form10k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
|
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934 for the fiscal year ended September 30,
2007
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Commission
File Number 0-15245
ELECTRONIC
CLEARING HOUSE, INC.
(Exact
name of registrant as specified in its charter)
Nevada
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93-0946274
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(State
or other jurisdiction of incorporation
or organization)
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(IRS
Employer
Identification No.)
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730
Paseo Camarillo, Camarillo, California
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93010
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number,
including area code: (805)
419-8700, fax
number: (805)
419-8682
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
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Name
of each exchange on which registered
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None
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None
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Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.01 par value
(Title
of
class)
Indicate
by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes £ No
R
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes £ No R
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 R No £
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405
of this chapter) 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. £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange
Act.
(Check one):
Large
accelerated filer £
|
Accelerated
filer R
|
Non-accelerated
filer £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No
R
Based
on
a closing price of $11.61 as reported by the NASDAQ Stock Market on March 31,
2007, the aggregate market value of the voting and non-voting common equity
held
by non-affiliates was $73,491,799 .
As
of
November 30 , 2007, the Registrant had outstanding 7,025,329 shares
of Common Stock.
DOCUMENTS
INCORPORATED BY REFERENCE – Portions of the issuer’s definitive Proxy Statement
to be filed pursuant to Regulation 14A within 120 days after the end of its
last
fiscal year are incorporated by reference into Part III of this
report.
ELECTRONIC
CLEARING HOUSE, INC.
2007
FORM 10-K ANNUAL REPORT
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PART
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
2007
Annual Report on Form 10-K contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Those statements include statements regarding our intent,
belief or current expectations. Examples of forward-looking
statements include statements regarding our strategy, financial performance,
revenue sources and anticipated expenditures. Prospective investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward-looking statements
as
a result of various factors, including, but not limited to, such factors
as
fluctuations in demand for our products and services, the introduction of new
products and services, our ability to maintain customer and strategic business
relationships, the underlying businesses of our customers, strategic
transactions or events (such as mergers, acquisitions or divestitures),
transactions or events that require us to revise our strategic objectives or
to
implement new strategies, transactions or events outside the ordinary course
of
business that divert management’s attention from our strategic
objectives, technological advancements and our ability to implement
new technologies, the impact of competitive products, services and pricing,
growth in targeted markets, the adequacy of our liquidity and financial strength
to support our growth and initiatives, and those other risk factors set
forth elsewhere in this Annual Report. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Risk
Factors.”
OVERVIEW
Electronic
Clearing House, Inc. (ECHO) is an electronic payment processor that
provides for the payment processing needs of retail, online and recurring
payment merchants through its direct sales team as well as channel partners
that include technology companies, banks, collection agencies and other trusted
resellers. The company derives the majority of its revenue from
two main business segments: 1) bankcard and transaction processing services
(“bankcard services”), whereby we provide solutions to merchants and banks to
allow them to accept and process credit and debit card payments from consumers;
and 2) check-related products (“check services”), whereby we provide various
services to merchants and banks to allow them to accept and process check
payments from consumers. The principal services we offer within these
two segments include, with respect to our bankcard services, debit and credit
card processing (where we provide authorization, clearing and settlement for
all
major credit and debit card brands), and with respect to our check services,
check guarantee (where, if we approve a check transaction and a check is
subsequently dishonored by the check writer's bank, the merchant is reimbursed
by us), check verification (where, prior to approving a check, we search our
negative and positive check writer database to determine whether the check
writer has a positive record or delinquent check-related debts),
electronic check conversion (the conversion of a paper check at the point of
sale to a direct bank debit which is processed for settlement through the
Federal Reserve System’s Automated Clearing House (“ACH”) network), eCheck (the
processing of a payment generally originating from an internet or recurring
payment merchant wherein the direct debit from a consumer’s checking account
occurs via the ACH network), check re-presentment (where we attempt to clear
a
check on multiple occasions via the ACH network prior to returning the check
to
the merchant so as to increase the number of cleared check transactions), and
check collection (where we provide national scale collection services for
returned checks). We operate our services under the following
brands:
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·
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ECHO,
our retail and wholesale brand for credit card and check processing
services to merchants, banks, technology partners and other trusted
reseller channels;
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·
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MerchantAmerica,
Inc. our online presence for merchant reporting and web
services;
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·
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National
Check Network (“NCN”), our proprietary database of negative and positive
check writer accounts (i.e., accounts that show delinquent history
in the
form of non-sufficient funds and other negative transactions), for
check
verification, check conversion capture services, and for membership
to
collection agencies; and
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·
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XPRESSCHEX,
Inc. for check collection services.
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We
discuss our services in greater detail below. Overall, our ability to
program and oversee the management of a merchant’s point-of-sale (POS) system,
provide credit card and debit card processing, provide multiple services for
the
processing of checks, provide both electronic and traditional collection
services, and integrate all of these services into an Internet-based reporting
capability allows us to provide for the majority of the payment processing
needs
of our customers.
Bankcard
and transaction processing services provide for the majority of our
revenues. We typically receive a percentage-based fee (“Discount
Rate”) on the dollar amount processed and a transaction fee on the number of
transactions processed. For the fiscal year 2007, the bankcard and
transaction processing business segment accounted for approximately 81.4% of
the
Company’s total revenue.
We
were
incorporated in Nevada in December 1981. Our executive offices are
located at 730 Paseo Camarillo, Camarillo, California 93010, and our telephone
number is (805) 419-8700. Our common stock is traded on the NASDAQ
Capital Market under the ticker symbol “ECHO.” Information on our
website, www.echo-inc.com, does not constitute part of this annual
report. We
make
available, free of charge on our website, our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments
to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we electronically file
such
material with, or furnish it to the SEC through a link to the appropriate
section of the SEC’s website.
In
October 2006, the Unlawful Internet Gaming Enforcement Act was passed and signed
into law. As a result of the passed legislation, several of our
Internet Wallet merchants, all of which used our check services, had a
significant drop in processing activities during the quarter ended December
31,
2006 as we wound down the services we provided to them. During February 2007,
the Company decided to cease processing and collection services for all Internet
wallet customers. On March 27, 2007, the Company entered into a
Non-Prosecution Agreement pursuant to which the Office of the United States
Attorney for the Southern District of New York agreed not to pursue actions
against the Company and its subsidiaries for activities related to its provision
of payment processing services to Internet wallets that provided services to
online gaming websites during the period from January 2001 through and including
the date of the signing of the Non-Prosecution Agreement.
On
December 14, 2006, we entered into an Agreement and Plan of Merger (the Merger
Agreement) to be acquired by Intuit, Inc. (Intuit) in a merger transaction
in
which we would have become a wholly owned subsidiary of Intuit (the Intuit
merger). Pursuant to the terms of the Merger Agreement and subject to
the conditions thereof, Intuit would have acquired all of the outstanding shares
of our common stock and all outstanding equity awards (which would have vested
in connection with the transactions) for a cash amount of $18.75 per share,
for
a total purchase price of approximately $142 million on a fully diluted
basis. The transaction was subject to regulatory review, our
shareholder approval and other customary closing conditions. On March
26, 2007, the Company mutually agreed with Intuit and Elan Acquisition
Corporation, a Nevada corporation and wholly owned subsidiary of Intuit
(“Elan”), to terminate the Merger Agreement. The parties determined
that it was in the mutual best interest of each party to terminate the proposed
agreement. In connection with the termination, the Company, Intuit
and Elan agreed to release each other from all claims arising under or related
to the terminated merger agreement. The Company also cancelled its
previously adjourned special stockholders’ meeting relating to the proposed
acquisition, which was scheduled to reconvene on March 27, 2007. As
of result of the termination of the merger agreement, the Company recorded
approximately $934,000 for the year ended September 30, 2007 of costs related
to
the merger.
OUR
HISTORY
ECHO
has been offering bankcard and check services for over 20 years. We
were incorporated in Nevada in 1981 under the name Bio Recovery Technology,
Inc.
and changed our name to Electronic Clearing House, Inc. with the acquisition
of
a credit card processing company, Electronic Financial Systems, Inc. in January
1986. In 1986, ECHO developed the capability, utilizing the Federal
Reserve System's Automated Clearing House ("ACH"), a network that serves as
a
nationwide, wholesale electronic payment and collection system by way of
transferring funds between banks via the Federal Reserve System, 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
1999,
ECHO acquired Magic Software Development, Inc., a check processing
company located in Albuquerque, New Mexico, that serviced National Check Network
(“NCN”), an association of approximately 60 affiliated collection agencies
across the nation. At the time, we provided a check guarantee service that
only
served California merchants, but with the addition of Magic's check processing
capabilities, our check guarantee services have been offered on a national
basis
since 1999. In fiscal 2000, Magic's corporate name was changed to
XPRESSCHEX.
In
November 1999, we acquired Peak Collection Services, a collection agency in
Albuquerque, New Mexico, and incorporated Peak into our XPRESSCHEX
operations
as our Collection Division in December of 1999. The XPRESSCHEX
Collection
Division conducts collections on a national basis. Having a fully integrated,
nationally approved collection service allows XPRESSCHEX
to operate
as a central check clearing facility for NCN's collection agencies without
each
agency having to authorize such activity.
In
January 2000, we acquired Rocky Mountain Retail Systems (“RMRS”) located in
Boulder, Colorado, which provided a national check verification service to
over
200 collection agencies across the nation. RMRS maintained a national check
database of negative and positive check writer records.
In
May
2001, we acquired the assets of National Check Network (“NCN”) and combined the
NCN positive and negative check writer records with the RMRS database, resulting
in a combined database of over 120 million check writer records which identify
the positive and negative check writing activities occurring with individual
check writers (including information related to accepted checks, bounced checks,
and the frequency of delinquent transactions).
In
May
2001, ECHO launched MerchantAmerica.com, a web-based source of
financial information whereby an ECHO merchant can access their
transactional history, bank information, significant business and office-related
services and build an online store and accept payment in the form of credit
cards or checks. The site also contains a National Merchant Directory that
is
free to any merchant in the United States. Additionally, it provides
any merchant in the United States with the ability to edit and enhance their
directory listing. While we believe that MerchantAmerica.com is a valuable
and
cost-effective resource for merchants, it provides us with a low-cost method
of
keeping our merchants informed and involved with us.
OUR
SERVICES
Bankcard
and Transaction Processing Services
Services
With
our
bankcard and transaction processing services, we provide payment solutions
to
merchants that allow them to accept credit and debit card payments from
consumers. Our bankcard and transaction processing services include
the following:
Debit
and Credit Card Payment Processing
ECHO
currently provides 24-hour daily payment processing, "800" number access to
customer service personnel and, as needed, various field support
services. Utilizing one of several methods of access to us, the
merchants' systems connect to our host computers that are interfaced to all
the
major card authorizing centers, and receive credit card and debit card
authorizations. At the end of each day, electronic files of
authorized transactions are transmitted to the major credit card organizations.
They withdraw the funds from the card issuing banks and deposit a lump sum
for
the day’s processing activity into our processing bank on the following
morning. Using a distribution file that we provide to them daily, our
processing bank then distributes and deposits the individual merchant’s funds
into the bank account of the merchant's choice.
Other
Payment Processing Services
We
also
provide various services related to our debit and credit card payment
processing, including:
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Internet
Processing – Utilizing our proprietary internet gateway or virtual
terminal, ECHO allows merchants to accept both card and eCheck
payment transactions in an online environment, providing immediate
processing and near real-time web based
reporting.
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Batch
File Processing – ECHO allows mail order, telephone order or
direct marketing merchants to process and transmit payments by using
Microsoft Excel®, Access® or any other program that can create a "flat
file" of data. In this process, the merchant can visit the
ECHO Merchant Center, log on through a secure gateway, and
upload
the file to ECHO's processing center. The transactions
are processed immediately, with reporting available almost immediately
on
each transaction.
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Deriving
Revenue
Bankcard
and transaction processing services provide for the majority of our
revenue. For the year ended September 30, 2007, bankcard and
transaction processing accounted for approximately 81.4% of our
revenue. Bankcard and transaction processing volume rose 11.2% in
fiscal 2007, from $1,775,063,000 in fiscal 2006 to $1,973,189,000 in fiscal
2007, and revenue increased approximately 9.8%, from $56,983,000 in fiscal
2006
to $62,580,000 in fiscal 2007.
During
the year ended September 30, 2007, one customer, Allegiant Travel Company
(“Allegiant”), accounted for 10.1% of total revenue. No customer
accounted for 10% or more of total revenue for the fiscal years 2006 and 2005.
At September 30, 2007 and 2006, Allegiant also accounted for 19.0% and 12.2%,
respectively, of the net accounts receivable balance.
ECHO’s
revenue for debit/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 and
is
deducted from the amount of each transaction submitted by the merchant, while
the net amount is deposited into the merchant's bank account.
A
transaction fee is charged for each transaction processed by ECHO,
including MasterCard, Visa, American Express and Discover Card
transactions.
Interchange,
the discount rate and transaction fee charged by the card-issuing bank and
paid
each day when transactions are processed, normally constitutes 60% to 70% of
the
bankcard revenue. Other external costs, such as Visa and MasterCard dues and
bank fees, increase external fees we pay to 67% to 75% of the total bankcard
revenue.
