UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
FOR THE PERIOD ENDED MARCH 31, 2003
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
COMMISSION FILE NUMBER: 0-15245
ELECTRONIC CLEARING HOUSE, INC.
(Exact name of registrant as specified in its charter)
NEVADA 93-0946274
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
28001 DOROTHY DRIVE,
AGOURA HILLS, CALIFORNIA 91301
(Address of principal executive offices)
TELEPHONE NUMBER (818) 706-8999
WWW.ECHO-INC.COM
(Registrant's telephone number, including area code; web site address)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
---
As of April 30, 2003, there were 5,805,155 shares of the Registrant's
Common Stock outstanding.
ELECTRONIC CLEARING HOUSE, INC.
INDEX
-----
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Balance Sheets 3
March 31, 2003 and September 30, 2002
Consolidated Statements of Operations 4
Three months and six months ended
March 31, 2003 and 2002
Consolidated Statements of Cash Flows 5
Six months ended March 31, 2003 and 2002
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Certification of Chief Executive Officer
Certification of Chief Financial Officer
2
PART I. FINANCIAL INFORMATION
- --------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
March 31, September 30,
2003 2002
------------- ---------------
Current assets:
Cash and cash equivalents $ 2,878,000 $ 2,409,000
Restricted cash 1,057,000 906,000
Accounts receivable less allowance of $445,000 and $431,000 1,889,000 1,744,000
Inventory 242,000 234,000
Prepaid expenses and other assets 216,000 169,000
Deferred tax asset 84,000 266,000
------------- ---------------
Total current assets 6,366,000 5,728,000
Noncurrent assets:
Property and equipment, net 6,016,000 5,101,000
Deferred tax asset 1,793,000 2,018,000
Other assets less accumulated amortization of $282,000 and $259,000 534,000 637,000
Goodwill, net -0- 4,707,000
------------- ---------------
Total assets $ 14,709,000 $ 18,191,000
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 571,000 $ 515,000
Accounts payable 95,000 201,000
Settlement payable to merchants 1,201,000 729,000
Accrued expenses 1,238,000 987,000
Deferred income -0- 62,000
------------- ---------------
Total current liabilities 3,105,000 2,494,000
Long-term debt 2,250,000 2,159,000
------------- ---------------
Total liabilities 5,355,000 4,653,000
------------- ---------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 36,000,000 authorized:
5,844,424 and 5,835,331 shares issued; 5,805,155 and
5,796,062 shares outstanding 58,000 58,000
Additional paid-in capital 21,456,000 21,435,000
Accumulated deficit (11,691,000) (7,486,000)
Less treasury stock at cost, 39,269 common shares (469,000) (469,000)
------------- ---------------
Total stockholders' equity 9,354,000 13,538,000
------------- ---------------
Total liabilities and stockholders' equity $ 14,709,000 $ 18,191,000
============= ===============
See accompanying notes to consolidated financial statements.
3
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
------------------------- --------------------------
2003 2002 2003 2002
----------- ------------ ------------ ------------
Revenues:
Processing revenue $5,139,000 $ 4,061,000 $ 9,886,000 $ 7,868,000
Transaction revenue 4,569,000 4,217,000 8,984,000 8,256,000
Terminal sales 27,000 54,000 59,000 129,000
Other revenue 32,000 54,000 139,000 54,000
----------- ------------ ------------ ------------
9,767,000 8,386,000 19,068,000 16,307,000
----------- ------------ ------------ ------------
Costs and expenses:
Processing and transaction expense 6,348,000 5,750,000 12,537,000 10,880,000
Cost of terminals sold 17,000 231,000 38,000 263,000
Other operating costs 758,000 678,000 1,479,000 1,287,000
Research and development expense 296,000 442,000 667,000 798,000
Selling, general and administrative expenses 1,883,000 1,786,000 3,355,000 3,528,000
Amortization expense - goodwill -0- 128,000 -0- 256,000
Legal settlement -0- 2,500,000 -0- 2,500,000
----------- ------------ ------------ ------------
9,302,000 11,515,000 18,076,000 19,512,000
----------- ------------ ------------ ------------
Income (loss) from operations 465,000 (3,129,000) 992,000 (3,205,000)
Interest income 7,000 14,000 15,000 36,000
Interest expense (47,000) (24,000) (99,000) (38,000)
----------- ------------ ------------ ------------
Income (loss) before provision for income taxes and
cumulative effect of an accounting change 425,000 (3,139,000) 908,000 (3,207,000)
(Provision) benefit for income taxes (157,000) 1,231,000 (406,000) 1,206,000
----------- ------------ ------------ ------------
Income (loss) before cumulative effect of an accounting change 268,000 (1,908,000) 502,000 (2,001,000)
Cumulative effect of an accounting change to adopt SFAS 142 -0- -0- (4,707,000) -0-
----------- ------------ ------------ ------------
Net earnings (loss) $ 268,000 $(1,908,000) $(4,205,000) $(2,001,000)
=========== ============ ============ ============
Basic net earnings (loss) per share
Before cumulative effect of accounting change $ 0.05 $ (0.33) $ 0.09 $ (0.35)
Cumulative effect of accounting change -0- -0- (0.81) -0-
----------- ------------ ------------ ------------
Basic net earnings (loss) per share $ 0.05 $ (0.33) $ (0.72) $ (0.35)
=========== ============ ============ ============
Diluted net earnings (loss) per share
Before cumulative effect of accounting change $ 0.05 $ (0.33) $ 0.09 $ (0.35)
Cumulative effect of accounting change -0- -0- ( 0.81) -0-
----------- ------------ ------------ ------------
Diluted net earnings (loss) per share $ 0.05 $ (0.33) $ (0.72) $ (0.35)
=========== ============ ============ ============
Weighted average shares outstanding
Basic 5,801,619 5,790,267 5,798,810 5,779,988
=========== ============ ============ ============
Diluted 5,914,121 5,790,267 5,852,717 5,779,988
=========== ============ ============ ============
See accompanying notes to consolidated financial statements.
