2000; and
$15,000 and 1,364 shares of Common Stock in fiscal 1999. Directors are
compensated for all reasonable expenses and are not compensated for special
meetings other than regular meetings.
EMPLOYMENT AGREEMENTS
None.
BONUS, PROFIT-SHARING AND OTHER REMUNERATION PLANS AND PENSION AND RETIREMENT
PLANS
The Company has established a bonus program to reward extraordinary performance
that exceeds pre-set goals established for executive officers and key personnel.
The Company believes that such a bonus program provides the incentive to exceed
such goals, thereby building shareholder value.
The Company has a contributory 401(K) Retirement Pension Plan, which covers all
employees who are qualified under the plan provisions.
STOCK OPTION PLAN
On May 13, 1992, the Company's Board of Directors authorized adoption of an
Officers and Key Employees Incentive Stock Option Plan ("Plan"), ratified by the
shareholders at the Annual Meeting held July 10, 1992. The Plan provided for
the issuance of up to 81,250 stock options, each to purchase one share of the
Common Stock for $3.40 per share, subject to adjustment in the event of stock
splits, combinations of shares, stock dividends or the like.
On November 18, 1996, the Company's Board of Directors authorized an increase in
the Plan to 843,750 options and was ratified by the shareholders at the Annual
Meeting held in February 1997.
On February 4, 1999, the Company's Board of Directors authorized an increase in
the Plan to 1,343,750 options and was ratified by the shareholders at the Annual
Meeting held in February 1999.
With the exception of the foregoing, the Company has no stock option plans or
other similar or related plans in which any of its officers or directors
participate.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of November 15, 2001, there were 5769,873 shares of the Company's Common
Stock outstanding. To the Company's knowledge, no individual has beneficial
ownership or control over 5% or more of the Company's outstanding Common Stock.
The following table sets forth the number of shares of Common Stock owned
beneficially by the Company's officers and directors, individually, and as a
group, as of November 15, 2001.
31
Amount and Percentage of
Nature of Beneficial Outstanding Stock[1]
Name and Address Ownership At 11/15/01
- ------------------------------- -------------------- ---------------------
Joel M. Barry 235,812[2] 3.93%
28001 Dorothy Drive
Agoura Hills, CA 91301
Lawrence M. Brown 32,500[2] 0.56%
28001 Dorothy Drive
Agoura Hills, CA 91301
Alice L. Cheung 52,500[2] 0.90%
28001 Dorothy Drive
Agoura Hills, CA 91301
Jesse Fong 16,278[2] 0.28%
28001 Dorothy Drive
Agoura Hills, CA 91301
R. Marshall Frost 3,750[2] 0.06%
28001 Dorothy Drive
Agoura Hills, CA 91301
Aristides W. Georgantas 6,579 0.11%
28001 Dorothy Drive
Agoura Hills, CA 91301
David Griffin 33,186[2] 0.58%
28001 Dorothy Drive
Agoura Hills, CA 91301
Herbert L. Lucas 66,687[3][4] 1.14%
28001 Dorothy Drive
Agoura Hills, CA 91301
Geoffrey Masaki 9,475[2] 0.16%
28001 Dorothy Drive
Agoura Hills, CA 91301
Donna L. Rehman 12,500[2] 0.21%
28001 Dorothy Drive
Agoura Hills, CA 91301
Carl W. Schafer 36,729[3] 0.63%
28001 Dorothy Drive
Agoura Hills, CA 91301
Rick Slater 58,500[2] 1.00%
28001 Dorothy Drive
Agoura Hills, CA 91301
Patricia M. Williams 35,000[2] 0.60%
28001 Dorothy Drive
Agoura Hills, CA 91301
32
Jack Wilson 43,575[2][5] 0.74%
28001 Dorothy Drive
Agoura Hills, CA 91301
All officers and directors
as a group (14 persons) 643,071 10.16%
______________________________
[1] Outstanding Common Shares with effect given to conversion of preferred
stock and options described in footnotes 2 through 5.
[2] Includes options according to the terms of the Incentive Stock Option Plan.
See "Item 11. Executive Compensation".
[3] Includes options granted to outside directors.
[4] Includes 17,972 shares indirectly owned by Mr. Lucas through a trust for
his wife.
[5] Includes 530 shares indirectly owned by Mr. Wilson through his wife.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no related-party transactions.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements Page
----
Report of Independent Accountants. . . . . . . . . . . . . . . F-1
Consolidated Balance Sheet at September 30, 2001 and 2000. . . F-2
Consolidated Statement of Operations for each of the three years
in the period ended September 30, 2001. . . . . . . . . . . . . . F-3
Consolidated Statement of Changes in Stockholders' Equity
for each of the three years in the period ended September
30, 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statement of Cash Flows for each of the three years
in the period ended September 30, 2001. . . . . . . . . . . F-5
Notes to Consolidated Financial Statements. . . . . . . . . . F-6
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts and Reserves . . S-1
All other schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes thereto.
(b) Reports on Form 8K for fourth quarter ending September 30, 2001:
Date of Filing Item Reported
---------------- --------------
July 18, 2001 On July 16, 2001, the company received Nasdaq notification
that the Panel determined to continue the listing of the
Company's securities on the Nasdaq SmallCap Market pursuant
to various exceptions. Additionally, the Board of Director
approved a one-for-four (1:4) stock split, subject to
shareholder approval at a special meeting of shareholders to
be held on September 7, 2001.
September 7, 2001 On September 7, 2001, the Company's shareholders approved
a one-for-four (1:4) reverse split of the Company's common
stock. The reverse split will affect shareholders of record
at the close of business on Monday, September 10, 2001.