Historically,
ECHO has been effective in selling to merchants who operate in
non-face-to-face, card not present environments, such as the Internet, mail
order and telephone order types of businesses. Approximately 70% of
our monthly credit card volume comes from these types of merchants. Our Agent
Bank program brings retail, face-to-face, card present types of merchants to
us
so we intend to continue to promote this channel going forward. In the
Technology Partner channel we see a good balance between both card present
and
card not present merchants. Our ability to effectively support this
processing diversity should allow us to be more effective in attracting key
technology companies as partners. Now that the Clearing module is installed
and
operational, we intend to broaden our marketing reach to actively pursue more
retail types of business. Since there is more competition for this type of
business, the price we charge to the merchant for our services will reflect
lower margins than we have historically been accustomed to getting. While we
intend to continue to pursue our historic higher margin merchant markets, the
added scope of merchants we intend to pursue and the lower margins inherent
in
this market may compress our margins overall, depending upon how successful
each
channel is in bringing new merchant
relationships.
Sponsorship
In
order
to engage in Visa and MasterCard processing, a cooperative relationship is
required with a Visa/MasterCard Primary Member Bank that sponsors the merchants
to accept Visa and MasterCard transactions. ECHO’s primary processing
bank relationship is with First Regional Bank of Los Angeles,
California. ECHO also maintains a secondary sponsoring
relationship with National Bank of California, located in Los Angeles
California. As a result of these relationships, ECHO is a
registered Independent Sales Organization and Merchant Service Provider with
Visa and MasterCard, respectively, which allows us to solicit and support
merchants utilizing our services. We have an agreement with First
Regional Bank which continues our relationship through July 2010. Our
relationship with National Bank of California extends to April 2012. Pursuant
to
the terms of these agreements, among other matters, we market and sell merchant
services and the bank provides various support services in connection with
individual transactions, in exchange for our payment to the bank, on a monthly
basis, of a payment of $0.01 to $0.02 per transaction. The agreements
do not allow either party to terminate other than for cause (as defined in
the
agreement) without incurring liability for breach of the agreement.
Check-Related
Products (or “Check Services”)
Services
With
our
check services, we provide various services to merchants and banks to allow
them
to accept and process check payments from consumers. Our check
services include the following:
Check
Verification
To
facilitate the acceptance of a check, we will search NCN, our proprietary
database of negative and positive check writer accounts, attempting to match
a
specific piece of information, such as a driver's license number or Magnetic
Ink
Character Recognition (“MICR”) number (the numeric data along the bottom of a
check), provided by a merchant. A match may identify whether the
check writer has a positive record or a negative record of check cashing
activity in the past. Upon notification of this match (via a coded response
from
the provider), the merchant decides whether to accept or decline the
check. Verification reduces the risk of accepting a bad check for the
merchant; however, in providing this program alone, we typically offer no
guarantee that the check will be honored by the check writer's bank and make
no
promise of reimbursement if the check is dishonored by the bank. Revenue from
check verification is derived from fees collected from the merchants when a
check is verified against our positive and negative check database. This revenue
is recognized when the transaction is processed, since we have no further
performance obligations.
The
NCN
database includes approximately 14 million negative check account records and
28
million positive records. Approximately 250 affiliated collection agencies
continually contribute to the database to enrich its depth and value. Through
its network of NCN members, ECHO can offer regional collection services
and distribute collection items to one or more of a select group of NCN’s member
agencies to maximize a merchant’s or bank’s ability to collect amounts on a
local level. NCN provides an ongoing revenue stream for ECHO
as collection agencies, major national merchants, banks, 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 losses experienced in accepting checks as
a
form of payment. Our NCN database is one of only four known national databases
that can serve this market need on a national scale. In addition to
operating NCN, we provide a common platform where a business can also access
other major negative check writer databases that are currently available in
the
nation.
Check
Guarantee
With
this
service, if we approve a check transaction and the check is subsequently
dishonored by the check writer's bank, the merchant is reimbursed by us and
we
must undertake any effort to collect the delinquent amount from the check
writer.
The
principal risk of providing this service is the risk of collecting the amount
we
guarantee from a delinquent or a fraudulent check writer whose check transaction
was dishonored by his or her own bank. If we are unable to collect
the dishonored check, we incur a bad debt expense. On average, we
collect 60-70% of the amounts on those checks that become
delinquent. Given the risks associated with check guarantee,
especially for large volume merchants, we exercise strict risk parameters with
the merchants to which this service is offered. We typically apply
several risk management approaches with this service, which include searching
NCN’s database, and “scoring” each transaction. This includes several
factors such as velocity (the number of times a check writer has been searched
in a certain period of time), prior activity (historic negative or positive
transactions with the check writer), check writer’s presence in other databases
(these national databases are selectively searched based upon the size of the
check and the prior activity with the check writer), size of the check, and
historic bad check activity by geographic and/or merchant specific locations,
to
name a few. If our scoring system concludes that the risk is too high, we issue
a coded response instructing the merchant that we will not guarantee the
check. If our scoring system results in a positive result, a coded
response advises the merchant that we have guaranteed payment on that
item.
Electronic
Check Conversion ("ECC")
Check
conversion is the ability to convert a paper check to an electronic item at
the
point of sale. Under the program, the merchant slips a customer's completely
filled-in 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 has the customer sign a receipt, much the same as in a credit card
transaction, and gives a copy of the signed receipt along with the check to
the
customer. The electronic image, captured by the reader, is sent to our
processing center and we settle the check transaction electronically. Merchants’
customers like this new system because they get their check back immediately
and
still have a hard copy receipt of the transaction. Banks like ECC because no
paper has to be handled by the bank to settle the transaction. While most
national merchants already have MICR check-reading equipment, small merchants
will adopt the system only if their check volume justifies the capital
investment in equipment, ranging from $125 to $150 per MICR reader and $300
to
$600 for an imager.
Check
Re-Presentment
The
Federal Reserve System's Automated Clearing House (“ACH”) provides the tools to
electronically present, re-present and settle funds between banks. Our check
re-presentment program allows a merchant to advise its bank that a returned
check should be sent to the XPRESSCHEX
data
processing center in Albuquerque, New Mexico, rather than returned to the
merchant. Upon receipt, XPRESSCHEX
converts
the check to an electronic ACH transaction for resubmission through the ACH
network and marks the check for possible collection activity, should it become
necessary. One feature a merchant may choose is to time the
re-presentment so as to coincide with a check writer’s typical payday to better
the odds of collection. Generally, 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 services.
Internet
Check (eCheck), Batch Check and Virtual Terminal
A
check
can be presented as a form of payment over the Internet and we support the
multiple types of ACH entry classes. XPRESSCHEX
allows an
e-commerce site to accept a check as payment, allows a batch of check data
to be
sent electronically for processing (this is commonly used by mail order or
phone
order businesses) and allows both verification-only and ACH transactions to
be
submitted by merchants via a secure logon and pass-code connection over the
Internet.
Visa
POS Check Service Program (“Visa Program”)
The
Visa
POS Check Program enables merchants to receive direct online authorization
for
checks written against consumer checking accounts, similar to the authorizations
provided for debit card transactions. The Visa Program was offered as
a pilot program by Visa to its member banks from December of 2000 to December
of
2002 over which time several banks electronically connected their check writer
data to the Visa network, making verification of the check writer’s bank account
balance possible when checks drawn on these select banks were processed. In
December of 2002, the program was officially released out of pilot and more
banks have been added each year to the Visa network. As of September 2007,
a
national merchant could expect connection to around 20%-30% of the nation’s
checking accounts from all locations and higher in some metropolitan
locations
As
described above, “check conversion” is the ability to convert a paper check to
an electronic item at the point of sale. The Visa Program provides
Visa member banks with a check conversion service that they can sell to their
bank merchants. The Visa Program allows the merchant to get an immediate
authorization or decline on a check while the check writer is at the checkout
counter. If the check is approved, the service allows the merchant to
immediately return the paper check to the check writer since the funds will
be
electronically withdrawn from the check writer’s account and deposited into the
merchant’s account.
Being
able to approve or decline a check in real time at the point of sale requires
some method to verify the check writer has either an adequate balance in the
bank to cover the check or, if that is not possible, to verify if the check
written is in a negative check account database. In order to provide
this check service on 100% of the checks received by a merchant, Visa needed
a
solution to approve or decline (and for those approved, electronically deposit)
the checks that processed through the program on a bank that had not yet
connected its check writer data to the Visa network. We are currently
one of the few companies that provide this service to Visa as a Third-Party
Processor. When a Visa member bank signs up to offer the Visa Program
to its merchants, it chooses a Third-Party Processor from the certified
providers.
When
Visa
receives electronic check data from a merchant and the bank upon which the
check
is drawn has not connected its check writer data to the Visa network, Visa
routes that check to the Third-Party Processor that was chosen by the merchant’s
bank when they set up the program. The Third-Party Processor
authorizes or declines a check based upon the negative and positive data
contained in several national check account databases that are commercially
available and, for those transactions that are approved, the Third-Party
Processor will electronically move the funds from the check writer’s account to
either the merchant bank’s master clearing account or directly to the merchant’s
banking account (depending on the bank’s desired settlement method) utilizing
the ACH.
An
Acquirer Processor in the Visa Program is the party who accepts transactions
from the merchant’s point-of-sale system and reformats them for submission to
the Visa network. We act as an Acquirer Processor for
several banks in the Visa Program.
We
entered into a sponsorship agreement with our primary credit card processing
bank, First Regional Bank, to enable us to sell the Visa Program directly to
merchants with an obligation to pay a transaction fee per check to the bank.
This allows the bank to realize added revenue, allows us to realize higher
revenue in a marked-up pricing model, and a portion of the mark-up to be used
to
compensate and motivate resellers of our products and services to offer the
Visa
Program to merchants in the marketplace. The balance of the mark-up
after paying the bank and the sales organization would be additional revenue
to
us. This will also enable us to use our direct sales channels to
provide the Visa Program to ECHO’s current and potential merchant
base.
The
Visa
infrastructure requires ECHO to coordinate and integrate its services
with several parties and systems. As part of the Visa Program, we have written,
tested and installed special merchant terminal software that meets specified
Visa Program requirements and certified our terminal and host response code
with
Vital Processing Services, a major provider of terminal services to many major
banks. ECHO has also developed special add-on services and reporting
for specific banks or select merchants that desired to participate in the Visa
Program. Additionally, ECHO has designed and implemented several risk
management tools that contribute to the significant reduction in net bad debt
seen by retailers, making the Visa Program a true competitive alternative to
guarantee services.
As
a more
mature product offering, we continue to see value in the Visa POS Program as
a
competitive differentiator. We will continue to leverage this unique
capability throughout our direct and indirect sales channels, however, the
market potential of this service is still unproven and its success is largely
dependent on the continuing marketing support of Visa and Visa’s member
banks.
Deriving
Revenue
For
the
year ended September 30, 2007, check services accounted for approximately 18.6%
of our revenue. Revenue decreased approximately 22.0%, from
$18,328,000 in fiscal 2006 to $14,304,000 in fiscal 2007. The
decrease in check revenue primarily reflects the wind-down of the Company’s
Internet wallet business and the discontinuation of services to several merchant
categories that management determined were carrying unacceptable levels of
business or financial risk.
ECHO’s
revenue in check services can come from several sources. Typically,
the merchant pays either a fixed fee for each transaction (verification,
conversion, eCheck, etc.) or a fee based on the face amount of the check or
both
(check guarantee). In the Visa model, ECHO can receive
transaction fees for providing Third-Party services to Visa banks, whereby
ECHO assists them in processing checks from banks not participating in
the Visa Program. In addition, ECHO may serve a Visa bank as
a collector of the transaction data for the merchant and submitting such data
to
VisaNet, a process referred to as an Acquirer
Processor. ECHO can also participate in the mark-up over
cost that is charged to those merchants ECHO sells directly through its
own primary sales channels. Additional revenue is earned if the merchant
utilizes ECHO’s collection services and it is primarily derived from
the collection fee associated with successful collection of an item. If
ECHO refers a collection item to an NCN member, a small participation
in the collection fee is returned to ECHO through agreement with the
NCN member. Finally, when ECHO provides a guarantee service to a
merchant directly or to a bank to offer to their merchants, it earns a
percentage of every check processed from the
merchant. ECHO’s earnings in this case are directly tied to
its success in collection and its risk management capability.
XPRESSCHEX
collection
revenue comes from two sources: service fees and percentage of the check
collection agreements. When XPRESSCHEX
is engaged
by a merchant or a bank to immediately collect on returned checks that were
converted from paper to an electronic item, XPRESSCHEX
normally
receives the service fee of $15 to $25 that is charged to the check writer,
not
the merchant. Some merchants also engage XPRESSCHEX
in
the
active collection of paper checks that have bounced or in the active collection
of secondary efforts after all initial attempts at collection have been
exhausted by the merchant. In these cases, XPRESSCHEX
negotiates
a percentage of the check amount, ranging from 10% to 30%, depending on several
factors.
Sponsorship
In
order
to process electronic check transactions into the ACH network, a sponsoring
relationship with a Federal Reserve member bank is
required. ECHO currently maintains four such sponsoring
relationships, First Regional Bank, Los Angeles, California, National Bank
of
California, Los Angeles, California, First Community Bank, Albuquerque, New
Mexico and Regal Financial Bank, Seattle, Washington.
OUR
CUSTOMERS
ECHO’s
primary customer focus is in the area of niche markets, in particular, markets
that are not well understood by our larger competitors. Approximately
70% of ECHO’s
revenues come from merchants who operate their business in non-face-to-face
environments such as mail order, phone order and the internet. These
relationships historically have higher margins than those seen with normal
retail merchants because of the additional financial risk. ECHO has
historically been very successful in managing the risk associated with the
non-face-to-face merchant. We have specific merchant concentrations
in the following areas;
Specialty
Retail
Primarily
driven by our unique product set in check services, we’ve been successful in
gaining access to a number of markets within the retail merchant vertical,
including grocery, convenience store and apparel.