4
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS
ENDED MARCH 31,
--------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss $(4,205,000) $(2,001,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation 330,000 307,000
Amortization of software 425,000 233,000
Amortization of goodwill -0- 251,000
Provision for losses on accounts and notes receivable 26,000 203,000
Provision for obsolete inventory -0- 200,000
Write-down of real estate -0- 100,000
Fair value of stock issued in connection with
directors' compensation 21,000 45,000
Deferred income taxes 407,000 (1,211,000)
Legal settlement -0- 1,300,000
Cumulative effect of an accounting change 4,707,000 -0-
Changes in assets and liabilities:
Restricted cash (151,000) 523,000
Accounts receivable (171,000) (250,000)
Inventory (8,000) 25,000
Accounts payable (106,000) 20,000
Settlement payable to merchants 472,000 (98,000)
Accrued expenses 251,000 (176,000)
Prepaid expenses (109,000) (71,000)
------------ ------------
Net cash provided by (used in) operating activities 1,889,000 (600,000)
------------ ------------
Cash flows from investing activities:
Other assets 80,000 (22,000)
Purchase of equipment and software (1,470,000) (958,000)
------------ ------------
Net cash used in investing activities (1,390,000) (980,000)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 292,000 -0-
Repayment of notes payable (88,000) (65,000)
Repayment of capitalized leases (234,000) (109,000)
Proceeds from exercise of stock options -0- 11,000
------------ ------------
Net cash used in financing activities (30,000) (163,000)
------------ ------------
Net increase (decrease) in cash 469,000 (1,743,000)
Cash and cash equivalents at beginning of period 2,409,000 4,147,000
------------ ------------
Cash and cash equivalents at end of period $ 2,878,000 $ 2,404,000
============ ============
5
ELECTRONIC CLEARING HOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
- ------------------------------------
The accompanying consolidated financial statements as of March 31, 2003, and for
the three and six month periods then ended are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair statement of the financial position
and the results of operations for the interim periods. The consolidated
financial statements herein should be read in conjunction with the consolidated
financial statements and notes thereto, together with management's discussion
and analysis of financial condition and results of operations, contained in the
Company's Annual Report to Stockholders incorporated by reference in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2002. The results of operations for the three and six months ended March 31,
2003 are not necessarily indicative of the likely results for the entire fiscal
year ending September 30, 2003.
NOTE 2 - STOCK-BASED COMPENSATION:
- -------------------------------------
The Company measures compensation expense for its employee stock-based
compensation under APB 25. The Company provides pro-forma disclosures of net
income and earnings per share as if a fair value method had been applied using
the Black Scholes Model. Therefore, pro forma compensation costs for employee
stock and stock options awards is measured as the excess, if any, of the fair
value of the common stock at the grant date over the amount an employee must pay
to acquire the stock and is amortized over the related service periods using the
straight-line method.
The following table compares net income and earnings per share as reported to
the pro forma amounts that would be reported had compensation expense been
recognized for the stock-compensation plans in accordance with the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation:
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income (loss), as reported $ 268,000 $(1,908,000) $(4,205,000) $(2,001,000)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards granted since October 1,
1995 $ (85,000) $ (83,000) $ (166,000) $ (168,000)
------------ ------------ ------------ ------------
Pro forma net income (loss) $ 183,000 $(1,991,000) $(4,371,000) $(2,169,000)
============ ============ ============ ============
Net earnings (loss) per share:
Basic - as reported $ 0.05 $ (0.33) $ (0.72) $ (0.35)
Basic - pro forma $ 0.03 $ (0.34) $ (0.75) $ (0.38)
Diluted - as reported $ 0.05 $ (0.33) $ (0.72) $ (0.35)
Diluted - pro forma $ 0.03 $ (0.34) $ (0.75) $ (0.38)
6
NOTE 3 - EARNINGS (LOSS) PER SHARE:
- -----------------------------------------
The Company calculates net earnings (loss) per share as required by Statement of
Financial Accounting Standard No. 128, "Earnings per Share".
Three months ended March 31, Six months ended March 31,
-------------------------------- --------------------------------
2003 2002 2003 2002
------------- ----------------- --------------- ---------------
Numerator:
Income (loss) before cumulative
effect of an accounting change $ 268,000 $ (1,908,000) $ 502,000 $ (2,001,000)
Cumulative effect of an accounting
change to adopt SFAS 142 -0- -0- (4,707,000) -0-
------------- ----------------- --------------- ---------------
Net income (loss) $ 268,000 $ (1,908,000) $ (4,205,000) $ (2,001,000)
============= ================= =============== ===============
Denominator:
Weighted average shares outstanding
for basic earnings (loss) per share 5,801,619 5,790,267 5,798,810 5,779,988
Effect of dilutive stock options 112,502 -0- 53,907 -0-
------------- ----------------- --------------- ---------------
Adjusted weighted average shares
outstanding for diluted earnings
(loss) per share 5,914,121 5,790,267 5,852,717 5,779,988
============= ================= =============== ===============
Basic net earnings (loss) per share:
Before cumulative effect of accounting
change $ 0.05 $ (0.33) $ 0.09 $ (0.35)
Cumulative effect of accounting change -0- -0- (0.81) -0-
------------- ----------------- --------------- ---------------
Basic net earnings (loss) per share $ 0.05 $ (0.33) $ (0.72) $ (0.35)
============= ================= =============== ===============
Diluted net earnings (loss) per share:
Before cumulative effect of
accounting change $ 0.05 $ (0.33) $ 0.09 $ (0.35)
Cumulative effect of accounting change -0- -0- (0.81) -0-
------------- ----------------- --------------- ---------------
Diluted net earnings (loss) per share $ 0.05 $ (0.33) $ (0.72) $ (0.35)
============= ================= =============== ===============
Dilutive common stock equilvalents have been excluded from the calculation of
diluted loss per share as their inclusion would be anti-dilutive to the loss per
share calculation.
NOTE 4 - NON-CASH TRANSACTIONS:
- -----------------------------------
Significant non-cash transaction for the six months ended March 31, 2003 was as
follows:
- Capital equipment of $177,000 was acquired under capital leases.
7
Significant non-cash transactions for the six months ended March 31, 2002 were
as follows:
- A $1.3 million 15-year long-term promissory note was issued as part of
the PLIC vs. ECHO legal settlement.
- Capital equipment of $87,000 was acquired under capital leases.