34
(c) Exhibits:
Exhibit
Number Description of Document
- ------- -------------------------
1.1 Form of Underwriting Agreement between the Company and J.W. Gant &
Associates, Inc. [3]
1.2 Form of Agreement among Underwriters. [3]
1.3 Form of Selected Dealer's Agreement. [3]
2.1 Copy of Merger Agreement and Plan of Reorganization between
Electronic Clearing House, Inc., ECHO Acquisition Corporation,
and Magic Software Development, Inc., dated April 20, 1999.[9]
2.2 Copy of Merger Agreement and Plan of Reorganization between
Electronic Clearing House, Inc., ECHO Acquisition Corporation,
and Rocky Mountain Retail Systems, Inc., dated January 4, 2000.[10]
3.1 Articles of Incorporation of Bio Recovery Technology, Inc., filed
with the Nevada Secretary of State on December 11, 1981. [1]
3.2 Certificate of Amendment to Articles of Incorporation of Bio
Recovery Technology, Inc., filed with the Nevada Secretary of
State on September 1, 1983. [1]
3.3 Certificate of Amendment of Articles of Incorporation of Bio
Recovery Technology, Inc., filed with the Nevada Secretary of
State on January 17, 1986. [1]
3.4 By-Laws of Bio Recovery Technology, Inc. [1]
4.1 Proposed Form of Purchase Option between the Company and J.W. Gant
& Associates, Inc. [3]
4.2 Specimen Common Stock Certificate. [3]
10.35 Copy of Merchant Marketing and Processing Services Agreement
between Electronic Clearing House, Inc. and First Regional Bank,
dated June 24, 1997. [8]
10.36 Copy of Merchant Marketing and Processing Services Agreement
between Electronic Clearing House, Inc. and The Berkshire Bank,
dated July 31, 1997. [8]
10.41 Copy of Processing and Software Development and License Agreement
between Electronic Clearing House, Inc. and National Bank
Drafting Systems, Inc., dated October 22, 1999.[10]
10.42 Copy of Addendum to Agreement between Electronic Clearing House,
Inc. and U-Haul International, dated January 1, 2000.[10]
10.44 Copy of Electronic Check Services Agreement between Electronic
Clearing House, Inc. and National Bank Drafting Systems, Inc.,
dated May 17, 2000.[10]
10.46 Copy of Amended and Restated Merchant Marketing and Processing
Services Agreement between Electronic Clearing House, Inc. and
First Regional Bank, dated August 1, 2000.[10]
10.47 Copy of Addendum to Amended and Restated Merchant Marketing and
Processing Services Agreement between Electronic Clearing House,
Inc. and First Regional Bank, dated August 1, 2000.[10]
10.48 Copy of POS Check Third Party Servicer Agreement between Visa
U.S.A., Inc. and Electronic Clearing House, Inc., dated December
12, 2000.
10.49 Copy of Asset Purchase Agreement between National Check Network,
Inc. and Electronic Clearing House, Inc., dated April 19, 2001
10.50 Copy of Addendum to Agreement between U-Haul International and
Electronic Clearing House, Inc., dated October 1, 2001.
22.0 Subsidiaries of Registrant. [2]
_________________________________
[1] Filed as an Exhibit to Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1988 and incorporated herein
by reference.
[2] Filed as an Exhibit to Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1989 and incorporated herein
by reference.
[3] Filed as an Exhibit to Registrant's Form S-1, Amendment No. 3,
effective November 13, 1990 and incorporated herein by reference.
[4] Filed as an Exhibit to Registrant's Annual Report on Form 10-K for
fiscal year ended September 30, 1992 and incorporated herein by
reference.
[5] Filed as an Exhibit to Registrant's Annual Report on Form 10-K for
fiscal year ended September 30, 1993 and incorporated herein by
reference.
[6] Filed as an Exhibit to Registrant's Annual Report on Form 10-K for
fiscal year ended September 30, 1994 and incorporated herein by
reference.
35
[7] Filed as an Exhibit to Registrant's Annual Report on Form 10-K for
fiscal year ended September 30, 1996 and incorporated herein by
reference.
[8] Filed as an Exhibit to Registrant's Annual Report on Form 10-K for
fiscal year ended September 30, 1997 and incorporated herein by
reference.
[9] Filed as an Exhibit to Registrant's Annual Report on Form 10-K for
fiscal year ended September 30, 1999 and incorporated herein by
reference.
[10] Filed as an Exhibit to Registrant's Annual Report on Form 10-K for
fiscal year ended September 30, 2000 and incorporated herein by
reference.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ELECTRONIC CLEARING HOUSE, INC.
By: \s\ Joel M. Barry
--------------------
Joel M. Barry, Chief Executive
Officer and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
\s\ Joel M. Barry Chairman of the Board ) December 21, 2001
- ----------------------------- and Chief Executive Officer)
Joel M. Barry )
)
)
\s\ Carl W. Schafer Director )
- ----------------------------- )
Carl W. Schafer )
)
)
)
\s\ Herbert L. Lucas, Jr. Director )
- ----------------------------- )
Herbert L. Lucas, Jr. )
)
)
)
\s\ Alice L. Cheung Chief Financial Officer )
- ---------------------- and Treasurer )
Alice L. Cheung )
)
)
)
\s\ Marjan Hewson Controller )
- ----------------------------- )
Marjan Hewson )
37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Electronic Clearing House, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 34 present fairly, in all material
respects, the financial position of Electronic Clearing House, Inc. and its
subsidiaries at September 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 2001 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedules listed in the index appearing under Item 14(a)(2) on page 34 present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedules are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
\S\ PRICEWATERHOUSECOOPERS LLP
Los Angeles
December 3, 2001
F 1
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
September 30,
--------------
2001 2000
------------ ------------
ASSETS
--------
Current assets:
Cash and cash equivalents $ 4,147,000 $ 3,941,000
Restricted cash 1,410,000 1,017,000
Accounts receivable less allowance of $313,000 and $380,000 1,864,000 1,911,000
Inventory 573,000 594,000
Prepaid expenses and other assets 137,000 132,000
------------ ------------
Total current assets 8,131,000 7,595,000
Noncurrent assets:
Long term receivables 21,000 19,000
Property and equipment, net 3,754,000 2,949,000
Real estate held for investment 252,000 252,000
Deferred tax asset 778,000 1,214,000
Other assets, net 800,000 411,000
Goodwill, net 5,185,000 4,573,000
------------ ------------
Total assets $18,921,000 $17,013,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings and current portion of
long-term debt $ 240,000 $ 177,000
Accounts payable 135,000 120,000
Settlement payable to merchants 618,000 170,000
Accrued expenses 1,395,000 1,046,000
Deferred income 50,000 53,000
------------ ------------
Total current liabilities 2,438,000 1,566,000
Long-term debt 744,000 767,000
------------ ------------
Total liabilities 3,182,000 2,333,000
------------ ------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.01 par value, 5,000,000 shares authorized
Series "K", 25,000 and 25,000 shares issued and outstanding, -0- -0-
Common stock, $.01 par value, 36,000,000 shares authorized;
5,809,121 and 5,472,009 shares issued; 5,769,873 and 5,432,734
shares outstanding 58,000 55,000
Additional paid-in capital 21,260,000 20,638,000
Accumulated deficit (5,110,000) (5,544,000)
Less treasury stock at cost, 39,248 and 39,275 common shares (469,000) (469,000)
------------ ------------
Total stockholders' equity 15,739,000 14,680,000
------------ ------------
Total liabilities and stockholders' equity $18,921,000 $17,013,000
============ ============
See accompanying notes to consolidated financial statements.