Online
Travel
As
a
result of one key relationship, ECHO has established a presence in the
dynamic online travel segment. Our current business includes an
online travel company selling travel packages to leisure destinations, both
on a
stand-alone basis (airfare only) and bundled with hotel rooms, rental cars
and
other travel related services.
Direct
Marketing
ECHO
has invested over 10 years in developing our reputation in the Direct Marketing
vertical. Our business consists of a wide range of merchant groups,
including seminars, direct sales and multi-level marketing organizations as
well
as number of web based product and service categories.
Cashing
Services
ECHO
has
established an integrated processing relationship with the largest check cashing
provider to the land-based gaming and casino market. Our services are
primarily centered on providing check verification (using our NCN database),
funds movement, collections and several sophisticated risk management services
that are used to assist the provider in confidently accepting
checks.
Specialty
Finance
Specialty
finance represents a diverse market. Our primary focus is in the area
of warranty, insurance and subscription services where there are significant
concentrations of recurring payments. Our warranty portfolio consists
mainly of auto warranties and the companies that serve this market, including
administrators, finance companies and sales agents. Our insurance
business includes merchants selling auto, watercraft, homeowners, condominium,
renters and umbrella products. Subscription Services include
merchants selling health club memberships, daycare and internet
services.
Small
Merchant Enterprise (SME)
Through
both internet based marketing initiatives as well as a number of key reseller
relationships, ECHO has built a solid business supporting small
merchants both in the internet and brick and mortar category.
OUR
STRATEGY
Overview
In
2007, ECHO has refocused on its sales and
service strategy which is to provide merchants, banks, technology partners
and
collection agencies with electronic payment services that combine credit card,
debit card and electronic check and collection services with quality customer
support. We believe this “All-In-One” offering represents a
significant competitive differentiator for ECHO.
ECHO’s services enable merchants to maximize revenue
by
offering a wide variety of payment options, minimize costs by dealing with
one
source and improve their bad debt collection rates through use of
ECHO’s integrated collection and risk management services.
As
a
niche processor, our strategy is to continue building upon the success of our
core markets and focus our sales effort towards adjacent markets that offer
high
growth potential; that can drive processing volume and that have recurring
or
scheduled payments. We view the non-face-to-face environment as
one of our largest growth opportunities. This segment includes both
internet sites and recurring billing merchants. All of these
merchants benefit from our ability to handle both a retail or online credit
card
or eCheck transaction quickly and securely.
Sales
and Marketing
Our
sales
and marketing strategy is to pursue direct sales opportunities where there
is a
significant amount of card and check acceptance; to build processing
relationships with certain providers of POS software/hardware that serve select
merchant markets; to maximize cross-selling opportunities within our existing
base of retail merchants and financial institutions; to sell integrated suites
of check, credit and debit card processing services through small banks; and
to
pursue associations aggressively.
ECHO
offers its payment services through three sales channels.
|
·
|
Direct
Sales– Direct sales personnel are dedicated to focused industries
and/or services. We employ approximately 20 people who serve in either
field or office positions that are dedicated to sales.
|
|
·
|
Channel
Partnerships– We have a well established base of channel
partnerships. These include Banks, our network of nearly 250
NCN Collection Agencies, Independent Sales Agents and
Associations. These relationships offer lower margins to us due
to their participation in the overall revenue generated from the
payment
processing fees.
|
|
·
|
Technology
Partnerships– ECHO has launched a new channel focused on
securing relationships with companies who provide technology solutions
to
our target merchant segments. This will be a new focus for the
company in 2008.
|
Direct
Sales
We
currently employ approximately 20 direct sales executives. The field
sales force is dispersed geographically throughout the United States and is
tasked with securing processing relationships with merchants in our designated
niche markets. We also maintain a telesales force within the
corporate headquarters. This staff provides first line sales for all
business generated through our various marketing initiatives, including web,
mail and print. Additionally, the telesales team acts as a closing
channel for all new business referred by our Channel and Technology
partnerships.
Promote
Merchant Payment Processing for Community Banks
ECHO
pursues small regional and community banks for credit card and check payment
programs that are characterized by having an asset base in the $500 million
range or less, and/or equity capital in the $10 to $50 million
range. ECHO has developed a service that allows smaller
banks to offer credit card and check processing services on a private-label
basis using our back-end infrastructure with little or no technical involvement
by the bank. Much of the reporting to the merchant utilizes the
Internet as a delivery channel, an environment in which we have significant
experience and knowledge. Due to the high fixed costs, most small
banks are either unable or unwilling to compete with national banks in providing
credit card and real time check processing services and Internet-based reporting
tools to their merchants. We have designed the program to be adopted
by a bank at little or no cost while it allows the bank to generate revenue
and
earnings in competition to those earned by much larger banks that have had
to
make major investments in the technology.
ECHO
estimates that there are approximately 8,000 community banks in the United
States. Based on third-party research, we estimate that approximately 57% of
these banks offer payment solutions for their merchants. We believe these banks
will be very responsive to the ECHO value proposition when a comparison
of features and costs is reviewed.
Along
similar lines, we believe there are quality independent sales organizations,
many of which are focused on select markets, where we can establish a viable
and
mutually profitable relationship wherein they sell our processing
services.
Associations
There
are
over 8,000 associations and guilds in the United States and many of the 4.1
million merchants belong to one of these organizations. We believe
our combination of services and our controlled cost structure will allow us
to
attract many of these organizations to actively refer their members to us for
meeting their payment processing needs.
Technology
Partners Providing POS Systems
We
believe there are significant opportunities in working closely with those firms
that specialize in certain industries and provide a point-of-sale (POS)
capability to merchants of some nature. By integrating our processing with
these
parties, we believe we can leverage our sales activity and have longer term
relationships with merchants than are historically the case for most
processors. We also believe our full processing capability allows us
to provide the POS system partner with some economic benefit from the processing
volume of the users of its system.
OUR
COMPETITION
Bankcard
processing and check processing services are highly competitive industries
and
are characterized by consolidation, 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. Credit card and debit card processors have similar direct
costs and therefore their products are becoming somewhat of a commodity product
where a natural advantage accrues to the highest volume processors. To offset
this fact, we have focused on marketing to niche markets where we can maintain
the margins we deem necessary to operate profitably but no assurance can be
given that this strategy will be successful in the future.
Of
the
top 50 credit card acquirers in the nation, the majority are independent sales
organizations or banks that may manage the front-end authorization service
but
they outsource the back-end clearing and settlement services from a full service
processor. There are probably 10 or fewer firms capable of full
credit card processing and these would include First Data Corporation, Total
Systems, NPC (Bank of America), Global Payments, Heartland Payments, Alliance
Data Systems and RBS Lynk. We believe we hold the distinction of
being the smallest public company who serves as a full service processor in
credit cards and check services. All of our competitors have greater
financial and marketing resources than us. As a result, they may be
better able to respond more quickly to new or emerging technologies and changes
in customer requirements. Competitors also may enjoy per transaction
cost advantages due to their high processing volumes that may make it difficult
for ECHO to compete.
There
are
a number of competitors in the check services industry, the largest of which
are
TeleCheck (the leading provider of conversion and guarantee services and a
subsidiary of First Data Corporation), SCAN/eFunds (the largest verification
provider in the nation), Certegy (purchased by Fidelity) and Global
Payments. While all four have major national accounts, we have been
successful in winning the processing relationships for national accounts when
competing for such business against these parties. ECHO
believes that it can effectively compete due to its ownership of the NCN
database, its integrated set of check and collection services and the
technological advantage of having been certified as both a Third-Party Processor
and Acquirer Processor with the Visa POS Check Program.
We
believe that being the smallest processor also has some
advantages. There are many merchants who are sizable to us that the
larger processors do not consider to be major merchants. We are
finding that these merchants appreciate receiving preferential treatment from
their processor. Also, our willingness to send top management into
the field to meet regularly with our major merchants at their locations is
a
perceived distinction and we are using it as a merchant retention
tool. While we understand that slightly lower costs can be generated
by processing high volumes, we do not think the economic advantages that high
volume affords are enough to eliminate ECHO as an acceptable and
competitive processor in most cases. Despite these potential advantages, we
believe that our success will depend largely on our ability to continuously
exceed expectations in terms of performance, service, and price, on our ability
to develop new products and services, and on how well and how quickly we enhance
our current products and introduce them into the
market.
OUR
EMPLOYEES
As
of
September 30, 2007, we employed 239 individuals, 222 of whom were full time
employees.
On
December 11, 2007, we entered into amended and restated separation agreements
with each of our principal executive officers (CEO and CFO) and each of our
senior vice presidents whereby, in the event of a change in control of
ECHO (as defined in each agreement) each such executive officer would
be entitled, to the extent they remain employed by us at the time of such change
in control, to the following: (i) an acceleration of vesting with respect to
all
stock option and restricted stock grants then outstanding and not yet vested,
(ii) a portion of such executive’s anticipated cash or sales commission-based
bonus, as applicable, for the fiscal year in which the change in control
occurred, and (iii) in the event that the executive is terminated without cause
(as defined in each agreement), or ceases to provide services to us (or our
successor) as a result of an involuntary termination (as defined in each
agreement) within the two year period following the change in control, then
the
executive would be entitled to a one-time lump sum cash payment equal to a
percentage of the executive’s anticipated total compensation for the fiscal year
in which the change in control occurred, plus continued medical benefits for
a
period of time following such termination. The amount of lump sum payout
ranges from 1 ½ to 2 years of anticipated total compensation, and duration of
continued medical benefits ranges between 1 ½ and 2 years depending on position
held by the principal executive or senior vice president. These
agreements amend and restate separation agreements previously entered into
with
each of these executives.
Further,
on December 11, 2007, we entered into indemnification agreements with each
of
our principal executive officers, senior vice presidents and
directors. Pursuant to the terms of the indemnification agreements,
we have agreed to provide indemnification for, and the advancement of expenses
to, our executive officers, senior vice presidents and directors, under certain
circumstances and in accordance with Nevada law, all as more completely
described within the agreements.
REPORTABLE
SEGMENTS
Refer
to
Note 18 “Segment Information” in the accompanying Notes to Consolidated
Financial Statements for reportable segment information.
Our
business, and accordingly, your investment in our common stock, is subject
to a
number of risks. These risks could affect our operating results and
liquidity. You should consider the following risk factors, among
others, before investing in our common stock:
Risks
Related To Our Business
We
rely on cooperative relationships with, and sponsorship by, banks, the absence
of which may affect our operations.
We
currently rely on cooperative relationships with, and sponsorship by, banks
in
order to process our Visa, MasterCard and other bankcard
transactions. We also rely on several banks for access to the
Automated Clearing House (“ACH”) for submission of both credit card and check
settlements. Our banking relationships are currently with smaller
banks (with assets of less than $500,000,000). Even though smaller banks tend
to
be more susceptible to mergers or acquisitions and are therefore less stable,
these banks find the programs we offer more attractive and we believe we cannot
obtain similar relationships with larger banks at this time. A bank could at
any
time curtail or place restrictions on our processing volume because of its
internal business policies or due to other adverse circumstances. If
a volume restriction is placed on us, it could materially adversely affect
our
business operations by restricting our ability to process credit card
transactions and receive the related revenue. Our relationships with
our customers and merchants would also be adversely affected by our inability
to
process these transactions.
We
currently have two primary bankcard processing and sponsorship relationships,
one with First Regional Bank in Los Angeles, California, and another one with
National Bank of California in Los Angeles, California, entered into on April
12, 2007. Our agreement with First Regional Bank continues through
July 2010 and our agreement with National Bank of California continues through
April 2012. We also maintain several banking relationships for ACH
processing. While we believe our current bank relationships are
sound, we cannot assure that these banks will not restrict our increasing
processing volume or that we will always be able to maintain these relationships
or establish new banking relationships. Even if new banking relationships are
available, they may not be on terms acceptable to us. With respect to
First Regional Bank, while we believe their ability to terminate our
relationship is cost-prohibitive, they may determine that the cost of
terminating their agreement is less than the cost of continuing to perform
in
accordance with its terms, and may therefore determine to terminate their
agreement prior to its expiration. Ultimately, our failure to
maintain these banking relationships and sponsorships may have a material
adverse effect on our business and results of operations.
Merchant
fraud with respect to bankcard and ACH transactions could cause us to incur
significant losses.
We
significantly rely on the processing revenue derived from bankcard and ACH
transactions. If any merchants were to submit or process unauthorized
or fraudulent bankcard or ACH transactions, depending on the dollar amount,
ECHO could incur significant losses which could have a material adverse
effect on our business and results of operations. ECHO
assumes and compensates the sponsoring banks for bearing the risk of these
types
of transactions.
We
have
implemented systems and software for the electronic surveillance and monitoring
of fraudulent bankcard and ACH use. As of September 30, 2007, we
maintained a dedicated chargeback reserve of $853,000 at our primary bank
specifically earmarked for such activity. Additionally, through our
sponsoring bank, as of September 30, 2007, we had access to approximately $20.3
million in merchant deposits to cover any potential chargeback
losses. Despite a long history of managing such risk, we cannot
guarantee that these systems will prevent fraudulent transactions from being
submitted and processed or that the funds set aside to address such activity
will be adequate to cover all potential situations that might
occur. We do not have insurance to protect us from these
losses. There is no assurance that our chargeback reserve will be
adequate to offset against any unauthorized or fraudulent processing losses
that
we may incur. Depending on the size of such losses, our results of
operations could be immediately and materially adversely affected.
Excessive
chargeback losses could significantly affect our results of operations and
liquidity.
Our
agreements with our sponsoring banks require us 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 we are unable to collect this amount from the
merchant’s account, or if the merchant refuses or is unable to reimburse us for
the chargeback due to merchant fraud, insolvency or other reasons, we will
bear
the loss for the amount of the refund paid to the cardholders.