- The Company purchased and subsequently retired 25,000 shares of ECHO's
common stock, which was pledged to the Company by a former merchant as
collateral to a $54,000 chargeback receivable owed to the Company.
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS:
- --------------------------------------
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". This interpretation expands the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability for the fair value of an obligation assumed under a guarantee. FIN 45
clarifies the requirements of SFAS 5, Accounting for Contingencies, relating to
guarantees. In general, FIN 45 applies to contracts or indemnification
agreements that contingently require the guarantor to make payments to the
guaranteed party based on changes in an underlying that is related to an asset,
liability, or equity security of the guaranteed party. The disclosure
requirements of FIN 45 are effective for the Company as of December 31, 2002,
and require disclosure of the nature of the guarantee, the maximum potential
amount of future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of FIN 45 are to
be applied prospectively to guarantees issued or modified after December 31,
2002. Significant guarantees that have been entered into by the Company are
disclosed in Note 8. The Company does not expect the requirements of FIN 45 to
have a material impact on results of operations, financial position, or
liquidity.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which provides guidance on how to
transition from the intrinsic value method of accounting for stock-based
employee compensation under APB 25 to SFAS 123's fair value method of
accounting, if a company so elects. In addition, SFAS 148 requires increased
disclosures for all companies, including those choosing not to adopt the
accounting provisions of FAS 123. The transition and disclosure changes are
effective for fiscal years ending after December 15, 2002. The Company adopted
the interim disclosure provision of SFAS 148 during the quarter ended March 31,
2003.
NOTE 6 - INVENTORY:
- ------------------
The components of inventory are as follows:
March 31 September 30
2003 2002
--------- -------------
Raw materials $ 26,000 $ 61,000
Finished goods 216,000 473,000
--------- -------------
$ 242,000 $ 534,000
Less:
Allowance for obsolescence -0- 300,000
--------- -------------
$ 242,000 $ 234,000
========= =============
8
NOTE 7 - SEGMENT INFORMATION:
- ----------------------------
The Company currently operates in two business segments: bankcard and
transaction processing, and check-related products, all of which are located in
the United States.
The Company's reportable operating segments have been determined in accordance
with the Company's internal management structure, which is organized based on
the Company's product lines. The Company evaluates performance based upon two
primary factors, one is the segment's operating income and the other is based on
the segment's contribution to the Company's future strategic growth.
The Company has consolidated the segment information for terminal sales into the
bankcard and transaction processing segment due to the decreased significance of
terminal sales.
Three Months Ended Six Months Ended
March 31 March 31
---------------------------- --------------------------
2003 2002 2003 2002
------------ -------------- ------------ ------------
Revenues:
Bankcard and transaction
processing $ 7,796,000 $ 6,876,000 $15,315,000 $13,471,000
Check-related products 1,971,000 1,510,000 3,753,000 2,836,000
------------ -------------- ------------ ------------
$ 9,767,000 $ 8,386,000 $19,068,000 $16,307,000
============ ============== ============ ============
Operating income (loss):
Bankcard and transaction
processing $ 963,000 $ 338,000 $ 1,885,000 $ 1,123,000
Check-related products 102,000 (305,000) 208,000 (419,000)
Other - corporate expenses (600,000) (3,162,000) (1,101,000) (3,909,000)
------------ -------------- ------------ ------------
$ 465,000 $ (3,129,000) $ 992,000 $(3,205,000)
============ ============== ============ ============
March 31 September 30
2003 2002
------------ --------------
Total assets:
Bankcard and transaction
Processing $ 6,389,000 $ 5,399,000
Check-related products 3,862,000 7,710,000
Other 4,458,000 5,082,000
------------ --------------
$14,709,000 $ 18,191,000
============ ==============
NOTE 8 - CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
- ------------------------------------------------------------
Effective October 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets". SFAS
142 requires that goodwill no longer be amortized, but instead be tested for
impairment at least annually using a fair value-based approach. In the year of
adoption, SFAS No. 142 also requires the Company to perform an initial
assessment of its reporting units to determine whether there is any indication
that the goodwill carrying value may be impaired. This transitional assessment
is made by comparing the fair value of each reporting unit, as determined in
accordance with the new standard, to its book value. To the extent the fair
value of any reporting unit is less than its book value, which would indicate
that potential impairment of goodwill exists, a second transitional test is
required to determine the amount of impairment.
The Company has determined that it has two reporting units, which correspond to
its two reportable business segments; the "Bankcard and Transaction Processing"
unit and the "Check Related Products" unit. All of the Company's goodwill
relates to business acquisition transactions, which apply exclusively to the
Check Related Products unit. The Company completed the transitional impairment
testing required by SFAS 142 in the first quarter of fiscal 2003. The Company
determined the estimated fair value of its reporting units using a discounted
cash flow technique and a market approach based upon the Company's total market
9
capitalization as of October 1, 2002. Based upon the valuation findings, the
Company determined that its goodwill was fully impaired and a non-cash charge
equal to the goodwill carrying amount of $4.7 million was recognized in the
Company's condensed consolidated financial statements. As prescribed by SFAS
142, the Company treated this non-cash goodwill impairment as a cumulative
effect of change in accounting principle. No income tax benefit has been
recognized for this charge as the goodwill is not deductible for income tax
purposes.