F 2
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Year ended September 30,
---------------------------
2001 2000 1999
------------ ------------ ------------
REVENUES:
Processing revenue $14,719,000 $14,917,000 $13,222,000
Transaction revenue 14,377,000 10,760,000 8,101,000
Terminal sales 447,000 2,459,000 2,106,000
Other revenue 400,000 204,000 399,000
------------ ------------ ------------
29,943,000 28,340,000 23,828,000
------------ ------------ ------------
COSTS AND EXPENSES:
Processing and transaction expense 19,239,000 18,128,000 14,778,000
Cost of terminals sold 419,000 1,790,000 1,166,000
Other operating costs 3,538,000 3,231,000 2,424,000
Selling, general and administrative expenses 5,760,000 4,816,000 4,176,000
Amortization expense - goodwill 424,000 359,000 92,000
------------ ------------ ------------
29,380,000 28,324,000 22,636,000
------------ ------------ ------------
Income from operations 563,000 16,000 1,192,000
Interest income 187,000 284,000 180,000
Interest expense (81,000) (88,000) (85,000)
Gain on sale of asset 350,000 312,000 -0-
------------ ------------ ------------
Income before (provision) benefit for income taxes 1,019,000 524,000 1,287,000
(Provision) benefit for income taxes (585,000) (233,000) 1,331,000
------------ ------------ ------------
NET INCOME $ 434,000 $ 291,000 $ 2,618,000
============ ============ ============
Earnings per share - Basic $ 0.07 $ 0.06 $ 0.58
============ ============ ============
Earnings per share - Diluted $ 0.07 $ 0.05 $ 0.45
============ ============ ============
Shares used in computing basic
earnings per share 5,797,120 5,257,393 4,535,777
============ ============ ============
Shares used in computing diluted
earnings per share 5,963,808 5,825,097 5,824,871
============ ============ ============
See accompanying notes to consolidated financial statements.
F 3
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Stock Additional
----------------------------------------------- Paid-in Treasury Accumulated
Treasury Common Preferred Amount Capital Stock Deficit Total
---------- ---------- ---------- ----------- ----------- ---------- ------------ -----------
Balance at September 30, 1998 1,560 3,780,136 516,511 $ 43,000 $14,253,000 $ -0- $(8,453,000) $ 5,843,000
Exercise of warrants 162,500 2,000 258,000 260,000
Exercise of stock options 226,250 2,000 554,000 556,000
Conversion of preferred to
common 545,555 (451,511) 1,000 (1,000) -0-
Issuance of common stock to
outside directors 4,091 45,000 45,000
Issuance of common stock -
acquisition 250,000 2,000 1,998,000 2,000,000
Purchase of treasury stock 19,918 (138,000) (138,000)
Net income 2,618,000 2,618,000
---------- ---------- ---------- ----------- ----------- ---------- ------------ -----------
Balance at September 30, 1999 21,478 4,968,532 65,000 50,000 17,107,000 (138,000) (5,835,000) 11,184,000
Exercise of warrants 87,500 1,000 139,000 140,000
Exercise of stock options 116,583 1,000 248,000 249,000
Conversion of preferred to
common 40,000 (40,000) -0-
Issuance of common stock to
outside directors 4,394 45,000 45,000
Issuance of common stock -
acquisition 255,000 3,000 3,099,000 3,102,000
Purchase of treasury stock 17,797 (331,000) (331,000)
Net income 291,000 291,000
---------- ---------- ---------- ----------- ----------- ---------- ------------ -----------
Balance at September 30, 2000 39,275 5,472,009 25,000 55,000 20,638,000 (469,000) (5,544,000) 14,680,000
Exercise of stock options 15,000 47,000 47,000
Issuance of common stock to
outside directors 11,250 45,000 45,000
Issuance of common stock -
acquisition 21,166 85,000 85,000
Issuance of performance stock 375,000 4,000 776,000 780,000
Re-issuance of treasury stock (27) -0-
Common stock repurchase (85,304) (1,000) (331,000) (332,000)
Net income 434,000 434,000
---------- ---------- ---------- ----------- ----------- ---------- ------------ -----------
Balance at September 30, 2001 39,248 5,809,121 25,000 $ 58,000 $21,260,000 $(469,000) $(5,110,000) $15,739,000
========== ========== ========== =========== =========== ========== ============ ===========
See accompanying notes to consolidated financial statements.
F 4
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year ended September 30,
---------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 434,000 291,000 2,618,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 488,000 325,000 271,000
Amortization of software 433,000 233,000 128,000
Amortization of goodwill 414,000 352,000 89,000
Provisions for losses on accounts and
notes receivable 326,000 586,000 443,000
Provision (benefit) for deferred income taxes 436,000 178,000 (1,392,000)
Fair value of stock issued in
connection with director's compensation 45,000 45,000 45,000
Gain on sale of asset (350,000) (312,000) -0-
Changes in assets and liabilities, net of effects of acquisitions:
Restricted cash (393,000) (281,000) (85,000)
Accounts receivable (307,000) (824,000) (790,000)
Inventory 21,000 (14,000) 139,000
Prepaid expenses and other current assets (5,000) (27,000) (45,000)
Accounts payable 15,000 (53,000) (46,000)
Settlement payable to merchants 448,000 170,000 -0-
Accrued expenses 349,000 128,000 (98,000)
Deferred income (3,000) (9,000) (421,000)
Other receivable (2,000) -0- (18,000)
------------ ------------ ------------
Net cash provided by operating activities 2,349,000 788,000 838,000
------------ ------------ ------------
Cash flows from investing activities:
Other assets (458,000) (139,000) (83,000)
Purchase of equipment and software (1,404,000) (1,246,000) (1,062,000)
Increase in notes receivable -0- (1,027,000) -0-
Repayment of notes receivable -0- 1,000,000 5,000
Proceeds from sale of asset 350,000 1,000,000 -0-
Cash (used for) acquired through acquisition (169,000) 80,000 -0-
------------ ------------ ------------
Net cash used in investing activities (1,681,000) (332,000) (1,140,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable -0- 400,000 540,000
Repayment of notes payable (130,000) (156,000) (590,000)
Repayment of capitalized leases (47,000) (48,000) (50,000)
Proceeds from common stock warrants exercised -0- 140,000 260,000
Proceeds from exercise of stock options 47,000 249,000 556,000
Repurchase of stock (332,000) -0- -0-
------------ ------------ ------------
Net cash (used in) provided by financing activities (462,000) 585,000 716,000
------------ ------------ ------------
Net increase in cash 206,000 1,041,000 414,000
Cash and cash equivalents at beginning of period 3,941,000 2,900,000 2,486,000
------------ ------------ ------------
Cash and cash equivalents at end of period $ 4,147,000 $ 3,941,000 $ 2,900,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F 5
ELECTRONIC CLEARING HOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- -------------------------------------------------------------------------------
Electronic Clearing House, Inc. (ECHO or the Company) is a Nevada corporation.