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 our sponsoring banks 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 September 30, 2007, this potential exposure totaled
approximately $650 million. At September 30, 2007, we, through our
sponsoring bank, had approximately $75,000 of unresolved chargebacks that were
in the process of resolution. At September 30, 2007, we, through our
sponsoring bank, had access to $20.3 million belonging to our merchants. This
money has been deposited at the sponsoring bank by the merchants to cover any
potential chargeback losses.
For
the
fiscal years ended September 30, 2007 and 2006, we processed approximately
$2.0
billion and $1.8 billion, respectively, of Visa and MasterCard transactions,
which resulted in $11.1 million in gross chargeback activities for the fiscal
year ended September 30, 2007 and $9.8 million for the fiscal year ended
September 30, 2006. Substantially all of these chargebacks were recovered from
the merchants.
Nevertheless,
if we are unable to recover these chargeback amounts from merchants, having
to
pay the aggregate of any such amounts would significantly affect our results
of
operations and liquidity.
Excessive
check return activity could significantly affect our results of operations
and
liquidity
All
check
settlement funds are moved utilizing the Automated Clearing House (ACH) system
of the Federal Reserve. Submission of an ACH request to withdraw
funds may be refused by the receiving bank for a number of reasons, the two
most
common being the account did not have an adequate balance to honor the request
or the account was closed. In each of these situations, we first look
to the merchant account for the return of any funds deposited. In
some situations, specific merchant reserves are set up in advance in order
to
honor all returns. In the event neither the merchant bank account nor
a specific reserve is adequate to cover a return, we allow either of the
processing banks to look to our reserve accounts to cover the return
activity. In such cases, we then actively look to recover our
advanced funds from the merchant, either from a subsequent day’s processing
activity or from one-time deposits requested of the merchant. In the
event such recovery is not possible, we could suffer a loss on return ACH
activity which could affect our results of operations and liquidity. The amount
we considered uncollectible for fiscal 2007 was $38,000.
Failure
to participate in the Visa POS Check Service Program would cause us to
significantly shift our operating and marketing strategy.
We
have
significantly increased our infrastructure, personnel and marketing strategy
to
focus on the potential growth of our check services through the Visa POS Check
Service Program. We currently provide critical back-end
infrastructure for the service, including our NCN database for
verification and our access to the Federal Reserve System’s Automated Clearing
House for funds settlement and for checks written on bank accounts with banks
not participating in the program.
Because
we believe the market will continue to gain acceptance of the Visa POS Check
Service Program, we have expended significant resources to market our check
conversion services and verification services to our merchant base, to solidify
our strategic relationships with the various financial institutions that have
chosen us as their Acquirer Processor and Third-Party processor under the
program, and to sell our other check products such as electronic check
re-presentments and check guarantee to the Visa member banks. We have
also increased our personnel to handle the increased volume of transactions
arising directly from our participation in the program.
Our
failure to adequately market our services through this relationship could
materially affect our marketing strategy going forward. Additionally,
if we fail to adequately grow our infrastructure to address increases in the
volume of transactions, cease providing services as a Third-Party processor
or
Acquirer Processor or are otherwise removed or terminated from the Visa Program,
this would require us to dramatically shift our current operating
strategy.
Our
inability to implement, and/or the inability of third-party software vendors
to
continue to support and provide maintenance services with respect to, the
third-party vendors’ products, could significantly affect our results of
operations and financial condition.
We
utilize various third-party software applications and depend on the providers
of
such software applications to provide support and maintenance services to
us. In the event that a third-party software vendor fails to continue
to support and maintain its software application, or fails to do so in a timely
manner, this could significantly affect our results of operations and financial
condition.
Our
inability to ultimately implement, or a determination to cease the
implementation of various of our software technology initiatives will
significantly adversely affect our results of operations and financial
condition.
We
have
spent significant time and monetary resources implementing several software
technologies, which resulted in significant cost being capitalized by us as
non-current software assets. The implementation of these technologies
will provide us with substantial operational advantages that would allow us
to
attract and retain larger merchants, as well as the small and mid-market
merchants that have been our target market. Management believes that
the implementation of these software technologies, and the technologies
themselves, continues to be in the best interests of, and the most viable
alternative for, the Company. However, the inability to ultimately
implement, or a determination to cease the implementation of these software
technologies would cause these assets to become impaired, and the corresponding
impairment would significantly adversely affect our results of operations and
financial condition.
A
significant amount of our bankcard processing revenue is dependent on
approximately 100 merchant accounts, several of which are very large
merchants. The loss of a substantial portion of these accounts would
adversely affect our results of operations.
We
depend
on approximately 100 key merchant accounts for our organic growth and
profitability. One merchant accounted for approximately 12.4% of our bankcard
processing revenue during the year ended September 30, 2007. The loss
of this account or the loss of merchants from this select group could adversely
affect our results of operations.
The
business activities of our merchants, third party independent sales
organizations and/or third party processors could affect our business, financial
condition and results of operations.
We
provide direct and back-end bankcard and check processing and collection
services (including check verification, conversion and guarantee services)
to
merchants across many industries. We provide these services directly
and through third party independent sales organizations and third party
processors. To the extent any of these merchants, independent sales
organizations or third party processors conduct activities which are deemed
illegal, whether as a result of the interpretation or re-interpretation of
existing law by federal, state or other authorities, or as a result of newly
introduced legislation, and/or to the extent these merchants, independent sales
organizations or third party processors otherwise become involved in activities
that incur civil liability from third parties, (including from federal, state
or
other authorities), those legal authorities and/or those third parties could
attempt to pursue claims against us, including, without limitation, for aiding
the activities of those merchants. Those legal authorities and/or
those third parties could also pursue claims against us based on their
interpretation or re-interpretation of existing law, based on their
interpretation or re-interpretation of newly introduced legislation, and/or
based on alternative causes of action that we can not predict. While
we believe that the services we provide are not illegal, and while we believe
that our services do not directly or indirectly aid in the activities of our
merchants, independent sales organizations or third party processors, and while
we have no intent to assist any such activities, of our merchants, independent
sales organizations or third party processors (other than to provide general
processing and collection services, or check verification, conversion and
guarantee services in the case of check services, consistent with past
practice), any claims by legal authorities or third parties would require us
to
expend financial and management resources to address and defend such
claims. Additionally, the aggregate resolution of any such claims
could require us to disgorge revenues or profits, pay damages or make other
payments. The occurrence of any of the foregoing would have an
adverse impact on our business, financial condition and results of
operations.
As
we
have previously disclosed, several of our former merchants provided consumers
access to “Internet wallets,” which subsequently permitted consumers to use
funds in those “Internet wallets” to, among other transactions, participate in
gaming activities over the Internet. In October 2006, the Unlawful
Internet Gaming Enforcement Act was passed and signed into law. As a
result of the passed legislation, several of our Internet wallet merchants,
all
of which used our check services, had a significant drop in processing
activities during the quarter ended December 31, 2006 as we wound down the
services we provided to them. During February 2007, we decided to cease
processing and collection services for all Internet wallet
customers. Our “Internet wallet” merchants comprised approximately
11.0% of our check revenue for the year ended September 30, 2007, of which
no
amounts were recorded after March 2007. On March 27, 2007, we entered
into a Non-Prosecution Agreement pursuant to which the Office of the United
States Attorney for the Southern District of New York agreed not to pursue
actions against us and our subsidiaries for activities related to our provision
of payment processing services to Internet wallets that provided services to
online gaming websites during the period from January 2001 through and including
the date of the signing of the Non-Prosecution Agreement. Pursuant to
the terms of the Non-Prosecution Agreement, we agreed to pay estimated profits
to the United States in the amount of a $2,300,000 civil disgorgement settlement
upon the execution of the Non-Prosecution Agreement, which represented our
management’s estimate of our profits from processing and collection services
provided to Internet wallets since 2001. We agreed to maintain a permanent
restriction upon providing automated clearing house services to any business
entity providing Internet gambling services to customers in the United States,
so long as the processing services and gambling services are illegal under
the
laws of the United States. Additionally, we agreed to, among other
matters, cooperate fully and actively with the U.S. Attorney’s Office, the
Federal Bureau of Investigation, and with any other agency of the government
designated by the U.S. Attorney’s Office, and to not commit any violations of
law. Our cooperation obligations will continue until the later of one year
from
the date of the signing of the Non-Prosecution Agreement or the date upon which
all prosecutions arising out of the conduct described in the Non-Prosecution
Agreement are final.
Actions
by federal, state or other authorities, or private third parties, could attempt
to seize or otherwise attempt to take action against the reserve and settlement
accounts we hold pursuant to our agreements with our merchants (to protect
against returns and other losses we may incur), the loss of which could
adversely affect our financial condition and results of
operation.
We
hold
reserve and settlement accounts on behalf of our bankcard and check merchants
to
protect us against returns and other losses we may incur as a result of the
merchant’s activities. To the extent any of these merchants conduct
activities which are deemed illegal, whether as a result of the interpretation
or re-interpretation of existing law by federal, state or other authorities,
or
as a result of newly introduced legislation, and/or to the extent these
merchants otherwise become involved in activities that incur civil liability
from third parties (including from federal, state or other authorities), those
federal, state or other authorities, and/or those private third parties, could
attempt to seize or otherwise attempt to take action against the reserve and
settlement accounts we hold pursuant to our agreements with those
merchants. The loss or decrease of any of these reserve or settlement
accounts could cause us to become directly responsible for returns and other
losses, which could adversely affect our financial condition and results of
operation.
New
or amended legislation and/or regulations could significantly affect our
business operations and the business operations of our
merchants.
We
provide direct and back-end bankcard and check processing and collection
services (including check verification, conversion and guarantee services)
to
merchants across many industries. We provide these services directly
and through third party independent sales organizations and third party
processors. To the extent any of these industries, or our services
within these industries, become subject to new legislation or regulations,
or
existing law or regulations are amended in a manner that affects our provision
of services within these industries, this could significantly affect our
business operations and the business operations of those merchants.
The
business in which we compete is highly competitive and there is no assurance
that our current products and services will stay competitive or that we will
be
able to introduce new products and services to compete
successfully.
We are
in the business of processing payment transactions and designing and
implementing integrated systems for our customers so that they can better use
our services. This business is highly competitive and is
characterized by rapid technological change, rapid rates of product
obsolescence, and rapid rates of new product introduction. Our market
share is relatively small as compared to most of our competitors and most of
these competitors have substantially more financial and marketing resources
to
run their businesses. While we believe our small size provides us the
ability to move quickly in some areas, our competitors’ greater resources enable
them to investigate and embrace new and emerging technologies, to quickly
respond to changes in customers’ needs, and to devote more resources to product
and services development and marketing. We may face increased
competition in the future and there is no assurance that current or new
competition will allow us to keep our customers. If we lose
customers, our business operations may be materially adversely affected, which
could cause us to cease our business or curtail our business to a point where
we
are no longer able to generate sufficient revenue to fund
operations. There is no assurance that our current products and
services will stay competitive with those of our competitors or that we will
be
able to introduce new products and services to compete successfully in the
future.
If
we are unable to process significantly increased volume activity, this could
affect our operations and we could lose our competitive
position.
We
have
built transaction processing systems for check verification, check conversion,
ACH processing, and bankcard processing activities. While current
estimates regarding increased volume are within the capabilities of each system,
it is possible that a significant increase in volume in one of the markets
would
exceed a specific system’s capabilities. To minimize this risk, we
have redesigned and upgraded our check related processing systems and previously
purchased a high end system to process bankcard activity. No assurance can
be
given that it would be able to handle a significant increase in volume or that
the operational enhancements and improvements will be completed in time to
avoid
such a situation. In the event we are unable to process increases in
volume, this could significantly adversely affect our banking relationships,
our
merchant customers and our overall competitive position, and could potentially
result in violations of service level agreements which would require us to
pay
penalty fees to the other parties to those agreements. Losses of such
relationships, or the requirement to pay penalties, may severely impact our
results of operations and financial condition.
We
incur financial risk from our check guarantee service.
The
check
guarantee business is essentially a risk management business. Any
limitation of a risk management system could result in financial obligations
being incurred by ECHO relative to our check guarantee
activity. While ECHO has provided check guarantee services
for several years, there can be no assurance that our current risk management
systems are adequate to assure against any financial loss relating to check
guarantee. ECHO is enhancing its current risk management
systems and it is being conservative with reference to the type of merchants
to
which it offers guarantee services in order to minimize this risk but no
assurance can be given that such measures will be adequate. During
the year ended September 30, 2007, we incurred $348,000 in losses from
uncollected guaranteed checks.
Security
breaches could impact our continued operations, our results of operations and
liquidity.
We
process confidential financial information and maintain several levels of
security to protect this data. Security includes hand and card-based
identification systems at our data center locations that restrict access to
the
specific facilities, various employee monitoring and access restriction
policies, and various firewall and network management methodologies that
restrict unauthorized access through the Internet. With the exception of one
incident in December 2006, these systems have worked effectively in the
past. The Company continues to strengthen its security processes and
systems but there can be no assurance that they will continue to operate without
a security breach in the future. Depending upon the nature of the
breach, the consequences of security breaches could be significant and dramatic
to ECHO’s continued operations, results of operations and
liquidity.
The
industry in which we operate involves rapidly changing technology and our
failure to improve our products and services or to offer new products and
services could cause us to lose customers.
Our
business industry involves rapidly changing technology. Recently, we
have observed rapid changes in technology as evidenced 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. Our success
depends on our ability to improve our 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 us. There is
no assurance that we will be able to find the funds necessary to keep up with
new technology or that if such funds are available that we can successfully
improve our existing products and services or successfully develop new products
and services. Our failure to provide improved products and services
to our customers or any delay in providing such products and services could
cause us to lose customers to our competitors. Loss of customers
could have a material adverse effect on ECHO.