Had the provisions of SFAS No. 142 been applied for the three and six months
ended March 31, 2002, the Company's net income before the cumulative effect of a
change in accounting principle, and net income (loss) per share would have been
as follows:
For the Three Months Ended For the Six Months Ended
March 31, March 31,
------------------------------ ------------------------------
2003 2002 2003 2002
-------------- -------------- ---------------- ------------
Net income (loss), as reported $ 268,000 $ (1,908,000) $ (4,205,000) $(2,001,000)
Add:
Goodwill amortization -0- 128,000 -0- 256,000
-------------- -------------- ---------------- ------------
Adjusted net income (loss) $ 268,000 $ (1,780,000 $ (4,205,000) $(1,745,000)
============== ============== ================ ============
Basic earnings (loss) per share, as reported $ 0.05 $ (0.33) $ (0.72) $ (0.35)
Effect of SFAS No. 142 -0- 0.02 -0- 0 04
-------------- -------------- ---------------- ------------
Adjusted basic earnings (loss) per share $ 0.05 $ (0.31) $ (0.72) $ (0.31)
============== ============== ================ ============
Diluted earnings (loss) per share, as reported $ 0.05 $ (0.33) $ (0.72) $ (0.35)
Effect of SFAS No. 142 -0- 0.02 -0- 0 04
-------------- -------------- ---------------- ------------
Adjusted diluted earnings (loss) per share $ 0.05 $ (0.31) $ (0.72) $ (0.31)
============== ============== ================ ============
NOTE 9 - COMMITMENTS, CONTINGENT LIABILITIES, AND GUARANTEES:
- ------------------------------------------------------------
The Company currently relies on cooperative relationships with, and sponsorship
by two banks in order to process its Visa, MasterCard and other bankcard
transactions. The agreement between the banks and the Company requires the
Company to assume and compensate the banks for bearing the risk of "chargeback"
losses. Under the rules of Visa and Mastercard, when a merchant processor
acquires card transactions, it has certain contingent liabilities for the
transactions processed. This contingent liability arises in the event of a
billing dispute between the merchant and a cardholder that is ultimately
resolved in the cardholder's favor. In such a case, the disputed transaction is
charged back to the merchant and the disputed amount is credited or otherwise
refunded to the cardholder. If the Company is unable to collect this amount
from the merchant's account, and if the merchant refuses or is unable to
reimburse the Company for the chargeback due to merchant fraud, insolvency or
other reasons, the Company will bear the loss for the amount of the refund paid
to the cardholders. The Company utilizes a number of systems and procedures to
manage merchant risk. In addition, the Company requires cash deposits by certain
merchants which are held by the Company's sponsoring banks to minimize the risk
that chargebacks are not collectible from merchants.
A cardholder, through its issuing bank, generally has until the later of up to
four months after the date a transaction is processed or the delivery of the
product or service to present a chargeback to the Company's sponsoring bank as
the merchant processor. Therefore, management believes that the maximum
potential exposure for the chargebacks would not exceed the total amount of
transactions processed through Visa and MasterCard for the last four months and
other unresolved chargebacks in the process of resolution. For the last four
months through March 31, 2003, this potential exposure totaled approximately
$308 million. At March 31, 2003, the Company, through its sponsoring banks, had
approximately $217,000 of unresolved chargebacks that were in the process of
resolution. At March 31, 2003, the Company, through its sponsoring banks, has
access to $9.0 million in merchant deposits to cover any potential chargeback
losses.
10
For the three-month ended March 31, 2003 and 2002, the Company processed
approximately $236 million (2003) and $187 million (2002) of Visa and MasterCard
transactions, which resulted in $2.4 million in gross chargeback activities for
the three months ended March 31, 2003 and $2.1 million for the three months
ended March 31, 2002. Substantially all of these chargebacks were recovered from
the merchants.
The Company records a reserve for chargeback loss allowance based on its
processing volume and historical trends and data. As of March 31, 2003 and
2002, the allowance for chargeback losses, which is classified as a component of
the allowance for uncollectible accounts receivable, was $380,000 and $178,000,
respectively. The expense associated with the valuation allowance is included
in processing and transaction expense in the accompanying consolidated
statements of income.
The Company has a small check guarantee business. The Company charges the
merchant a percentage of the face amount of the check and guarantees payment of
the check to the merchant in the event the check is not honored by the
checkwriter's bank. Merchants typically present customer checks for processing
on a regular basis and, therefore, dishonored checks are generally identified
within a few days of the date the checks are guaranteed by the Company.
Accordingly, management believes that its best estimate of the Company's maximum
potential exposure for dishonored checks at any given balance sheet date would
not exceed the total amount of checks guaranteed in the last 10 days prior to
the balance sheet date. As of March 31, 2003, the Company estimates that its
maximum potential dishonored check exposure was approximately $486,000.
For the quarters ended March 31, 2003 and 2002, the Company guaranteed
approximately $3,970,000 (2003) and $2,689,000 (2002) of merchant checks, which
resulted in $169,000 (2003) and $191,000 (2002) of dishonored checks presented
to the Company for payments. The Company has the right to collect the full
amount of the check from the checkwriter. Based on its actual collection
experience, the Company collects approximately 50-60% of the total dishonored
checks. The Company establishes a reserve for this activity based on historical
and projected loss experience. As of March 31, 2003 and 2002 the reserve for
check guarantee loss was $138,000 (2003) and $106,000 (2002). The expense
associated with the valuation allowance is included in processing and
transaction expense in the accompanying consolidated statements of income.
During November 2002, the Company negotiated a $500,000 lease line with a
leasing company to fund certain computer equipment needs. The Company has
financed $119,000 of computer equipment through this lease line through March
31, 2003. In January 2003, an $800,000 line of credit for working capital needs
and a $700,000 lease line for funding the remaining Oasis software installment
payments were secured from First Regional Bank, the Company's primary bankcard
sponsoring bank, at a borrowing rate of prime + 1%. The Company has drawn down
$292,000 of the Oasis lease line as of March 31, 2003.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
---------------------------------------
OVERVIEW
Electronic Clearing House, Inc. ("ECHO" or "the Company") is an electronic
payment processor and one of the processors in the nation who can provide a
"complete solution" to the payment processing needs of merchants, banks and
collection agencies. The Company's services include point-of-sale (POS) terminal
management, debit and credit card processing, check guarantee, check
verification, check conversion, check re-presentment, check collection and
inventory tracking. The Company's ability to program and oversee the management
of a merchant's POS system, provide credit card and debit card processing,
provide multiple check services, provide both electronic and traditional
collection services and fully integrate all these services into a single
internet-based reporting capability constitutes a definition of what the Company
refers to as a "complete solution" to the payment processing needs of merchants,
banks and collection agencies.
The Company derives revenues from two main business segments, bankcard and
transaction processing (bank services), and check-related products (check
services) and operates under the following brands;
- MerchantAmerica, ECHO's retail provider of processing services to both
the merchant and bank markets;
- U-Haul(R) Services, which provides credit card authorization, collects
rental and compensation activity and tracks available inventory.