The Company provides credit card authorizations, electronic deposit services,
check guarantee, check verification, check conversion, check collection,
inventory tracking services and various Internet services to retail and
wholesale merchants, and U-Haul dealers across the nation. In addition, the
Company develops and sells electronic terminals for use by its customers and
other processing companies. The Company has four active wholly owned
subsidiaries: ECHO Payment Services, Inc. (formerly GCLC Corporation), Computer
Based Controls, Inc., MERCHANTAMERICA (formerly NCCR), XPRESSCHEX, Inc. (the
combined entity of Magic Software Development, Inc. and Rocky Mountain Retail
Systems, Inc.).
The following comments describe the more significant accounting policies.
Principles of Consolidation
- -----------------------------
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
Cash and Cash Equivalents
- ----------------------------
Cash and cash equivalents consist of unrestricted balances only. The Company
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents.
Restricted Cash
- ----------------
Under the terms of the processing agreements with the Company's primary
processing banks, the Company maintains several cash accounts as a reserve
against chargeback losses. As processing fees are received by the processing
banks, they are allocated per the processing agreement to the reserve accounts.
Accounts Receivable Chargeback
- --------------------------------
Accounts receivable chargeback losses occur when a credit card holder presents a
valid claim against one of the Company's merchants and the merchant has
insufficient funds or is no longer in business resulting in the charge being
absorbed by the Company. The Company records a receivable for those chargebacks
for which the merchant is liable but has not made payment. A reserve is
estimated based upon a historically-determined percentage of gross credit card
processing volume and actual losses experienced.
Inventory
- ---------
Inventory is stated at the lower of cost or market, cost being determined on the
first-in, first-out method. Inventory consists of terminals and printers held
for sale or lease and related component parts.
Property and Equipment
- ------------------------
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Expenditures for additions and major improvements are
capitalized. Repair and maintenance costs are expensed as incurred. When
property and equipment are retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the accounts. Gains or losses
from retirements and disposals are credited or charged to income. Depreciation
and amortization are computed using the straight-line method over the shorter of
the estimated useful lives of the respective assets or terms of the related
leases. The useful lives and lease terms for depreciable assets are as follows:
F 6
Note 1: (Continued)
- -------
Building 39 years
Computer equipment and software 3-5 years
Furniture, fixtures and equipment 5 years
Building improvements 10 years
Other Assets
- -------------
Other Assets consist primarily of patents and deposits. Costs related to
obtaining a patent are capitalized and amortized over the life of the patent.
Software Development Costs
- ----------------------------
Under the provisions of Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," the Company
capitalizes costs associated with software developed for internal use when both
the preliminary project stage is completed and management has authorized further
funding for the completion of the project. Capitalized costs include only (1)
external direct costs of materials and services consumed in developing or
obtaining internal-use software, (2) payroll and payroll-related costs for
employees who are directly associated with the software project, and (3)
interest costs incurred, when material, while developing internal-use software.
Capitalization of such costs ceases no later than the point at which the project
is substantially complete and ready for its intended purpose. Capitalized
software development costs are amortized using the straight-line method over the
lesser of three years or estimated useful life.
Research and development costs and other computer software maintenance costs
related to software development are expensed as incurred.
Goodwill
- --------
Goodwill represents the excess of purchase price over net assets acquired in the
acquisition of XPRESSCHEX and Rocky Mountain Retail Systems and is being
amortized on a straight-line basis over estimated useful lives of 10 years and
15 years, respectively.
Long-Lived Assets
- ------------------
When circumstance indicates, the Company reviews its long-lived assets for
impairment using estimated undiscounted future cash flows associated with such
assets. An impairment loss would be determined as the difference between the
fair values and the carrying amounts of the assets. Management believes no such
impairment has occurred as of September 30, 2001 and 2000.
Revenues and Expenses
- -----------------------
All processing and transaction revenues are recognized at the time the
transactions are processed by the merchant. Processing costs paid to banks are
included in costs and expenses. Terminal sales are recorded when product is
shipped and title transferred to the customer.
The Company expensed $272,000, $528,000, and $433,000 for the years ended
September 30, 2001, 2000 and 1999, respectively for bankcard processing
chargeback losses. The Company provided for other uncollectible leases and
notes receivable balances of $7,100, $35,000 and $48,000 for the years ended
September 30, 2001, 2000 and 1999, respectively.
The Company has one customer that accounted for approximately $2,493,000,
$4,082,000, and $2,898,000 of revenues for the years ended 2001, 2000 and 1999,
respectively. The revenues for this customer are recorded as part of the
bankcard transaction fees and terminal sales and lease segments.
In June 2001, the Company sold all the ownership interest of a select group of
the Company's credit card processing merchants to a financial institution. In
consideration of this sale, the Company received cash proceeds of $350,000 and
thereby recognized a $350,000 gain on the sale of an asset. The sale was
non-recourse and will not have any material impact on the future revenue stream
of the Company.
F 7
Note 1: (Continued)
- -------
Income Taxes
- -------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). FAS 109
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. A valuation allowance is
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
Reverse Stock Split
- ---------------------
On September 7, 2001, the Company's board of directors authorized and the
shareholders approved a reverse stock split, effective September 11, 2001,
whereby every four shares of common stock were converted into one share of
common stock. Unless otherwise indicated, all references in the consolidated
financial statements to the average number of common shares and related per
share amounts have been restated to reflect the reverse stock split.
Net Income Per Share
- -----------------------
Net income per share is based on the weighted average number of common shares
and dilutive common equivalent shares outstanding during the period. The shares
issuable upon conversion of preferred stock and exercise of options and warrants
are included in the weighted average for the calculation of diluted net income
per share except where it would be anti-dilutive. For the basic net income per
common share, the convertible preferred stock is not considered to be equivalent
to common stock.