Our
inability to protect or defend our trade secrets and other intellectual property
could hurt our business.
We
have
expended a considerable amount of time and money to develop information systems
for our merchants. We regard these information systems as trade
secrets that are extremely important to our payment processing
operations. We rely on trade secret protection and confidentiality
and/or license agreements with employees, customers, partners and others to
protect this intellectual property and have not otherwise taken steps to obtain
additional intellectual property protection or other protection on these
information systems. We cannot be certain that we have taken adequate
steps to protect our intellectual property. In addition, our
third-party confidentiality agreements can be breached and, if they are, there
may not be an adequate remedy available to us. If our trade secrets
become known, we may lose our competitive position, including the loss of our
merchant and bank customers. Such a loss could severely impact our
results of operations and financial condition.
Additionally,
while we believe that the technology underlying our information systems does
not
infringe upon the rights of any third parties, there is no assurance that third
parties will not bring infringement claims against us. We also have
the right to use the technology of others through various license
agreements. If a third party claimed our activities and/or these
licenses were infringing their technology, while we may have some protection
from our third-party licensors, we could face additional infringement claims
or
otherwise be obligated to stop utilizing intellectual property critical to
our
technology infrastructure. If we are not able to implement other
technology to substitute the intellectual property underlying a claim, our
business operations could be severely effected. Additionally,
infringement claims would require us to incur significant defense costs and
expenses and, to the extent we are unsuccessful in defending these claims,
could
cause us to pay monetary damages to the person or entity making the
claim. Continuously having to defend such claims or otherwise making
monetary damages payments could materially adversely affect our results of
operations.
If
we do not continue to invest in research and development, and/or otherwise
improve our technology platforms, we could lose our competitive
position.
Because
technology in the payment processing industry evolves rapidly, we need to
continue to invest in research and development in both the bankcard processing
business segment and the check-related products segment in order to remain
competitive. This includes investments in our technology platforms to permit
them to process higher transaction volumes, to transition some of these
technologies to more commonly used platforms, to permit us to process foreign
currency transactions, and to expand our point-of-sale connection capability
for
our bankcard processing services. Research and development expenses increased
from $1,539,000 in fiscal 2006 to $2,134,000 in fiscal 2007. Most of our
development project costs were capitalized once we entered into coding and
testing phases. We continue to evaluate projects, which we believe will assist
us in our efforts to stay competitive. Although we believe that our
investment in these projects will ultimately increase earnings, there is no
assurance as to when or if these new products will show profitability or if
we
will ever be able to recover the costs invested in these
projects. Additionally, if we fail to commit adequate resources to
grow our technology on pace with market growth, we could quickly lose our
competitive position, including the loss of our merchant and bank
customers.
Failure
to obtain additional funds can impact our operations and future
growth.
We
use
funds generated from operations, as well as funds obtained through credit
facilities and equity financing, to finance our operations. As a
result of the cash flow generated from operations, we believe we have sufficient
cash to support our business activities, including research, development and
marketing costs. However, future growth may depend on our ability to
continue to raise additional funds, either through operations, bank borrowings,
or equity or debt financings. There is no assurance that we will be
able to continue 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 to us. The inability to
generate the necessary funds from operations or from third parties in the future
may require us to scale back our research, development and growth opportunities,
which could harm our overall operations.
While
we maintain insurance protection against claims related to our services, there
is no assurance that such protection will be adequate to cover potential claims
and our inability to otherwise pay such claims could harm our
business.
We
maintain errors and omissions insurance for the services we
provide. While we believe the limit on our errors and omissions
insurance policy is adequate and consistent with industry practice, if claims
are brought by our customers or other third parties, we could be required to
pay
the required claim or make significant expenditures to defend against such
claims in amounts that exceed our current insurance coverage. There
is no assurance that we will have the money to pay potential plaintiffs for
such
claims if they arise beyond the amounts insured by us. Making these
payments could have a material adverse effect on our business.
Involvement
in litigation could harm our business.
We
are
involved in various lawsuits arising in the ordinary course of
business. Although we believe that the claims asserted in such
lawsuits are without merit, the cost to us for the fees and expenses to defend
such lawsuits could have a material adverse effect on our financial condition,
results of operations or cash flow. In addition, there can be no
assurance that we will not at some time in the future experience significant
liability in connection with such claims. During 2007, we spent
approximately $1,701,000 in legal fees, of which $874,000 related to our
Internet wallet settlement and $475,000 related to our failed merger with
Intuit.
Our
inability to recover from natural disasters could harm our
business.
We
currently maintain two data centers: one in Camarillo, California, and one
in
Albuquerque, New Mexico (co-location facility). Should a natural disaster occur
in any of the locations, it is possible that we would not be able to fully
recover full functionality at one of our data centers. To minimize this risk,
we
centralized our data processing functionality in Camarillo during fiscal 2005
and completed a full back-up site in Albuquerque in October of
2006. Despite such contingent capabilities, it is possible a natural
disaster could limit or completely disable a specific service offered by
ECHO until such time that the specific location could resume its
functionality. Our inability to provide such service could have a
material adverse effect on our business and results of operations.
Increases
in the costs and requirements of technical compliance could harm our
business.
The
services which we offer require significant technical
compliance. This includes compliance to both Visa and MasterCard
regulations and association rules, NACHA guidelines and regulations with regard
to the Federal Reserve System’s Automated Clearing House and check related
issues, and various banking requirements and regulations. We have personnel
dedicated to monitoring our compliance to the specific industries we serve
and
when possible, we are moving the technical compliance responsibility to other
parties. As the compliance issues become more defined in each
industry, the costs and requirements associated with that compliance may present
a risk to ECHO. These costs could be in the form of
additional hardware, software or technical expertise that we must acquire and/or
maintain. Additionally, burdensome or unclear requirements could increase the
cost of compliance. While ECHO currently has these costs under control,
we have no control over those entities that set the compliance requirements
so
no assurance can be given that we will always be able to underwrite the costs
of
compliance in each industry wherein we compete.
Risks
Associated With Our Common Stock
If
we need to sell or issue additional shares of common stock or assume additional
debt to finance future growth, our stockholders’ ownership could be diluted or
our earnings could be adversely impacted.
Our
business strategy may include expansion through internal growth, by acquiring
complementary businesses or by establishing strategic relationships with
targeted customers and suppliers. In order to do so, or to fund our
other activities, we may issue additional equity securities that could dilute
our stockholders’ stock ownership. We may also assume additional debt
and incur impairment losses related to goodwill and other tangible assets if
we
acquire another company and this could negatively impact our results of
operations. As of the date of this report, management has no plan to
raise additional capital through the sale of securities and believes that our
cash flow from operations together with cash on hand will be sufficient to
meet
our working capital and other commitments.
We
have adopted a number of anti-takeover measures that may depress the price
of
our common stock.
Our
rights agreement, our ability to issue additional shares of preferred stock
and
some provisions of our articles of incorporation and bylaws could make it more
difficult for a third party to make an unsolicited takeover attempt of
us. These anti-takeover measures may depress the price of our common
stock by making it more difficult for third parties to acquire us by offering
to
purchase shares of our stock at a premium to its market price.
Our
stock price has been volatile.
Our
common stock is quoted on the NASDAQ Capital Market, and there can be
substantial volatility in the market price of our common stock. Over
the course of the quarter ended September 30, 2007, the market price of our
common stock has been as high as $14.90, and as low as
$8.40. Additionally, over the course of the year ended September 30,
2007, the market price of our common stock was as high as $18.73 and as low
as
$8.40. The market price of our common stock has been, and is likely
to continue to be, subject to significant fluctuations due to a variety of
factors, including quarterly variations in operating results, operating results
which vary from the expectations of securities analysts and investors, changes
in financial estimates, changes in market valuations of competitors,
announcements by us or our competitors of a material nature, loss of one or
more
customers, additions or departures of key personnel, future sales of common
stock and stock market price and volume fluctuations. In addition, general
political and economic conditions such as a recession, or interest rate or
currency rate fluctuations may adversely affect the market price of our common
stock.
We
have not paid and do not currently plan to pay dividends, and you must look
to
price appreciation alone for any return on your
investment.
Some
investors favor companies that pay dividends, particularly in general downturns
in the stock market. We have not declared or paid any cash dividends
on our common stock. We currently intend to retain any future
earnings for funding growth, and we do not currently anticipate paying cash
dividends on our common stock in the foreseeable future. Because we
may not pay dividends, your return on this investment likely depends on your
selling our stock at a profit.
|
Unresolved
Staff Comments
|
None.
In
October 2003, we signed a five-year lease for 21,566 square feet of a 40,000
square foot building in Camarillo, California. Our principal
executive offices, including customer support, data center and other operational
departments were moved to this Camarillo location. We signed an addendum to
the
Camarillo lease in July 2004 and added 11,103 square feet to the
lease. We currently occupy 32,669 square feet of the Camarillo
building. The lease payment for this facility as of September 2007 was $38,000
per month.
We
have
additional real property leases in Albuquerque, New Mexico; Lakewood, Colorado;
Provo, Utah; and South Jordan, Utah for sales, data center and other operations,
under various agreements, which expired at various times during
2007. The total of these lease payments are approximately $18,000 per
month. Subsequent to September 30, 2007, we entered into new leases at new
locations for our Albuquerque, New Mexico and Lakewood, Colorado
facilities.
We
are
involved in various lawsuits arising in the ordinary course of
business. Based upon current information, management, after
consultation with legal counsel, believes the ultimate disposition of these
lawsuits will have no material effect upon either our results of operations,
financial position, or cash flows.
|
Submission
of Matters to a Vote of Security
Holders
|
Reference
is made to our Quarterly Report on Form 10-Q for the period ended June 30,
2007. There were no such matters during the quarter ended September
30, 2007.
|
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities
|
Since
January 17, 1986, we have been trading on the over-the-counter market under
the
name Electronic Clearing House, Inc. On October 2, 1989, we were
accepted for listing on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") and trade under the symbol of "ECHO" on the
NASDAQ Capital Market. The following table sets forth the range of
high and low closing prices for each quarter for our common stock during the
fiscal periods indicated, as reported on the NASDAQ Capital
Market.
FISCAL
YEAR ENDED
SEPTEMBER
30
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
18.49
|
|
|
$ |
10.97
|
|
Second
Quarter
|
|
$ |
18.73
|
|
|
$ |
11.14
|
|
Third
Quarter
|
|
$ |
14.50
|
|
|
$ |
11.28
|
|
Fourth
Quarter
|
|
$ |
14.90
|
|
|
$ |
8.40
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
11.00
|
|
|
$ |
9.00
|
|
Second
Quarter
|
|
$ |
13.66
|
|
|
$ |
10.01
|
|
Third
Quarter
|
|
$ |
18.19
|
|
|
$ |
12.51
|
|
Fourth
Quarter
|
|
$ |
18.08
|
|
|
$ |
13.16
|
|
The
prices set forth above are not necessarily indicative of liquidity of the
trading market. Trading in our common stock is limited and sporadic,
as indicated by the average monthly trading volume of approximately
1,149,000 shares for the period from October 2006 to
September 2007. On November 30, 2007, the closing representative
price per share of our common stock, as reported on the NASDAQ Capital Market,
was $10.01.
Holders
of Common Stock
As
of
November 30, 2007, there were 786 record holders and 1,966 beneficial holders
of
our common stock, with shares outstanding. The number of holders of record
is based on the actual number of holders registered on the books of our 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
We
have
not paid any dividends in the past and have no current plan to pay any
dividends. We intend to devote all funds to the operation of our
businesses.
Equity
Compensation Plan Information
The
following table sets forth information concerning our equity compensation plans
as of September 30, 2007.
Plan
Category
|
|
(a)
Number of
securities
to be
issued
upon
exercise
of
outstanding
options
|
|
|
(b)
Weighted-average
exercise
price of
outstanding
options
|
|
|
(c)
Number of securities
remaining
available for
future
issuance under
equity
compensation
(excluding
securities
reflected
in column (a))
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders[1]
|
|
|
767,925
|
|
|
$ |
5.94
|
|
|
|
74,324
|
|
[1]
|
Plan
represents the Officers and Key Employees Incentive Stock Option
Plan,
which expired in May 2002, and our 2003 Incentive Stock Option
Plan.
|
Purchases
of Equity Securities
We
have
not repurchased, nor has any affiliated purchaser repurchased, shares of our
common stock during fiscal 2007.
PERFORMANCE
GRAPH
The
following graph shows a five-year comparison of the total cumulative returns
of
investing $100 on September 30, 2002, in Electronic Clearing House, Inc.
(“ECHO”) Common Stock, the NASDAQ-Composite Index, and the
NASDAQ-Finance Index. The NASDAQ-Composite Index represents a broad
market group in which we participate. The NASDAQ-Finance Index was
chosen as having a representative peer group of companies for the 2007 Form
10K
and includes Electronic Clearing House, Inc. All comparisons of stock
price performance shown assume the reinvestment of dividends, although we have
not historically paid any dividends on shares of our Common
Stock.