- National Check Network(R) (NCN(R)) for check verification;
- XPRESSCHEX, Inc. for processing check guarantee, check conversion,
check collection and check verification; and
MerchantAmerica, as a retail sales channel, generates revenues through the sale
of both of the Company's business segments, while all of NCN and XPRESSCHEX
revenues are reflected in the Company's check services business segment. The
Company actively solicits and has sold both bankcard processing and check
services to U-Haul dealers for their non-U-Haul activity and such sales are
recorded against the appropriate business segment. All specific transaction
processing activity related directly to U-Haul rental activity is reported under
the Company's bankcard services business segment.
The Company's main revenue generator is its bankcard services business segment.
ECHO typically receives a percentage-based fee on the dollar amount processed
and a transaction fee on the number of transactions processed. This business
segment accounts for approximately 80% of the Company's total revenue. This
business segment has been profitable consistently, although price competition is
intense.
In a desire to enhance this business segment's processing infrastructure and
reduce processing costs, the Company licensed several payment processing systems
from Oasis Technologies in 2002 and a full integration of this system is
currently projected for completion by the last quarter of 2003.
ECHO generates a recurring revenue stream for processing U-Haul rental
activities. The C.A.R.D. terminal system was developed by ECHO in 1993 to
provide complex services and features for U-Haul's rental activities, which
include tracking advance reservations and dealer compensation. The Company has
experienced a gradual decline in the number of transactions processed over the
past twelve months due to U-Haul's efforts in slowly migrating their larger
dealers to a PC processing platform and active use of internet-based processing
services. The Company's proprietary terminals, which were designed to serve
smaller dealers, are expected to continue to meet a need with U-Haul dealers who
cannot justify the cost of business internet connection. Due to the growing
revenue from other sales channels and the gradual reduction in active U-Haul
dealers, revenue generated for U-Haul has dropped below 5% of the Company's
total revenue. Therefore, future break-out of U-Haul as a specific sales
channel and revenue source is not deemed to be necessary and will be
discontinued.
12
The check services business segment has been built over the past four years,
building upon the Company's XPRESSCHEX subsidiary that operated for many years
as a check guarantee service to primarily California-based merchants. The
acquisition of Magic Software Development, Inc. in 1999 and the acquisition of
Rocky Mountain Retail Systems in 2000 significantly increased the Company's
capabilities and provided a national market for the Company's check services.
Over the past four years, ECHO has invested significant resources and management
focus in its check services business. Check services revenues are based on a
fixed fee per transaction or a fee based on the amount of the check for each
transaction. The Company is one of few check processors in the nation with both
an Automated Clearing House (ACH) engine, which gives the Company the ability to
transfer and settle funds, and a robust check writer database (NCN), which
provides check risk management. The NCN database includes over 20 million
bad-check writer records, 80 million positive records, and 260 affiliated
collection agencies that continually contribute to the database to enrich its
depth and value.
NCN provides an ongoing revenue stream as collection agencies, major national
merchants, other transaction processors, and thousands of small merchants access
the NCN database daily to verify the status of a check writer in real time.
Check verification has been recognized as one of the lowest cost and most
effective ways for retailers to lower the risks and loss experience in accepting
checks as a form of payment and the Company's NCN database is one of only four
major databases in the nation that can serve this market need on a national
scale.
XPRESSCHEX revenues are growing significantly due to the increased use of the
Company's check conversion services, which include capture of the necessary
check data at the point of sale and submission of the transaction electronically
to the Automated Clearing House (ACH) nightly for settlement. XPRESSCHEX also
maintains an active collection agency, registered in 48 states, that serves
primarily as a referral agent to select NCN members that are collection agencies
and are located in various regions of the country. This ability to provide
local collection capability through one national entity is a distinctive
advantage the Company holds over other check service companies who operate
centralized collection agencies and only go to local agencies as a secondary or
last chance option.
In 2000, Visa U.S.A. announced its intention to utilize its credit card
processing network that connects over 14,000 banks and over 4 million merchants
to electronically process checks as well. This program was called Visa POS Check
Service and in December 2000, ECHO signed an agreement with Visa U.S.A. as a
third-party acquiring processor in Visa's Point-of-Sale (POS) Check Services
program. The Visa POS Check Service allows merchants to receive immediate online
authorization for paper checks, by converting them into electronic transactions
at the point of sale and verifying them against Visa's member bank accounts.
The Company provides critical back-end infrastructure for the service, including
its NCN database for verification and its ACH backbone for funds settlement, for
checks written on non-participating banks. At the present time, ECHO is the
preferred third-party acquiring processor for a majority of the financial
institutions currently signed up for the Visa program.
The Company also qualified as an acquirer processor with Visa, a role that
accepts transactions from the merchant's POS terminal and reformats them for
submission to the Visa network. To date, ECHO is the only company to register
as both a third-party processor and an acquirer processor with Visa under the
Visa POS Check Service program.
STRATEGY
ECHO's strategy is to provide merchants and financial institutions with
electronic connectivity to various payment services in the credit card, debit
card and check-related markets. ECHO's services enable merchants to maximize
revenues by offering a wide variety of payment options, reduce the costs
associated with processing and handling checks, improve collections and manage
risk more effectively. The Company has targeted several areas as significant
opportunities for growth, including focusing on middle-market retail accounts
for check services and developing a scalable infrastructure to support
widespread implementation of the Visa POS Check Services. The Company also seeks
to increase profitability of core merchant services by enhancing the back-end
technology and reducing processing costs.
- --The Company plans to grow ECHO's check services business by focusing on
mid-size retail chains that can benefit most from automating check processing
and verification. These mid-size accounts typically offer higher margins than
larger accounts and offer a less competitive marketplace. ECHO has signed
agreements with several retailers and the pipeline for prospective customers is
growing.
13
- --The Company is continuing to enhance the Visa's POS Check Services so as to
leverage ECHO's check services products through Visa member banks. As the market
gains acceptance of the Visa POS Check Services, it will significantly increase
the Company's opportunities to market its check conversion services and
verification services to its core merchant base and solidify its strategic
relationships with the various financial institutions that have chosen the
Company as its third-party processor under the Visa POS Check Service program.
It would also create a tremendous marketing channel for the Company to cross
sell it's other check products such as check representments and check guarantee
to the Visa member banks participating in the Visa POS Check Service program.