Stock-Based Compensation
- -------------------------
The Company has elected to account for its stock-based compensation plans in
accordance with APB Opinion No. 25 and to adopt only the disclosure requirements
of FAS 123. The pro forma disclosure required by FAS 123 is included in Note
10.
Compensation expense is recognized in association with the issuance of stock
options for the difference, if any, between the trading price of the stock at
the time of issuance and the price to be paid by an officer or director.
Compensation expense is recorded over the period the officer or director
performs the related service.
Accounting Estimates
- ---------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
- ---------------------------------------
The amount recorded for financial instruments in the Company's consolidated
financial statements approximates fair value as defined in SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments".
NOTE 2 - STATEMENT OF CASH FLOWS:
- --------------------------------------
September 30
-------------
2001 2000 1999
------- ------- -------
Cash paid for:
Interest $81,000 $88,000 $85,000
Income taxes 72,000 40,000 64,000
Significant non-cash transactions for fiscal 2001 are as follows:
- 21,116 shares of common stock valued at $85,000 were issued for the
purchase of certain National Check Network, Inc. assets.
F 8
Note 2: (Continued)
- -------
- In September 2001, the Company's Board of Directors approved a
one-for-four (1:4) reverse stock split. As stipulated in the Merger
Agreement, this event triggered the issuance of the remaining 375,000
performance shares to the RMRS selling shareholders. The performance
shares were valued at $780,000, based on the market price on the date
of stock issuance, and recorded on the books as goodwill to be
amortized over fifteen years.
- Capital equipment of $216,000 was acquired under capital leases.
Significant non-cash transactions for fiscal 2000 are as follows:
- In connection with two business acquisition transactions, the Company
issued 255,000 shares of common stock with a market value of
$3,102,000.
- The Company acquired 17,797 shares of its common stock valued at
$331,000 for repayment of a note receivable.
Significant non-cash transactions for fiscal 1999 are as follows:
- Capital equipment of $43,000 was acquired under capital leases.
- In connection with a business acquisition transaction, the Company
issued 250,000 shares of common stock with a market value of $2
million.
- The Company acquired 19,918 shares of its common stock valued at
$138,000 as a result of a chargeback receivable settlement.
NOTE 3 - INVENTORY
- ---------------------
The components of inventory are as follows:
September 30
------------------
2001 2000
-------- --------
Raw materials $ 62,000 $ 98,000
Finished goods 529,000 499,000
-------- --------
591,000 597,000
Less: Allowance for obsolescence 18,000 3,000
-------- --------
$573,000 $594,000
======== ========
NOTE 4 - PROPERTY AND EQUIPMENT:
- ------------------------------------
Property and equipment are comprised of the following:
F 9
Note 4: (Continued)
- ------
September 30
--------------
2001 2000
------------- ------------
Land and building $ 880,000 $ 880,000
Computer equipment and software 5,541,000 3,802,000
Furniture, fixtures and equipment 977,000 1,023,000
Building improvements 281,000 271,000
Tooling equipment 285,000 285,000
Auto 16,000 -0-
------------- ------------
Cost 7,980,000 6,261,000
Less: accumulated depreciation and amortization ( 4,226,000) (3,312,000)
------------- ------------
Net book value $ 3,754,000 $ 2,949,000
============= ============
Included in property and equipment are assets under capital lease of $425,000
and $209,000 at September 30, 2001 and 2000, with related accumulated
amortization of $165,000 and $119,000, respectively, and capitalized software
development costs of $2,037,000 and $1,120,000, with related accumulated
amortization of $873,000 and $485,000, respectively.
NOTE 5 - INCOME TAXES
- -------------------------
The (provision) benefit for income taxes consists of the following components:
September 30
------------
2001 2000 1999
---------- ---------- -----------
Current federal taxes $ (29,000) $ (4,000) $ (11,000)
Current state taxes (120,000) (51,000) (50,000)
Deferred taxes (436,000) (178,000) 1,392,000
---------- ---------- -----------
Total (provision) benefit for income taxes $(585,000) $(233,000) $1,331,000
========== ========== ===========
The effective tax rate varies from the U.S. Federal statutory tax rate for the
years ended September 30 principally due to the following:
September 30
-------------
2001 2000 1999
------ ------- ---------
U.S. Federal statutory tax rate 34.00% 34.00% 34.00%
Add (deduct):
Non-deductible goodwill 14.3% 22.8% 0.7%
State and local taxes 8.3% 7.1% 6.3%
Valuation allowance 0% (19.3%) (144.6%)
All other 0.8% (0.1%) 0.2%
------ ------- ---------
Effective tax rate 57.40% 44.53% (103.42%)
====== ======= =========
During the year ended September 30, 2000, the Company recognized the income tax
benefit of a reserve established against the value of certain real estate owned
by it. In addition, during the year ended September 30, 1999, the Company
released its previously established valuation allowance against deferred tax
assets, as a result of a return to profitability and tax planning strategies.
Components of the deferred tax asset include:
F 10
Note 5: (Continued)
- ------
September 30
-------------
2001 2000
-------- ----------
Deferred tax assets:
Bank organization cost $ -0- $ 28,000
Reserve for bad debts 25,000 16,000
Inventory reserve 8,000 1,000
Reserve on real estate 109,000 109,000
Inventory cost capitalized 54,000 -0-
State tax expense 41,000 18,000
Net operating loss carryforward 390,000 894,000
Business tax credit 113,000 113,000
AMT credit 38,000 35,000
-------- ----------
Total deferred tax assets $778,000 $1,214,000
======== ==========
The Company has a federal net operating loss carryforward of $1,147,000 which
expires in 2007 through 2011.
NOTE 6 - BUSINESS ACQUISITION
- ---------------------------------
On January 4, 2000, the Company acquired RMRS. The acquisition was accounted
for using the purchase method of accounting and, accordingly, the purchase price
was allocated to the assets purchased and the liabilities assumed based upon
their estimated fair values at the date of acquisition.
Pursuant to the Merger Agreement, the Company issued a total of 250,000 shares
of common stock to the selling shareholders of RMRS. As a result of this
transaction, the Company recorded approximately $2,973,000 in goodwill and other
acquisition costs which are being amortized over fifteen years.