Measurement
Point
|
|
Sep-02
|
|
|
Sep-03
|
|
|
Sep-04
|
|
|
Sep-05
|
|
|
Sep-06
|
|
|
Sep-07
|
|
ECHO
|
|
$ |
100.00
|
|
|
$ |
586.67
|
|
|
$ |
733.33
|
|
|
$ |
770.83
|
|
|
$ |
1,504.17
|
|
|
$ |
900.00
|
|
NASDAQ
- Composite
|
|
$ |
100.00
|
|
|
$ |
152.35
|
|
|
$ |
161.85
|
|
|
$ |
184.73
|
|
|
$ |
194.81
|
|
|
$ |
230.57
|
|
NASDAQ
- Finance
|
|
$ |
100.00
|
|
|
$ |
124.59
|
|
|
$ |
147.07
|
|
|
$ |
161.79
|
|
|
$ |
182.31
|
|
|
$ |
183.99
|
|
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 in Items 7 and 8 below. The following data,
insofar as it relates to each of the five years ended September 30, has been
derived from our annual financial statements, including the consolidated balance
sheets at September 30, 2007 and 2006, and the related consolidated statements
of operations and of cash flows for the three years ended September 30, 2007,
2006 and 2005, and notes thereto appearing elsewhere herein.
Effective
October 1, 2005, we began recording compensation expense associated with stock
options in accordance with SFAS No. 123(R), Share-Based Payment. We
have adopted the modified prospective transition method provided under SFAS
No.
123(R), and as a result, have not retroactively adjusted results from prior
periods. Under this transition method, compensation expense
associated with stock options recognized in fiscal year 2006 and 2007 includes
expense related to the remaining unvested portion of all stock option awards
granted prior to October 1, 2005, based on the grant date fair value estimated
in accordance with the original provisions of SFAS No. 123. See Note
1 and Note 12 to the financial statements for more information.
|
|
Year
Ended September 30
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
( ----
Amounts in thousands, except per share ----
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
76,884
|
|
|
$ |
75,311
|
|
|
$ |
55,551
|
|
|
$ |
48,320
|
|
|
$ |
41,149
|
|
Costs
and expenses
|
|
|
81,996
|
|
|
|
71,157
|
|
|
|
53,872
|
|
|
|
44,863
|
|
|
|
38,724
|
|
(Loss)
income from operations
|
|
|
(5,112 |
) |
|
|
4,154
|
|
|
|
1,679
|
|
|
|
3,457
|
|
|
|
2,425
|
|
Interest
income (expense), net
|
|
|
422
|
|
|
|
197
|
|
|
|
23
|
|
|
|
(104 |
) |
|
|
(172 |
) |
Gain
on sale of assets
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
1,319
|
|
|
|
-0-
|
|
(Loss)
income before income tax (provision) benefit and cumulative effect
of an
accounting change
|
|
|
(4,690 |
) |
|
|
4,351
|
|
|
|
1,702
|
|
|
|
4,672
|
|
|
|
2,253
|
|
Benefit
(provision) for income taxes
|
|
|
2,309
|
|
|
|
(2,034 |
) |
|
|
(669 |
) |
|
|
(1,823 |
) |
|
|
(925 |
) |
(Loss)
income before cumulative effect of an accounting change
|
|
|
(2,381 |
) |
|
|
2,317
|
|
|
|
1,033
|
|
|
|
2,849
|
|
|
|
1,328
|
|
Cumulative
effect of an accounting change to adopt SFAS 142[1]
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
(4,707 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
(2,381 |
) |
|
$ |
2,317
|
|
|
$ |
1,033
|
|
|
$ |
2,849
|
|
|
$ |
(3,379 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
earnings per share-basic
|
|
$ |
(0.35 |
) |
|
$ |
0.35
|
|
|
$ |
0.16
|
|
|
$ |
0.45
|
|
|
$ |
(0.58 |
) |
(Loss)
earnings per share-diluted
|
|
$ |
(0.35 |
) |
|
$ |
0.33
|
|
|
$ |
0.15
|
|
|
$ |
0.41
|
|
|
$ |
(0.56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares and equivalents
outstanding-basic
|
|
|
6,747
|
|
|
|
6,614
|
|
|
|
6,485
|
|
|
|
6,312
|
|
|
|
5,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares and equivalents
outstanding-diluted
|
|
|
6,747
|
|
|
|
7,005
|
|
|
|
6,939
|
|
|
|
6,900
|
|
|
|
6,024
|
|
Balance
Sheet Data:
Working
capital
|
|
$ |
10,120
|
|
|
$ |
12,542
|
|
|
$ |
8,037
|
|
|
$ |
8,004
|
|
|
$ |
3,201
|
|
Current
assets
|
|
|
21,940
|
|
|
|
41,893
|
|
|
|
29,207
|
|
|
|
29,869
|
|
|
|
9,619
|
|
Total
assets
|
|
|
35,134
|
|
|
|
55,007
|
|
|
|
40,714
|
|
|
|
39,374
|
|
|
|
18,748
|
|
Current
liabilities
|
|
|
11,820
|
|
|
|
29,351
|
|
|
|
21,170
|
|
|
|
21,865
|
|
|
|
6,418
|
|
Long-term
debt, and payables to stockholders and related parties, less current
portion
|
|
|
834
|
|
|
|
448
|
|
|
|
705
|
|
|
|
704
|
|
|
|
1,961
|
|
Total
stockholders' equity
|
|
$ |
22,480
|
|
|
$ |
22,286
|
|
|
$ |
17,772
|
|
|
$ |
16,240
|
|
|
$ |
10,369
|
|
[1]
|
The
Company completed the transitional impairment testing required by
SFAS No.
142 in the first quarter of fiscal 2003 and determined that its goodwill
was fully impaired and a $4.7 million goodwill write-off was
recognized.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
OVERVIEW
Electronic
Clearing House, Inc. is an electronic payment processor that provides for the
payment processing needs of merchants, banks and collection
agencies. We derive the majority of our revenue from two main
business segments, bankcard and transaction processing services (“bankcard
services”), whereby we provide solutions to merchants and banks to allow them to
accept credit and debit card payments from consumers, and check-related products
(“check services”), whereby we provide various services to merchants and banks
to allow them to accept and process check payments from
consumers. The principal services we offer within these two segments
include, with respect to our bankcard services, debit and credit card
processing, and with respect to our check services, check guarantee, check
verification, electronic check conversion, check re-presentment, and check
collection.
We
organize our service offerings under the following brand names:
|
·
|
MerchantAmerica:
ECHO’s retail provider of payment processing services to both
merchant and bank markets;
|
|
·
|
National
Check Network (“NCN”): for check verification, check conversion capture
services and for membership to collection
agencies;
|
|
·
|
XPRESSCHEX:
for
check collection services; and
|
|
·
|
ECHO:
for wholesale credit card and check processing
services.
|
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Management's
discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, management evaluates its estimates, including
those related to revenue recognition, deferred taxes, reserve for doubtful
accounts, capitalization of software costs, contingencies and litigation.
Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
Management
applies the following critical accounting policies in the preparation of our
consolidated financial statements:
-
Revenue Recognition Policy. We earn revenue from services which include
the following: debit and credit card processing, check verification, ACH
services, check conversion, check re-presentment, check collection, and check
guarantee. All of these services are performed pursuant to a contract
with customers which states the terms and fixed price for all contracted
services. The price of a service may be a fixed fee for each
transaction and/or a percentage of the transaction processed, depending on
the
service. We generally collect our fee and recognize revenue at the
time we process the transaction and, accordingly, collectibility of the service
fee is reasonably assured.
Revenue
from debit and credit card (collectively called bankcards) and transaction
processing revenue is based on a percentage of the transaction value, commonly
referred to as a discount fee on a credit and debit card transaction processed
by us. In addition, there is a per transaction fee associated with
each bankcard transaction which is charged to the merchant. We
recognize the processing and transaction revenue when the services are
performed.
Revenue
from check verification is derived from fees collected from the merchants when
a
check is verified against our own positive and negative check database and
other
check databases that we use. This revenue is recognized when the transaction
is
processed, since we have no further performance obligations.
Revenue
from check conversion is derived from fees collected from merchants to convert
the paper check received by merchants into an ACH transaction, which allows
us
to settle the transaction electronically for the merchant. We
recognize the revenue related to check conversion fees when the services are
performed.
Revenue
from check re-presentment is derived from fees charged to check
writers. Check re-presentment is a service that allows merchants to
collect a paper check through the ACH network after a check has previously
been
presented to the bank for collection unsuccessfully at least
once. The fees earned from the check writer are recognized when
collected, as collectibility is not reasonably assured until that
point.
Revenue
from check guarantee is derived from a percentage of the gross amount of the
check and guarantees payment of the check to the merchant in the event the
check
is not honored by the check writer’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 us. We recognize revenue when the checks are processed
at the point of sale. At the time the guarantee revenue is
recognized, we provide a reserve for estimated guarantee losses based upon
our
historical loss experience. In the event the check is dishonored, we
have the right to collect the full amount of the check from the check writer.
We
establish a receivable from the delinquent check writer for the full amount
of
the guaranteed check. The check guarantee service also earns revenue based
on
fees collected from delinquent check writers, which collection fee is recognized
when collected, as collectibility is not reasonably assured until that
point.
Revenue
from check collection is derived from collection activities performed on behalf
of a merchant on uncollected checks. The merchants usually keep the
face amount of the uncollected checks if the collection effort is
successful. Our revenue is derived from the collection fee collected
from the check writer. If we refer the collection item to another
collection agency, we will receive a fee from the collection agency upon its
successful efforts. Collection fee revenue is recognized when
collected, as collectibility is not reasonably assured until that
point.
-
Deferred Taxes. Deferred taxes are determined based on the differences
between the financial statement and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. In assessing the
need for a valuation allowance, management considers estimates of future taxable
income and ongoing prudent and feasible tax planning strategies.
-
Chargeback Losses. Chargeback losses occur when a credit
card holder presents a valid claim against one of our merchants and the merchant
has insufficient funds or is no longer in business resulting in the charge
being
absorbed by us. We record a receivable for those chargebacks for
which the merchant is liable but has not made payment. We record a
provision for estimated chargeback losses at the time bankcard transactions
are
processed. A reserve is estimated based upon a
historically-determined percentage of gross credit card processing volume and
actual losses experienced.
-
Research and Development Expense. Expenditures for
activities relating to product development and improvement are charged to
expense as incurred. Such expenditures amounted to $2,134,000 in
fiscal year 2007 and $1,539,000 in fiscal year 2006.
-
Capitalization of Software Costs. The costs of purchased and internally
developed software used to provide services to customers or for the process
of
internal administration are capitalized and amortized on a straight-line basis
over the lesser of three years or estimated useful life. Under the provisions
of
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," we capitalize software costs when
both
the preliminary project stage is completed and management has authorized further
funding for the completion of the project. Capitalization of costs ceases when
the project is substantially complete and the software is ready for its intended
use. Software developed or obtained for internal use is tested for
impairment whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable.
-
Stock-Based Compensation. Effective October
1, 2005, we began recording compensation expense associated with stock options
in accordance with SFAS No. 123(R), Share-Based Payment. Estimates
include risk-free interest rate, expected volatility, expected dividend yield,
expected forfeiture rate, and expected stock option life. Prior to October
1,
2005, we accounted for stock-based compensation related to stock options under
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25; therefore, we measured compensation expense for our stock option
plan using the intrinsic value method, that is, as the excess, if any, of the
fair market value of our stock at the grant date over the amount required to
be
paid to acquire the stock, and provided the disclosures required by SFAS Nos.
123 and 148. We have adopted the modified prospective transition
method provided under SFAS No. 123(R), and as a result, have not retroactively
adjusted results from prior periods. Under this transition method,
compensation expense associated with stock options recognized in fiscal year
2006 and 2007 includes expense related to the remaining unvested portion of
all
stock option awards granted prior to October 1, 2005, based on the grant date
fair value estimated in accordance with the original provisions of SFAS No.
123. We have not issued any stock options since the adoption of SFAS
No. 123(R).
RESULTS
OF OPERATIONS
Fiscal
years 2007 and 2006
Financial
highlights for fiscal 2007 as compared to fiscal 2006 were as
follows:
--
|
Total
revenue increased 2.1% to $76.9
million
|
--
|
Gross
margin from processing and transaction revenue decreased to 29.6%
from
33.5%
|
--
|
Operating
income decreased from $4.2 million to an operating loss of $5.1
million
|
--
|
Diluted
loss per share was $0.35 as compared to diluted earnings of $0.33
per
share
|
--
|
Bankcard
and transaction processing revenue increased by 9.8% to $62.6
million
|
--
|
Bankcard
processing volume increased 11.2% to $2.0
billion
|
--
|
Check-related
revenue decreased by 22.0% to $14.3
million
|
--
|
ACH
processing volume decreased 27.7% to 27.5 million
transactions
|
REVENUE. Total
revenue
increased 2.1% to $76,884,000 for fiscal 2007, from $75,311,000 for fiscal
2006.
The increase was primarily attributable to 9.8% growth in bankcard and
transaction processing revenue offset by the 22.0% decline in check services
revenue year-over-year. The bankcard and transaction processing revenue growth
has occurred organically from our existing merchants and from our marketing
initiatives during the year. The decrease in check revenue primarily reflects
the wind-down of the Company’s Internet wallet business and the discontinuation
of services to several merchant categories that management determined were
carrying unacceptable levels of business or financial risk.
The
bankcard and transaction processing revenue increase was mainly attributable
to
an 11.2% increase in bankcard processing volume as compared to fiscal
2006. This increase was the result of our organic growth and the
growth from our various marketing channels such as the Agent Bank
program.
The
check-related processing revenue decrease was attributable to a 27.7% decrease
in ACH processing volume. The decrease in ACH revenue was mainly due
to the Internet wallet wind-down described above and as a result of declining
check usage overall.