- --ECHO has identified an underserved, niche market of smaller regional and
community banks for its agent bank program. The Company is providing a turn-key
solution to allow smaller banks to offer bankcard and check processing services
using ECHO's back-end infrastructure. The program is being sold at a low
incremental cost to ECHO and still provides a better priced and a more
integrated product offering to small banks than they can currently receive from
other providers.
SALES AND MARKETING
ECHO sells its merchant and check services through several marketing channels,
including independent sales organizations (ISO), its own internal sales force
and direct merchant referrals by existing merchants. Approximately 20% of the
Company's new accounts have historically been generated through the ISOs. In
fiscal 2002, ECHO restructured its sales force and implemented an
incentive-based commission structure with the goal of targeting specific
accounts and shortening the sales cycle. The Company also offers merchant
services through a direct online sales channel, MerchantAmerica.com.
Management believes that the Company is unique in the number of payment methods
that the Company offers to its merchants, the combination of transaction types
that it manages directly, its ability to integrate additional services and its
ability to support each merchant through one vertically integrated source.
The Company's marketing strategy is to maximize cross selling opportunities to
its existing base of merchants and financial institutions in the Visa POS Check
Program; sell integrated suites of payment services, bankcard and check
processing services to small banks; enhance and market MerchantAmerica; and
develop the private label check service program.
COMPETITION
Bankcard processing and check processing services are highly competitive
industries and are characterized by rapid technological change, rapid rates of
product obsolescence and introductions of competitive products often at lower
prices and/or with greater functionality than those currently on the market.
ECHO is not currently a major player in the industries in which it competes and
many of the Company's competitors have 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.
Competitors also have economies of scale cost advantages over ECHO due to their
high processing volumes that may make it difficult for ECHO to compete. The
Company believes that its success will depend upon its ability to continuously
develop new products and services and to enhance its current products and to
introduce them promptly into the market.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
- -------------------------------------------------
Financial highlights for the second quarter of 2003 as compared to the same
period last year were as follows:
- --Total revenue increased 16.5% to $9.8 million
- --Gross margins from processing and transaction revenue increased to 34.6% from
30.5%
- --Diluted EPS of $0.05 as compared to diluted loss per share of $0.33
14
- --Bankcard and transaction processing revenue increased 13.4% to $7.8 million
- --Check-related revenue increased 30.5% to $ 1.97 million
REVENUE. Total revenue increased 16.5% to $9,767,000 for the three months ended
March 31, 2003, from $8,386,000 for the same period last year. The increase can
be primarily attributed to a 13.4% growth from same period last year in the
bankcard processing business and 30.5% growth from the same period last year in
the check services business segment. Total processing and transaction revenue
for this fiscal quarter increased 17.3%, from $8,278,000 in fiscal 2002 to
$9,708,000 in fiscal 2003.
COST OF SALES. Bankcard processing expenses are largely a direct reflection of
any changes in processing revenue. A majority of the Company's bankcard
processing expenses are fixed as a percentage of each transaction amount, with
the remaining costs being based on a fixed rate applied to the transactions
processed. Processing-related expenses, consisting of bankcard processing
expense and transaction and check processing expense, increased from $5,750,000
in the second fiscal quarter of 2002 to $6,348,000 in the current fiscal
quarter, a 10.4% increase. The increase reflects a 17.3% increase in processing
and transaction revenues for the current fiscal quarter.
Gross margin from processing and transaction services increased from 30.5% in
the second fiscal quarter last year to 34.6% in this fiscal quarter. This
increase in gross margin was due to the lower chargeback losses experienced in
the current quarter combined with a higher percentage of check services revenue,
which resulted in an improvement in the gross margin.
EXPENSE. Other operating costs such as personnel costs, telephone and
depreciation expenses increased from $678,000 in the second fiscal quarter of
2002 to $758,000 in this fiscal quarter, an increase of 11.8%. This increase was
primarily attributable to a 16.5% increase in total revenue. Research and
development expense decreased from $442,000 in the prior year quarter to
$296,000 in the current fiscal quarter. This was mainly attributable to the
Visa POS Check Service program transitioning from the pilot phase to
implementation phase and the diminishing research and development expenses
associated with this program.
Selling, general and administrative expenses increased from $1,786,000 in the
second fiscal quarter 2002 to $1,883,000 in the current quarter. This increase
was primarily attributable to the higher costs to support the Company's sales
and marketing programs and overall higher personnel costs due to cost of living
adjustments and increases in employee benefits such as medical insurance cost.
The increase was partially offset by the higher legal expenses incurred during
the prior year quarter as a result of the legal settlement with Premiere
Lifestyles International Corporation ("PLIC"). As a percentage of total revenue,
selling, general and administrative expenses decreased from 21.3% in the second
fiscal quarter 2002 to 19.3% in the current fiscal quarter.
OPERATING INCOME. Operating income for the quarter ended March 31, 2003 was
$465,000, as compared to an operating loss of $3,129,000 in the same period last
year. The increase in operating income was due to a combination of factors
including an increase of $497,000 in gross profit as result of the 16.5%
increase in revenue, the elimination of $128,000 of goodwill amortization
expense upon the adoption of SFAS 142 by the Company in the first fiscal quarter
of this year, a reduction of $300,000 in valuation allowance for real estate and
inventory in the prior year quarter, and the legal and settlement expense of
$2,669,000 incurred in the second quarter of fiscal 2002.
INTEREST EXPENSE. Interest expense increased to $47,000 for the quarter ended
March 31, 2003, from $24,000 in the same period last year. The increase is due
to the increase of $624,000 in interest bearing debt from March 2002.
EFFECTIVE TAX RATE. Effective tax rate of 36.9% differs from the statutory rate
of 42.5% as a result of prior year estimates.
SEGMENT RESULTS
Bankcard and Transaction Processing. Bankcard processing and transaction revenue
increased 13.4%, from $6,876,000 in the second fiscal quarter 2002 to $7,796,000
for this fiscal quarter. This revenue increase was mainly attributable to
approximately 26.5% increase in bankcard processing volume as compared to the
same quarter last year. The processing volume increase was a result of the
organic growth from the Company's existing merchants and other marketing
15
initiatives, such as the Company's MerchantAmerica services and other sales
programs. The bankcard and transaction processing revenue increase was partially
offset by a 27.6% decrease in U-Haul revenue as compared to the prior year
quarter. Additionally, the Company has one bankcard processing merchant which
has grown significantly over the past year and accounted for approximately 9% of
the total bankcard and transaction revenue for the quarter ended March 31, 2003.