In September 2001, the Company's Board of Directors approved a one-for-four
(1:4) reverse stock split. As stipulated in the Merger Agreement, this event
triggered the issuance of the remaining 375,000 performance shares to the RMRS
selling shareholders. The performance shares were valued at $780,000, based on
the market price on the date of stock issuance, and recorded on the books as
goodwill to be amortized over fifteen years.
NOTE 7 - SHORT-TERM BORROWINGS AND LONG-TERM DEBT:
- --------------------------------------------------------
Short-term borrowings and long-term debt consist of the following:
September 30
-------------
2001 2000
---------- ----------
Term loan collateralized by corporate headquarters building,
due February 15, 2009, bearing interest at 7.87% per annum $ 438,000 $ 480,000
Term loan, collateralized by equipment, due 2005, bearing
interest at prime rate, 6.5% at September 30, 2001 266,000 346,000
Capital leases 277,000 106,000
Notes payable, bearing interest at 9.5% 3,000 12,000
---------- ----------
984,000 944,000
Less: current portion (240,000) (177,000)
---------- ----------
Total long-term debt $ 744,000 $ 767,000
========== ==========
F 11
Note 7: (Continued)
- -------
The weighted average interest rate on the prime rate term loan for the period it
was outstanding during the year ended September 30, 2001 was 8.19%
One of the term loans contains restrictive debt covenants consisting of debt
service coverage ratio and tangible net worth requirements.
Future maturities of debt are as follows:
Fiscal year ended September 30
----------------------------------
2002 $240,000
2003 218,000
2004 211,000
2005 84,000
2006 63,000
thereafter 168,000
-------
$984,000
========
NOTE 8 - ACCRUED EXPENSES:
- -----------------------------
September 30
---------------
Accrued expenses are comprised of the following: 2001 2000
---------- ----------
Accrued bankcard fees $ 136,000 $ 145,000
Accrued compensation and taxes 240,000 187,000
Accrued communication costs 289,000 117,000
Accrued professional fees 362,000 166,000
Accrued commission 147,000 291,000
Other 221,000 140,000
---------- ----------
$1,395,000 $1,046,000
========== ==========
NOTE 9 - STOCKHOLDERS' EQUITY:
- ---------------------------------
Preferred Stock
- ----------------
During fiscal 1994, the Company issued 23,511 shares of Series H Preferred Stock
(Class H Stock) to two noteholders in exchange for $329,000 of debt and accrued
interest. Each share of Class H Stock has a stated value of $14.00 and is
convertible into five (5) shares of common stock after adjustment for the
one-for-four (1:4) reverse stock split in September 2001. Class H Stock has
priority in liquidation over the Company's common stock but is junior in
liquidation to all previous classes of preferred stock. During fiscal 1999,
23,511 shares of Class H Preferred Stock were converted into 117,555 shares of
common stock.
During fiscal 1996, the Company issued 425,000 shares of Series K Preferred
Stock (Class K Stock) for an aggregated price of $850,000. Each share of Class
K Stock has a stated value of $2.00 per share and is convertible into one share
of common stock after adjustment for the one-for-four (1:4) reverse stock split
in September 2001. Class K Stock has priority in liquidation over the Company's
common stock but is junior in liquidation to all previous classes of preferred
stock. Between fiscal 1997 through 1999, a total of 400,000 shares of Class K
Stock were converted into 400,000 shares of the Company's common stock. As of
September 30, 2001, there are 25,000 shares of Class K Stock outstanding which
are convertible into 25,000 shares of common stock.
During fiscal 1997 and 1998, the Company issued a total of 212,000 shares of
Series L Preferred Stock (Class L Stock), for an aggregate price of $1,060,000.
Class L Stock has a stated value of $5.00 per share and is convertible into one
share of common stock after adjustment for the one-for-four (1:4) reverse stock
split in September 2001. Class L Stock has priority in liquidation over the
Company's common stock, but is junior in liquidation to all previous classes of
preferred stock. Class L and Class K Preferred Stock have no dividend yield and
are non-cumulative. Between fiscal 1998 through 2000, a total of 212,000 shares
of Class L Stock were converted into 212,000 shares of common stock. As of
September 30, 2000, all the Class L Stock had been converted into shares of
common stock.
F 12
Note 9: (Continued)
- -------
Stockholders' Rights Plan
- ---------------------------
The Company has a Stockholders' Rights Plan. All stockholders have one preferred
share purchase right ("Right") for each outstanding share of common stock of the
Company. Each Right entitles the registered holder to purchase from the Company
one-hundredth of a share of series A Junior Participating Preferred Stock, no
par value ("preferred Stock") of the Company at a price of $2.00 per one
one-hundredth of a share of Preferred Stock ("Purchase Price"), after adjustment
for the one-for-four (1:4) reverse stock split in September 2001. The
description and terms of the Rights are set forth in a Rights Agreement dated as
of September 30, 1996 ("Rights Agreement").
The Rights will separate from the Common Stock and a Distribution Date will
occur upon the earlier of (i) 10 days following a public announcement that,
without consent of the Board of Directors, a person or group of affiliated or
associated persons ("Acquired Person") have acquired beneficial ownership of
twenty-percent (20%) or more of the outstanding Common Stock, or (ii) 10
business days (or such later date as may be determined by action of the Board of
Directors prior to such time as any person becomes an Acquired Person) following
the commencement of, or announcement of an intention to make a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of twenty-percent (20%) of more such outstanding
Common Stock.
In the event that any person becomes the beneficial owner of twenty-percent
(20%) or more of the Common Stock of the Company, ten (10) days thereafter
("Flip-In Event") each holder of a Right will thereafter have the right to
receive, upon exercise thereof at the then current Purchase Price of the Right,
Common Stock which has a value of two times the Purchase Price of the Right
(such right being called the "Flip-In Right"). In the event the Company is
acquired in a merger or other business combination transaction where the Company
is not the surviving corporation or in the event that 50% or more of its assets
or earning power is sold, proper provision shall be made so that each holder of
a Right will thereafter have the right to receive, upon the exercise thereof at
the then current Purchase Price of the Right, common stock of the acquiring
entity which has a value of two times the Purchase Price of the Right. Upon the
occurrence of the Flip-In Event, any Rights that are or were at any time owned
by an Acquiring Person shall become null and void insofar as they relate to the
Flip-In Right.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on September 30, 2006 ("Final Expiration Date"), unless the Rights are
earlier redeemed or exchanged by the Company, in each case, as description in
the Rights Agreement.