COST
OF
SALES. Bankcard processing expenses are directly related to the
changes in processing revenue. A majority of our bankcard processing expenses
are fixed costs and are reflected as a percentage of the total face amount
of
each bankcard transaction, and the remaining costs are based on a fixed rate
applied to the number of transactions processed. Processing-related expenses,
consisting of bankcard processing expense and transaction and check processing
expense, increased 8.2% for the year, from $50,072,000 in fiscal 2006 to
$54,158,000 in fiscal 2007. The increase was primarily due to the
9.8% increase in bankcard and transaction processing revenue for the year,
and a
$911,000 increase in amortization expense, offset by the 22.0% decrease in
check-related revenue.
Total
gross margin from processing and transaction services decreased from 33.5%
in
fiscal 2006 to 29.6% in fiscal 2007. Gross margin from bankcard and
transaction processing increased from 25.0% in fiscal 2006
to 25.2% in fiscal 2007. The
increase in gross margin was primarily related to the Company clearing its
own
processed transactions as opposed to outsourcing this function until January
2007. This was offset by several high volume merchants who negotiated
lower than average discount rates due to the size of their accounts.
Additionally, gross margin from check processing decreased from 60.1% in fiscal
2006 to 48.5% in fiscal 2007. The check services gross margin decrease was
mainly attributable to the decrease in Internet wallet transactions described
above, which typically yields higher margins.
EXPENSE.
Other operating costs such as personnel costs, telephone, depreciation expenses
and outside services increased 13.0%, from $5,775,000 in fiscal 2006 to
$6,523,000 in fiscal 2007. This was primarily due to an increase in salaries
of
12.4% from $3,539,000 in fiscal 2006 to $3,979,000 for fiscal 2007.
Research
and development expenses increased 38.7%, from $1,539,000 in fiscal 2006 to
$2,134,000 in fiscal 2007. Research and development initiatives are
critical for us to remain competitive with our peers. Several major development
projects were completed during fiscal year 2006 and early
2007. However, given the rapid change in technology in our industry,
we plan to continue to invest in product development in both the bankcard
processing business segment and the check-related products segment in order
to
stay ahead of our competitors.
Selling,
general and administrative (SG&A) expenses increased 15.4% from $12,162,000
in fiscal 2006 to $14,036,000 in fiscal 2007. This increase was
primarily attributable to: 1) an $814,000 increase in salaries and bonus due
to
the increase in employees to support the Company’s growth and the executive
compensation expense approved by the Board of Directors for 2007; and 2) a
$753,000 increase in professional fees, of which $426,000 related to the
investigation, customer notification and administration of a security incident.
As a percentage of total revenue, SG&A expenses increased from 16.1% in
fiscal 2006 to 18.3% in fiscal 2007.
Legal
Settlements and Fees - On March 27, 2007, we entered into a Non-Prosecution
Agreement pursuant to which the Office of the United States Attorney for the
Southern District of New York agreed not to pursue actions against us or our
subsidiaries for activities related to its provision of payment processing
services to Internet wallets that provided services to online gaming websites
during the period from January 2001 through and including the date of the
signing of the Non-Prosecution Agreement. Pursuant to the terms of
the Non-Prosecution Agreement, we agreed to pay estimated profits to the United
States in the amount of a $2,300,000 civil disgorgement settlement upon the
execution of the Non-Prosecution Agreement, which represented management’s
estimate of our profits from processing and collection services provided to
Internet wallets since 2001. Also included is approximately $880,000
for legal fees and expenses related to the negotiation and resolution of the
Non-Prosection Agreement. For the year ended September 30, 2006, we
settled a patent related lawsuit for $600,000 and also incurred $661,000 of
related legal expenses.
Merger
Related Costs - On March 26, 2007, we mutually agreed with Intuit and Elan
Acquisition Corporation, a Nevada corporation and wholly owned subsidiary of
Intuit (“Elan”), to terminate the Agreement and Plan of Merger previously
entered into on December 14, 2006. The Company incurred approximately
$934,000 of legal, professional and other fees and expenses related to the
merger for the year ended September 30, 2007.
Severance
Costs – The Company recorded $1,031,000 as a result of its retirement and
separation agreement with the former Chairman and Chief Executive Officer Joel
M. Barry. Such costs included cash compensation, accelerated vesting
of certain equity-based awards and other non-monetary benefits.
OPERATING
INCOME. Operating income decreased from $4,154,000 in fiscal 2006 to
an operating loss of $5,112,000 in fiscal 2007, a decrease of 223.1%. The
decrease in operating income was primarily attributable to the 2.1% increase
in
revenue offset by the 3.9% decrease in the gross margin percentage, the
increased selling, general and administrative expenses and non-recurring
expenses described above.
INTEREST
INCOME AND EXPENSE. Interest expense decreased to $66,000 for fiscal
2007 from $92,000 for fiscal 2006. The decrease was due to the full repayment
of
one note and some capital leases during fiscal 2006, offset by a new equipment
financing entered into in July 2007. Interest income increased from $289,000
in
fiscal 2006 to $488,000 in fiscal 2007 due to higher cash balances on hand
throughout fiscal year 2007 and those balances earning higher rates as compared
to 2006.
EFFECTIVE
TAX RATE. The income tax benefit was $2,309,000 for fiscal 2007 as compared
to
an income tax provision of $2,034,000 for fiscal 2006. Our effective
tax rate was a benefit of 49.2% for fiscal 2007, as compared to a provision
of
46.7% for fiscal 2006. The difference was primarily due to the Company having
a
loss before income taxes for the year ended September 30, 2007 as compared
to
income before taxes for the corresponding prior year period. The
Company also, based upon a study conducted during the year ended September
30,
2007, recorded certain research and development tax credits for fiscal years
ended September 30, 2003 through 2007. These tax credits resulted in
an income tax benefit of $787,000. See Notes to Consolidated
Financial Statements included elsewhere herein for a further explanation of
the
income tax expense and a reconciliation of reported income taxes to the amount
utilizing the statutory rate.
NET
INCOME. Net loss for fiscal 2007 was $2,381,000, as compared to net income
of
$2,317,000 for fiscal 2006. This decrease was primarily attributable to the
factors described above.
SEGMENT
RESULTS
Bankcard
and Transaction Processing. For the year ended September 30, 2007, bankcard
processing and transaction revenue accounted for approximately 81.4% of our
revenue, compared to 75.7% in fiscal 2006. Bankcard processing and
transaction revenue increased 9.8%, from $56,983,000 in fiscal 2006 to
$62,580,000 in fiscal 2007. This increase was mainly attributable to an 11.2%
increase in bankcard processing volume as compared to fiscal 2006. We continue
to increase our bankcard processing business primarily through organic growth
and various sales and marketing programs.
In
fiscal
2007, the bankcard and transaction processing segment generated operating income
of $9,236,000, or 14.8% of the related revenue, as compared to $8,495,000,
or
14.9% of the related revenue in fiscal 2006. This increase in operating income
was primarily due to the increase in revenue offset by SG&A
expense.
In
fiscal
2003, we purchased a fully integrated, multi-modular bankcard processing system
from Oasis Technologies for approximately $1.6 million which included three
payment processing modules: Clearing, Merchant Accounting System (MAS) and
Switch. We incurred an additional $2.6 million of internal development costs
thus far in implementing this system. The implementation of this system will
give us greater flexibility to price our credit card processing services,
allowing us to attract and retain larger merchants as well as the small and
mid-market merchants that have been our target market. Integration of
the Clearing module was finalized in September 2006 and all merchants were
moved
to the platform in January 2007.
Check
Related Products. Check-related revenue decreased from $18,328,000 for
fiscal 2006 to $14,304,000 for fiscal 2007, a decrease of 22.0%. Check
verification revenue decreased 10.6% to $3,805,000 for fiscal 2007 from
$4,258,000 for fiscal 2006. Check conversion, ACH services and check
re-presentment revenue decreased 36.0% to $6,303,000 for fiscal 2007, from
$9,842,000 for fiscal 2006. Additionally, check collection revenue
decreased 0.7%, from $3,879,000 in fiscal 2006 to $3,850,000 in fiscal
2007. The decrease in check revenue primarily reflects the wind-down
of the Company’s Internet wallet business and the discontinuation of services to
several merchant categories that management determined were carrying
unacceptable levels of business or financial risk. Total
ACH transactions processed during fiscal 2007 were 27.5 million transactions,
as
compared to 38.0 million transactions processed in fiscal 2006, a decrease
of
27.7%.
Check
services revenue made up 18.6% of the total processing and transaction revenue
for fiscal 2007 as compared to 24.3% of the total processing and transaction
revenue for fiscal 2006. Check-related operating loss was $1,116,000
in fiscal 2007, as compared to operating income of $4,384,000 in fiscal 2006,
a
decrease of 125.5%. The decrease in operating income was mainly due to the
22.0%
decrease in check-related revenue due to the factors previously
described.
Fiscal
years 2006 and 2005
Financial
highlights for fiscal 2006 as compared to fiscal 2005 were as
follows:
--
|
Total
revenue increased 35.6% to $75.3
million
|
--
|
Gross
margin from processing and transaction revenue decreased to 33.5%
from
35.4%
|
--
|
Operating
income increased from $1.7 million to $4.2
million
|
--
|
Diluted
earnings per share were $0.33 as compared to $0.15 per
share
|
--
|
Bankcard
and transaction processing revenue increased by 38.7% to $57.0
million
|
--
|
Bankcard
processing volume increased 49.6% to $1.8
billion
|
--
|
Check-related
revenue increased by 26.8% to $18.3
million
|
--
|
ACH
processing volume increased 18.3% to 38.0 million
transactions
|
REVENUE. Total
revenue increased 35.6% to $75,311,000 for fiscal 2006, from $55,551,000 for
fiscal 2005. The increase was primarily attributable to 38.7% growth in bankcard
and transaction processing revenue and 26.8% growth in check services revenue
year-over-year. This growth has occurred organically from our existing merchants
and from our marketing initiatives during the year.
The
bankcard and transaction processing revenue increase was mainly attributable
to
a 49.6% increase in bankcard processing volume as compared to fiscal
2005. This increase was the result of our organic growth and the
growth from our various marketing channels such as the Agent Bank
program.
The
check-related processing revenue increase was attributable to a 19.3% increase
in ACH services revenue and an 85.0% increase in check collection
revenue. The high growth in ACH revenue was mainly due to Internet
wallet funding activities and increases in overall ACH activities.
COST
OF
SALES. Bankcard processing expenses are directly related to the
changes in processing revenue. A majority of our bankcard processing expenses
are fixed costs and are reflected as a percentage of the total face amount
of
each bankcard transaction, and the remaining costs are based on a fixed rate
applied to the number of transactions processed. Processing-related expenses,
consisting of bankcard processing expense and transaction and check processing
expense, increased 39.6% for the year, from $35,867,000 in fiscal 2005 to
$50,072,000 in fiscal 2006. The increase was primarily due to the
35.6% increase in total revenue for the year, and a $750,000 increase in
amortization expense.
Total
gross margin from processing and transaction services decreased from 35.4%
in
fiscal 2005 to 33.5% in fiscal 2006. Gross margin from bankcard and
transaction processing decreased from 27.5% in fiscal 2005 to 25.0% in fiscal
2006. The decrease in gross margin was primarily attributable to
several high volume merchants who negotiated lower than average discount rates
due to the size of their accounts. Additionally, gross margin from check
processing increased from 58.0% in fiscal 2005 to 60.1% in fiscal 2006. The
check services gross margin increase was mainly attributable to an increase
in
Internet wallet transactions, which yields higher margins.
EXPENSE.
Other operating costs such as personnel costs, telephone, depreciation expenses
and outside services increased 2.2%, from $5,653,000 in fiscal 2005 to
$5,775,000 in fiscal 2006. This was primarily due to the increases to support
the 35.6% revenue growth in fiscal 2006.
Research
and development expenses decreased 4.4%, from $1,609,000 in fiscal 2005 to
$1,539,000 in fiscal 2006. Research and development initiatives are
critical for us to remain competitive with our peers. Several major development
projects were completed during fiscal year 2006. However, given the
rapid change in technology in our industry, we plan to continue to invest in
product development in both the bankcard processing business segment and the
check-related products segment in order to stay ahead of our
competitors.
Selling,
general and administrative (SG&A) expenses increased 36.0% from $8,944,000
in fiscal 2005 to $12,162,000 in fiscal 2006. This increase was
primarily attributable to: 1) a $1,234,000 increase in salaries, bonus and
payroll taxes due to the increase in employees to support the Company’s growth
and the executive compensation expense approved by the Board of Directors for
2006, as well as an increase in bonus compensation; 2) a $1,357,000 increase
in
stock compensation expense as a result of the implementation of SFAS No. 123(R)
starting this fiscal year, including $204,000 of additional stock compensation
expense to correct certain prior year stock option errors of which $177,000
related to prior periods (see Note 15); and 3) a $648,000 increase in
professional fees mainly related to Sarbanes-Oxley (“SOX”) expenses. As a
percentage of total revenue, SG&A expenses remained consistent at 16.1% in
fiscal 2005 and fiscal 2006.
Legal
Settlements and Fees – During 2006, we settled a patent related lawsuit for
$600,000 and also incurred $661,000 of related legal expenses. During
2005, we settled a lawsuit for $450,000 and also incurred $1,349,000 of related
legal expenses.
Merger
Related Costs - On March 26, 2007, we mutually agreed with Intuit and Elan
Acquisition Corporation, a Nevada corporation and wholly owned subsidiary of
Intuit (“Elan”), to terminate the Agreement and Plan of Merger previously
entered into on December 14, 2006. The Company incurred approximately
$348,000 of legal, professional and other fees and expenses related to the
merger for the year ended September 30, 2006.
OPERATING
INCOME. Operating income increased from $1,679,000 in fiscal 2005 to
$4,154,000 in fiscal 2006, an increase of 147.4%. The increase in operating
income was primarily attributable to the 35.6% increase in revenue offset by
the
1.9% decrease in gross margin and the increased selling, general and
administrative expenses described above.