The bankcard and transaction processing segment generated a gross margin of
27.1% in the quarter ended March 31, 2003 as compared to 26.5% in the same
period last year. This increase in gross margin was attributable to lower
chargeback losses. Operating income for this business segment was $963,000 for
the second fiscal quarter, up 184.9% from $338,000 in the same period last year.
The increase in operating income is attributable to the 13.4% increase in
bankcard processing revenue this quarter over the prior year quarter.
Check Related Products. Check-related revenues increased from $1,510,000 for the
second fiscal quarter ended March 31, 2002 to $1,971,000 for the current fiscal
quarter, an increase of 30.5%. This was attributable to a 2.8% increase in check
verification revenue and a 53.8% increase in other electronic check processing
and collection revenue.
Check services revenue made up 20.3% of total processing and transaction
revenues in this fiscal quarter as compared to 18.0% in the prior year.
Check-related operating income was $102,000 for the current fiscal quarter as
compared to an operating loss of $305,000 in the same period last year. The
improvement in this business segment was primarily attributable to the 30.5%
increase in revenue.
Other. Other revenue decreased from $54,000 in the second fiscal quarter 2002 to
$32,000 in this fiscal quarter due to the decrease in the amount of customer
software development work completed during the current quarter. Terminal sales
have diminished gradually each quarter as the Company focuses its sales effort
primarily on the processing business.
SIX MONTHS ENDED MARCH 31, 2003 AND 2002
Financial highlights for the six months ended March 31, 2003, as compared to the
same period last year, were as follows:
- --Total revenue increased 16.9% to $19.1 million
- --Gross margins from processing and transaction revenue increased to 33.6% from
32.5%
- --Diluted EPS before cumulative effect of accounting change of $0.09 as compared
to diluted loss per share of $0.35
- --Bankcard and transaction processing revenue increased 13.7% to $15.3 million
- --Check-related revenue increased 32.3% to $3.8 million
REVENUE. Total revenue increased 16.9% to $19,068,000 for the six months ended
March 31, 2003, from $16,307,000 for the same period last year. Total
processing and transaction revenue for this six-month period increased 17.0%,
from $16,124,000 for the six months ended March 31, 2002 to $18,870,000 for the
same period last year.
COST OF SALES. Processing-related expenses increased from $10,880,000 for the
six-month period in 2002 to $12,537,000 for the six months ended March 31, 2003,
a 15.2% increase. The increase reflects a 17.0% increase in processing and
transaction revenues for the six months ended March 31, 2003 as compared to the
same period in the prior year.
Gross margin from processing and transaction services increased from 32.5% in
the six-month period last year to 33.6% for the current six-month period. This
increase in gross margin was due to the lower chargeback losses experienced in
the current period combined with the 32.3% increase in check services revenue,
which resulted in an improvement in the gross margin.
16
EXPENSE. Other operating costs increased from $1,287,000 for the six months
ended March 31, 2002 to $1,479,000 for the six months ended March 31, 2003, an
increase of 14.9%. This increase was primarily attributable to 16.9% increase in
total revenue. Research and development expense decreased from $798,000 in the
six months ended March 31, 2002 to $667,000 in the current six-month period.
This was mainly attributable to the Visa POS Check Service program transitioning
from the pilot phase to implementation phase and the diminishing research and
development expenses associated with this program.
Selling, general and administrative expenses decreased from $3,528,000 for the
six months ended March 31, 2002 to $3,355,000 in the current six-month period.
This decrease was attributable to the lower legal fees experienced in the
current year due to the PLIC settlement in March 2002. The decrease was offset
by the higher selling expenses required to support the Company's sales and
marketing programs. As a percentage of total revenue, selling, general and
administrative expenses decreased from 21.6% for the six months ended March 31,
2002 to 17.6% in the current six-month period.
OPERATING INCOME. Operating income for the six months ended March 31, 2003 was
$992,000, as compared to an operating loss of $3,205,000 for the same period
last year. The improvement in operating income was primarily attributable to the
$3,095,000 legal and settlement expense related to the PLIC lawsuit settlement
in March 2002, the $131,000 decrease in research and development expense, the
elimination of $256,000 of goodwill amortization expense and the 16.9% increase
in revenue.
INTEREST EXPENSE. Interest expense increased to $99,000 for the six months
ended March 31, 2003, from $38,000 in the same period last year.
EFFECTIVE TAX RATE. Effective tax rate for the six months ended March 31, 2003
was 44.7%, as compared to a tax benefit of $1,206,000 for the six months ended
March 31, 2002, primarily due to the lawsuit settlement.
SEGMENT RESULTS
Bankcard and Transaction Processing. Bankcard processing and transaction revenue
increased 13.7%, from $13,471,000 for the six months ended March 31, 2002 to
$15,315,000 for the current six-month period. This revenue increase was mainly
attributable to approximately 25.2% increase in bankcard processing volume as
compared to the same six-month period last year. The processing volume increase
was a result of the organic growth from the Company existing merchants and other
marketing initiatives.
The bankcard and transaction processing segment generated a gross margin of
27.1% for the six months ended March 31, 2003 as compared to 28.5% in the same
period last year. This decrease in gross margin was attributable to the pricing
concession offered to several high volume merchants and a decrease in U-Haul
revenue, which yields a higher margin than the average bankcard processing
activities.
Check Related Products. Check-related revenues increased from $2,836,000 for the
six months ended March 31, 2002 to $3,753,000 for the current six-month period,
an increase of 32.3%. This was attributable to the growth in the check
conversion revenue and the increase in other electronic check processing and
collection revenue.
Check services revenue accounted for 19.7% of total for the current six-month
period as compared to 17.4% in the same period prior year. Check-related
operating income was $208,000 for the current six-month period as compared to an
operating loss of $419,000 in the same period last year. The improvement in
operating income was primarily attributable to the 32.3% increase in check
services revenue.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, the Company had available cash of $2,878,000, restricted
cash of $1,057,000 in reserve with its primary processing banks and working
capital of $3,261,000.