Earnings Per Share
- --------------------
The following table sets forth the computation of basic and diluted earnings per
share:
September 30
-------------
2001 2000 1999
---------- ---------- ----------
Net income: $ 434,000 $ 291,000 $2,618,000
Shares:
Denominator for basic earnings per
share - weighted-average shares
outstanding 5,797,120 5,257,393 4,535,777
Effect of dilutive securities:
Employee stock options 141,688 514,304 964,053
Warrants -0- 14,848 124,735
Series H Convertible Preferred Stock -0- -0- 37,698
Series K Convertible Preferred Stock 25,000 25,000 91,507
Series L Convertible Preferred Stock -0- 13,552 71,101
---------- ---------- ----------
Dilutive potential common shares 166,688 567,704 1,289,094
---------- ---------- ----------
F 13
Note 9: (Continued)
- -------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 5,963,808 5,825,097 5,824,871
========== ========== ==========
Basic earnings per share $ 0.07 $ 0.06 $ 0.58
========== ========== ==========
Diluted earnings per share $ 0.07 $ 0.05 $ 0.45
========== ========== ==========
NOTE 10 - COMMON STOCK OPTIONS:
- -----------------------------------
The Company has an Incentive Stock Option Plan (the "Plan"), which provides for
the issuance of up to 1,343,750 stock options, each to purchase one share of the
common stock at a price not less than 100% of the market price at the date of
grant.
Stock option activity during 2001, 2000, and 1999 was as follows:
Exercise
Options Price
--------- -------------------
Outstanding September 30, 1998 950,250 $ 1.60 - $ 6.00
Granted 161,250 4.00 - 8.00
Forfeited (55,667) 3.64 - 5.88
Exercised (226,250) 2.00 - 3.40
---------
Outstanding September 30, 1999 829,583 $ 1.60 - $ 8.00
Granted 106,250 7.00 - 16.48
Forfeited (32,917) 5.76 - 10.24
Exercised (116,583) 1.60 - 4.48
---------
Outstanding September 30, 2000 786,333 $ 1.60 - $16.48
Granted 88,750 2.84 - 3.24
Forfeited (165,416) 1.60 - 8.48
Exercised (15,000) 2.00 - 3.40
---------
Outstanding September 30, 2001 694,667 $ 1.60 - $16.48
=========
Exercisable at September 30, 1999 594,500 $ 1.80 - $ 5.76
=========
Exercisable at September 30, 2000 527,500 $ 1.84 - $10.04
=========
Exercisable at September 30, 2001 437,000 $ 1.60 - $16.48
=========
Options available for grant
at September 30, 2000 512,750
=========
Options available for grant
at September 30, 2001 461,500
=========
All officer and key employee options are granted under the Company's incentive
stock option plan, with the exception of 87,500 shares of options granted to
three officers, vesting over a period of 3-5 years, which were not granted under
the plan. Options granted to outside directors are not included in the
incentive stock option plan. The exercise price of both the incentive stock
options and directors' options shall be 100% of the fair market value on the
date the option is granted. Options granted to outside directors are normally
vested immediately. Options granted to officers and employees are normally
vested over a five-year period. Options are exercisable for a period of five
years from date of vest.
F 14
Note 10: (Continued)
- --------
The following table summarizes information about stock options outstanding at
September 30, 2001:
Options Outstanding Options Exercisable
--------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding at Contractual Exercise Exercisable at Exercise
Exercise Prices Sept. 30, 2001 Life Price Sept. 30, 2001 Price
- ---------------- -------------- ------------ --------- --------------- ---------
1.60 - $2.00 254,000 2.9 $ 1.89 253,000 $ 1.85
2.84 - $4.24 249,000 4.4 $ 3.58 90,000 $ 3.87
4.84 - $7.00 121,000 4.9 $ 6.10 78,000 $ 5.90
8.00 - $16.48 71,000 8.3 $ 10.09 16,000 $ 9.83
-------------- ---------------
695,000 4.3 $ 4.07 437,000 $ 3.28
============== ===============
The weighted average fair value of the options granted under the plan in effect
at September 30, 2001, during the fiscal years ended September 30, 2001, 2000
and 1999 were $1.89, $3.20, and $2.88, respectively. Fair value was determined
using the Black Scholes options pricing formula. For options granted in fiscal
2001, the risk free interest rate was approximately 5%, the expected life was
3-5 years, the expected volatility was approximately 80.0% and the expected
dividend yield was 0%, all calculated on a weighted average basis. For options
granted in fiscal 2000, the risk-free interest rate was approximately 6%, the
expected life was 3-5 years, the expected volatility was approximately 90.1% and
the expected dividend yield was 0%, all calculated on a weighted average basis.
For options granted in fiscal 1999, the risk-free interest rate was
approximately 5%, the expected life was 3-5 years, the expected volatility was
approximately 88.4%, and the expected dividend yield was 0%, all calculated on a
weighted average basis.
On a pro forma basis under the provision of FAS 123, net income and net income
per share would have decreased by $321,000 and $0.06 for the year ended
September 30, 2001, respectively; net income and net income per share would have
decreased by $245,000 and $0.05 for the year ended September 30, 2000,
respectively; and net income and net income per share would have decreased by
$207,000 and $0.05 for the year ended September 30, 1999, respectively.
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
- --------------------------------------------
Lease Commitments
- ------------------
The Company leases real property under agreements which expire at various times
over the next three years. The Company's future minimum rental payments for
capital and operating leases at September 30, 2001 are as follows:
Fiscal Year Capital Leases Operating Leases
- ------------ --------------- ----------------
2002 $ 130,000 $ 162,000
2003 98,000 128,000
2004 81,000 20,000
--------------- ---------------
Total minimum lease payments $ 309,000 $ 310,000
===============
Less: imputed interest of 8.6% 32,000
---------------
Present value of net
minimum lease payment $ 277,000
===============
Rent expense for the years ended September 30, 2001, 2000, and 1999 totaled
$193,000, $155,000, and $60,000, respectively. Certain operating leases have
renewal options at the end of the lease term solely at the Company's discretion.
F 15
NOTE 12 - LITIGATION
- -----------------------
The Company is involved in various legal cases arising in the ordinary course of
business. Based upon current information, management, after consultation with
legal counsel, believes the ultimate disposition thereof will have no material
effect upon either the Company's results of operations or its financial
position.
The Company is defending a lawsuit filed against the Company in which the
plaintiff asserts claims for breach by the Company of its obligations under a
Letter of Commitment and interference with the plaintiff's contractual and
business relationships. Based upon current information, including facts
produced at trial, management, after consultation with legal counsel, believes
that the plaintiff's claims are without merit, however, there is no assurance
that the ultimate resolutions of these claims will not result in material
liability to the Company.
NOTE 13 - SEGMENT INFORMATION
- ---------------------------------
The Company has adopted FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). FAS 131 established revised
standards for public companies related to the reporting of financial and
descriptive information about their operating segments in financial statements.
Certain information is disclosed, per FAS 131, based on the way management
organizes financial information for making operating decisions and assessing
performance.
The Company currently operates in three business segments: Bankcard and
Transaction Processing, Terminal Sales and Leasing, and Check Related Products,
all of which are located in the United States.
The Company's reportable operating segments have been determined in accordance
with the Company's internal management structure, which is organized based on
operating activities. The accounting policies of the operating segments are the
same as those described in the summary of significant accounting policies. The
Company evaluates performance based upon two primary factors, one is the
segment's operating income and the other is based on the segment's contribution
to the Company's future strategic growth.
September 30
-------------
Business Segments 2001 2000 1999
- ----------------- ------------ ------------ ------------
Revenues:
Bankcard and Transaction Processing $25,017,000 $23,902,000 $21,089,000
Terminal Sales 447,000 2,459,000 2,431,000
Check Related Products 4,479,000 1,979,000 308,000
------------ ------------ ------------
$29,943,000 $28,340,000 $23,828,000
============ ============ ============
Operating Income:
Bankcard and Transaction Processing $ 1,181,000 $ 831,000 $ 1,499,000
Terminal Sales (431,000) 259,000 132,000
Check Related Products (187,000) (1,074,000) (439,000)
------------ ------------ ------------
$ 563,000 $ 16,000 $ 1,192,000
============ ============ ============
Depreciation and Amortization:
Bankcard and Transaction Processing $ 532,000 $ 419,000 $ 302,000
Terminal Sales 39,000 53,000 88,000
Check Related Products 764,000 495,000 98,000
------------ ------------ ------------
$ 1,335,000 $ 967,000 $ 488,000
============ ============ ============
Capital Expenditures:
Bankcard and Transaction Processing $ 821,000 $ 742,000 $ 938,000
Terminal Sales 2,000 20,000 16,000
Check Related Products 859,000 613,000 187,000
------------ ------------ ------------
$ 1,682,000 $ 1,375,000 $ 1,141,000
============ ============ ============
F 16
Note 13: (Continued)
- --------------------
Total Assets:
Bankcard and Transaction Processing $10,111,000 $10,026,000 $ 9,300,000
Terminal Sales 876,000 1,038,000 1,381,000
Check Related Products 7,934,000 5,949,000 2,251,000
------------ ------------ ------------
$18,921,000 $17,013,000 $12,932,000
============ ============ ============
NOTE 14 - NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations".
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company does not believe that the adoption of SFAS 141 will have a
significant impact on its financial statements and the results of its
operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS"), "Goodwill and Other Intangible Assets", which is effective for
fiscal years beginning after December 15, 2001. SFAS 142 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.
In August 2001, FASB issued Statement of Financial Accounting Standards No. 144
("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets."
This Statement supersedes FASB Statement No. 121, ("SFAS 121") Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of,
and the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business (as previously defined
in that Opinion). This statement establishes a single accounting model for
long-lived asset impairment, based on the framework established in SFAS 121, for
long-lived assets to be disposed of by sale, and resolves significant
implementation issues related to SFAS 121. The Company is currently evaluating
the impact that SFAS 144 will have on its financial statements and the results
of its operations.
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED)
- ----------------------------------------------------
The following summarizes the unaudited quarterly financial results of the
Company for the fiscal years ended September 30, 2001 and September 30, 2000 (in
thousands, except share data):
Year Ended September 30, 2001
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- ---------
Net revenues $ 6,979 $ 7,380 $ 7,758 $ 7,826
Gross profit 2,266 2,788 2,644 2,587
Income (loss) from operations 63 350 203 (53)
Net income (loss) 22 167 282 (37)
Basic net income (loss) per
common share $ 0.00 $ 0.03 $ 0.05 ($0.01)
Diluted net income (loss) per
common share $ 0.00 $ 0.03 $ 0.05 ($0.01)
F 17
Note 15: (Continued)
- -------
Year Ended September 30, 2000
----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- -------- --------
Net revenues $ 6,205 $ 6,574 $ 8,022 $ 7,539
Gross profit 1,749 1,924 2,376 2,373
Income (loss) from operations (56) (288) 299 61
Net income (loss) (19) (219) 321 208
Basic net income (loss) per
common share $ 0.00 ($0.04) $ 0.06 $ 0.04
Diluted net income (loss) per
common share $ 0.00 ($0.04) $ 0.05 $ 0.04
F 18
ELECTRONIC CLEARING HOUSE, INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE VIII TO FORM 10K
RULE 12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
REDUCTION IN REDUCTION IN
RESERVE AND RESERVE AND
BALANCE AT CHARGED TO ACCOUNTS BALANCE AT CHARGED TO ACCOUNTS BALANCE AT
DESCRIPTION 09/30/1998 EXPENSE RECEIVABLE 09/30/1999 EXPENSE RECEIVABLE 09/30/2000
- ----------------------- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Allowance for
trade receivables/
chargeback receivables $ 1,829,000 $ 443,000 $ 1,271,000 $ 1,001,000 $ 557,000 $ 1,178,000 $ 380,000
Allowance for
notes receivable $ 148,000 $ 0 $ 0 $ 148,000 $ 29,000 $ 0 $ 177,000
Allowance for
obsolete inventories $ 202,000 $ 0 $ 0 $ 202,000 $ 3,000 $ 202,000 $ 3,000
Allowance for
deferred tax asset $ 1,713,000 $ 0 $ 1,713,000 $ 0 $ 0 $ 0 $ 0
REDUCTION IN
RESERVE AND
CHARGED TO ACCOUNTS BALANCE AT
DESCRIPTION EXPENSE RECEIVABLE 09/30/2001
- ----------------------- ----------- ------------- -----------
Allowance for
trade receivables/
chargeback receivables $ 544,000 $ 611,000 $ 313,000
Allowance for
notes receivable $ 0 $ 177,000 $ 0
Allowance for
obsolete inventories $ 29,000 $ 32,000 $ 0
Allowance for
deferred tax asset $ 0 $ 0 $ 0
F 19