Accounts receivable net of allowance for doubtful accounts increased to
$1,889,000 at March 31, 2003 from $1,744,000 at September 30, 2002. Allowance
17
for doubtful accounts, which reflect chargeback losses, increased to $445,000 at
March 31, 2003 from $431,000 at September 30, 2002.
Inventory remained relatively constant at $242,000 at March 31, 2003 from
$234,000 at September 30, 2002.
Net cash provided by operating activities for the six months ended March 31,
2003 was $1,889,000, as compared to net cash used in operating activities of
$600,000 for the six months ended March 31, 2002. This was primarily
attributable to an increase in operating income of $992,000, as compared to an
operating loss of $3,205,000 for the same six-month period in the prior year.
In the six months ended March 31, 2003, the Company used $538,000 for the
purchase of equipment and $932,000 for the acquisition and capitalization of
software costs. During the six months ended March 31, 2003, the Company used
$30,000 for financing activities such as notes payable proceeds and repayment of
notes and capitalized leases obligations.
During November 2002, the Company negotiated a $500,000 lease line with a
leasing company to fund certain computer equipment needs of which approximately
$121,000 had been drawn down through March 31, 2003. In January 2003, the
Company negotiated an $800,000 line of credit for working capital needs and a
$700,000 secured promissory note to fund the remaining Oasis software
installment payments from First Regional Bank, the Company's primary bankcard
sponsoring bank, at a borrowing rate of prime + 1%. In March 2003, the Company
completed a draw down of $292,000 to fund the Oasis software installment
payments from First Regional Bank. The Company anticipates a full draw down of
this lease line by the last quarter of 2003.
At March 31, 2003 the Company had the following cash commitments:
Payment Due By Period
---------------------
Contractual Less than After
Obligations Total 1 year 2-3 years 4-5 years 5 years
- ------------------- ---------- ---------- ---------- ---------- ----------
Long-term debt
including interest $3,025,155 $ 373,168 $ 785,734 $ 508,069 $1,358,184
Capital lease
obligations 848,430 382,965 465,465 -0- -0-
Operating leases 517,869 251,624 266,245 0- 0-
---------- ---------- ---------- ---------- ----------
Total contractual
cash obligations $4,391,454 $1,007,757 $1,517,444 $ 508,069 $1,358,184
========== ========== ========== ========== ==========
The Company's primary source of liquidity is expected to be cash flow generated
from operations and cash and cash equivalents currently on hand. Management
believes that its future cash flow from operations together with cash on hand
and the funding sources already secured will be sufficient to meet its working
capital needs and other commitments at the present time.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. This interpretation expands the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability for the fair value of an obligation assumed under a guarantee. FIN 45
clarifies the requirements of SFAS 5, Accounting for Contingencies, relating to
guarantees. In general, FIN 45 applies to contracts or indemnification
18
agreements that contingently require the guarantor to make payments to the
guaranteed party based on changes in an underlying that is related to an asset,
liability, or equity security of the guaranteed party. The disclosure
requirements of FIN 45 are effective for the Company as of December 31, 2002,
and require disclosure of the nature of the guarantee, the maximum potential
amount of future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of FIN 45 are to
be applied prospectively to guarantees issued or modified after December 31,
2002. The Company does not expect the requirements of FIN 45 to have a material
impact on results of operations, financial position, or liquidity.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which provides guidance on how to
transition from the intrinsic value method of accounting for stock-based
employee compensation under APB 25 to SFAS 123's fair value method of
accounting, if a company so elects. In addition, SFAS 148 requires increased
disclosures for all companies, including those choosing not to adopt the
accounting provisions of FAS 123. The transition and disclosure changes are
effective for fiscal years ending after December 15, 2002. The Company adopted
SFAS 148 for the increased disclosures requirements during the second quarter of
2003.
FORWARD-LOOKING STATEMENTS
The discussion of the financial condition and results of operations of the
Company should be read in conjunction with the consolidated financial statements
and notes thereto included elsewhere herein. This discussion contains
forward-looking statements, including statements regarding the Company's
strategy, financial performance and revenue sources, which involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth elsewhere herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------------
The Company could be exposed to market risk from changes in interest rates on
its lease lines. The Company's exposure to interest rate risk relates to its
$800,000 line of credit and $700,000 software lease line. There was an
outstanding balance of $292,000 against the $700,000 lease line as of March 31,
2003. However, a hypothetical 1% interest rate change would have no material
impact on the Company's results of operations.
ITEM 4. CONTROLS AND PROCEDURES
-------------------------
Within the 90-day period prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14(c) and 15d-14(c) of the Securities Exchange
Act of 1934. Based upon that evaluation, our Chief Executive Officer and our
Chief Financial Officer concluded that our disclosure controls and procedures
are effective in timely alerting them to material information relating to the
Company, required to be included in this quarterly report on Form 10-Q.
There have been no significant changes in our internal controls or in other
factors, which could significantly affect internal controls subsequent to the
date that the Company carried out is evaluation.
19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-------------------------------------
99.1 Certification by Joel M. Barry, Chief Executive Officer of Electronic
Clearing House, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by Alice L. Cheung, Chief Financial Officer of
Electronic Clearing House, Inc. pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following reports on Form 8-K were filed during the quarter ended March 31,
2003:
Date of Filing Item Reported
- ---------------- --------------
February 4, 2003
Press release issued announcing the signing of an
Amended and Restated Rights Agreement with its transfer
agent, which amends the Rights Agreement adopted by the
Board of Directors on September 30, 1996.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELECTRONIC CLEARING HOUSE, INC.
-------------------------------
(Registrant)
Date: May 14, 2003 By: \s\ Alice Cheung
---------------------------
Alice Cheung, Treasurer and
Chief Financial Officer
21
FORM OF CERTIFICATION FOR FORM 10-Q
I, Joel M. Barry, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Electronic Clearing
House, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Joel M. Barry
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Chairman, Chief Executive Officer
FORM OF CERTIFICATION FOR FORM 10-Q
I, Alice L. Cheung, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Electronic Clearing
House, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Alice L. Cheung
----------------------
Chief Financial Officer