INTEREST
INCOME AND EXPENSE. Interest expense decreased to $92,000 for fiscal
2006 from $113,000 for fiscal 2005. The decrease was due to the full repayment
of one note and some capital leases during fiscal 2006. Interest income
increased from $136,000 in fiscal 2005 to $289,000 in fiscal 2006 due to higher
cash balances on hand throughout fiscal year 2006 and those balances earning
higher rates as compared to 2005.
EFFECTIVE
TAX RATE. The income tax provision was $2,034,000 for fiscal 2006 as compared
to
$669,000 for fiscal 2005. Our effective tax rate was 46.7% for fiscal
2006, as compared to 39.3% for fiscal 2005. The increase was
primarily due to non-deductible stock compensation expense related to the
adoption of SFAS No. 123(R) in 2006. See Notes to Consolidated Financial
Statements included elsewhere herein for a further explanation of the income
tax
expense and a reconciliation of reported income taxes to the amount utilizing
the statutory rate.
NET
INCOME. Net income for fiscal 2006 was $2,317,000, as compared to $1,033,000
for
fiscal 2005. This increase was primarily attributable to the increase in
revenues.
SEGMENT
RESULTS
Bankcard
and Transaction Processing. For the year ended September 30, 2006, bankcard
processing and transaction revenue accounted for approximately 75.7% of our
revenue, compared to 74.0% in fiscal 2005. Bankcard processing and
transaction revenue increased 38.7%, from $41,093,000 in fiscal 2005 to
$56,983,000 in fiscal 2006. This increase was mainly attributable to a 49.6%
increase in bankcard processing volume as compared to fiscal 2005. We continue
to increase our bankcard processing business primarily through organic growth
and various sales and marketing programs.
In
fiscal
2006, the bankcard and transaction processing segment generated operating income
of $8,495,000, or 14.9% of the related revenue, as compared to $5,829,000,
or
14.2% of the related revenue in fiscal 2005. This increase in operating income
was primarily due to the increase in revenue offset by lower gross margin and
SG&A expense.
We
purchased a fully integrated, multi-modular bankcard processing system from
Oasis Technologies for approximately $1.6 million which included three payment
processing modules: Clearing, Merchant Accounting System (MAS) and Switch.
We
have incurred an additional $2.4 million of internal development costs thus
far
in implementing this system. The implementation of this system will give us
greater flexibility to price our credit card processing services, allowing
us to
attract and retain larger merchants as well as the small and mid-market
merchants that have been our target market. Integration of the
Clearing module was in its final testing phase in September 2006 and select
merchants were moved to the platform in October 2006. Full deployment
of the total base is expected to occur by December of 2006.
Check
Related Products. Check-related revenue increased from $14,458,000 for
fiscal 2005 to $18,328,000 for fiscal 2006, an increase of 26.8%. Check
verification revenue increased 16.8% to $4,258,000 for fiscal 2006 from
$3,645,000 for fiscal 2005. Check conversion, ACH services and check
re-presentment revenue increased 19.3% to $9,842,000 for fiscal 2006, from
$8,251,000 for fiscal 2005. Additionally, check collection revenue
increased 85.0%, from $2,096,000 in fiscal 2005 to $3,879,000 in fiscal 2006.
The high growth in ACH revenue was due to Internet wallet activities and the
overall increase in the ACH and conversion product. Total ACH transactions
processed during fiscal 2006 were 38.0 million transactions, as compared to
32.1
million transactions processed in fiscal 2005, an increase of
18.3%.
Check
services revenue made up 24.3% of the total processing and transaction revenue
for fiscal 2006 as compared to 26.0% of the total processing and transaction
revenue for fiscal 2005. Check-related operating income was
$4,384,000 in fiscal 2006, as compared to operating income of $2,204,000 in
fiscal 2005, an increase of 98.9%. The increase in operating income was mainly
due to the 26.8% increase in check-related revenue.
LIQUIDITY
AND CAPITAL RESOURCES
As
of
September 30, 2007, we had available cash and cash equivalents of $10,752,000,
restricted cash of $1,168,000 in reserve with our primary processing banks
and
working capital of $10,120,000.
Accounts
receivable, net of allowance for doubtful accounts, increased to $3,322,000
at
September 30, 2007 from $2,914,000 at the end of fiscal 2006. Allowance for
doubtful accounts, which reflects chargeback losses decreased to $321,000 at
the
end of fiscal 2007 from $392,000 at September 30, 2006. The increase
in accounts receivable was due to the higher processing revenue generated in
fiscal 2007 and therefore higher month-end balances. In addition, the
decrease in allowance for doubtful accounts was mainly due to the write-off
of
receivables from certain merchants.
Net
cash
provided by operating activities for the year ended September 30, 2007 was
$2,489,000, as compared to net cash provided by operating activities of
$9,649,000 for fiscal 2006. The $7,160,000 decrease in cash from operations
was
primarily attributable to the $4,698,000 decrease in net income between fiscal
2007 and 2006, and a decrease of $2,841,000 in deferred income
taxes.
Net
cash
used in investing activities was $4,906,000 for fiscal 2007 as compared to
$5,197,000 for the fiscal 2006. During fiscal 2007, we purchased less equipment
and incurred less capitalized software costs as compared to fiscal
2006.
Net
cash
provided by financing activities was $1,565,000 for the current fiscal year
as
compared to $420,000 for fiscal year 2006. During fiscal 2007, we
paid off $344,000 in notes payable and capitalized leases. During
fiscal 2007, we received $838,000 from the exercise of employee stock options
and $932,000 from a new equipment loan.
During
2006, we utilized the remainder of our previous net operating loss carryforwards
for federal and state tax purposes. The Company, based upon a study
conducted during the year ended September 30, 2007, recorded certain research
and development credits for fiscal years ended September 30, 2003 through
2007. These research and development credits resulted in an income
tax benefit of $0.8 million. We expect our effective income tax rate to be
approximately 40% in 2008, and do not expect to make tax cash payments until
the
research and development credits and net operating loss carryforwards are fully
utilized.
As
of
September 2007, we had a $3,000,000 working capital credit line with Bank of
the
West which has yet to be utilized. We were in compliance with our
amended debt covenants at September 30, 2007.
At
September, 2007, we had the following contractual obligations and cash
commitments:
Payments
Due By Period
Contractual
Obligations
|
|
Total
|
|
|
Less
than
1
year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
Than
5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt including interest
|
|
$ |
1,463,000
|
|
|
$ |
542,000
|
|
|
$ |
695,000
|
|
|
$ |
226,000
|
|
|
$ |
-0-
|
|
Capital
lease obligations
|
|
|
34,000
|
|
|
|
34,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Operating
leases
|
|
|
499,000
|
|
|
|
499,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Minimum
vendor commitments
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Total
contractual cash obligations
|
|
$ |
2,246,000
|
|
|
$ |
1,325,000
|
|
|
$ |
695,000
|
|
|
$ |
226,000
|
|
|
$ |
-0-
|
|
Our
primary source of liquidity is expected to be cash flow generated from
operations and cash and cash equivalents currently on
hand. Management believes that our cash flow from operations together
with cash on hand and our established line of credit with Bank of the West
will
be sufficient to meet our working capital and other commitments for a period
of
at least twelve months.
OFF-BALANCE
SHEET ARRANGEMENTS
At
September 30, 2007, we did not have any off-balance sheet
arrangements.
NEW
ACCOUNTING PRONOUNCEMENTS
In
2006,
the FASB issued SFAS No. 157, “Fair Value Measurement” (SFAS No.
157). SFAS No. 157 provides guidance for using fair value to measure
assets and liabilities. The standard expands required disclosures
about the extent to which companies measure assets and liabilities at fair
value, the information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS No. 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair
value. SFAS No. 157 does not expand the use of fair value in any new
circumstances. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. We are currently evaluating the impact of
adopting SFAS No. 157 on our consolidated financial statements.
In
2007,
the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-including an amendment of FASB Statement
No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities
to measure at fair value many financial instruments and certain other items
that
are not currently required to be measured at fair value, with unrealized gains
and losses related to these financial instruments reported in earnings at each
subsequent reporting date. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. We are currently evaluating the impact of adopting
SFAS 159 on our consolidated financial statements.
In
2006,
the SEC issued Staff Accounting Bulletin No. 108 (SAB No. 108) “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements” which addresses quantifying the
financial statement effects of misstatements, specifically, how the effects
of
prior year uncorrected errors must be considered in quantifying misstatements
in
the current year financial statements. SAB No. 108 is effective for
fiscal years ending after November 15, 2006. We adopted the
provisions of SAB No. 108 as of October 1, 2006, and it did not have a material
impact to our financial condition or results of operations.
In
2006,
the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes– an interpretation of FASB Statement 109” (FIN
48). This interpretation clarifies the accounting for uncertain taxes
recognized in a company’s financial statements in accordance with SFAS No. 109,
“Accounting for Income Taxes.” The interpretation requires us to analyze the
amount at which each tax position meets a “more likely than not” standard for
sustainability upon examination by taxing authorities. Only tax
benefit amounts meeting or exceeding this standard will be reflected in tax
provision expense and deferred tax asset balances. The interpretation
also requires that any differences between the amounts of tax benefits reported
on tax returns and tax benefits reported in the financial statements be recorded
in a liability for unrecognized tax benefits. The liability for
unrecognized tax benefits is reported separately from deferred tax assets and
liabilities and classified as current or noncurrent based upon the expected
period of payment. Additional disclosure in the footnotes to the
audited financial statements will be required concerning the income tax
liability for unrecognized tax benefits, any interest and penalties related
to
taxes that are included in the financial statements, and open statutes of
limitations for examination by major tax jurisdictions. FIN 48 is
effective for annual periods beginning after December 15, 2006 and any
cumulative effect of adopting FIN 48 will be recorded as a change in accounting
principle in the financial statements for the three months ending December
31,
2007. We do not expect the impact of FIN 48 to be material to our
consolidated financial statements.
In
2006,
the Emerging Issues Task Force (EITF) reached a consensus on EITF 06-3, “How
Taxes Collected From Customers and Remitted to Government Authorities Should
Be
Presented in the Income Statement (That is, Gross Versus Net
Presentation)”. EITF 06-3 discussed the correct accounting
treatment of taxes charged to a customer but collected and remitted by a
reporting entity. We currently report our revenue net of any sales
tax collected on our Consolidated Statement of
Operations.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We
are
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, we 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.
Our
exposure to interest rate risk is very limited. A hypothetical 1%
interest rate change would have no impact on our results of
operations.
|
Financial
Statements and Supplementary
Data
|
The
Financial Statements and Supplementary Data are listed under "Item 15. Exhibits,
Financial Statements, and Financial Statement Schedules".
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
None.
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
As
of
September 30, 2007, the end of the period covered by this report, under the
supervision and with the participation of management, including our Chief
Executive Officer and our Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934). Based upon that evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded that as of
September 30, 2007, our disclosure controls and procedures were
effective.
Management’s
Report on Internal Control over Financial Reporting
The
management of ECHO is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over
financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended, as a process designed by, or under
the supervision of, the Company's principal executive and principal financial
officers and effected by the Company's board of directors, management and other
personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in
accordance with generally accepted accounting principles and includes those
policies and procedures that:
(i) pertain
to the
maintenance of records that in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company;
(ii) provide
reasonable
assurance that transactions are recorded as necessary to permit preparation
of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the
Company; and
(iii) provide
reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Company's assets that could have a material effect
on
the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our
management assessed the effectiveness of the Company's internal control over
financial reporting as of September 30, 2007. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.
Based
on
our assessment, management believes that, as of September 30, 2007, the
Company's internal control over financial reporting is effective.
Our
effectiveness of the Company’s internal control over financial reporting as of
September 30, 2007 and 2006 has been audited by BDO Seidman, LLP, an independent
registered public accounting firm, as stated in their report which appears
herein.
Changes
in Internal Control over Financial Reporting
During
the quarter ended September 30, 2007, there was no change in our internal
control over financial reporting that materially affects, or that is reasonably
likely to materially affect, our internal control over financial
reporting.
None.
|
Directors,
Executive Officers and Corporate
Governance
|
The
executive officers and directors of ECHO are:
Name
|
|
Position
|
|
Date
first became
Officer
or Director
|
|
|
|
|
|
Charles
J. Harris
|
|
Director, Chief
Executive Officer
|
|
2005
|
|
|
|
|
|
William
Wied
|
|
Chief
Information Officer
|
|
2006
|
|
|
|
|
|
Alice
L. Cheung
|
|
Chief
Financial Officer, Treasurer
|
|
1996
|
|
|
|
|
|
Karl
Asplund
|
|
Senior
Vice President
|
|
2006
|
|
|
|
|
|
Sharat
Shankar
|
|
Senior
Vice President
|
|
2003
|
|
|
|
|
|
Patricia
M. Williams
|
|
Senior
Vice President
|
|
1997
|
|
|
|
|
|
Jack
Wilson
|
|
Senior
Vice President
|
|
1994
|
|
|
|
|
|
Kris
Winckler
|
|
Senior
Vice President
|
|
1999
|
|
|
|
|
|
Steve
Hoofring
|
|
Senior
Vice President
|
|
2003
|
|
|
|
|
|
Rick
Slater
|
|
Chief
Technology Officer, Vice President
|
|
1998
|
|
|
|
|
|
Herbert
L. Lucas, Jr.
|
|
Director
|
|
1991
|
|
|
|
|
|
Aristides
W. Georgantas
|
|
Director
|
|
1999
|
|
|
|
|
|
Richard
D. Field
|
|
Director
|
|
2004
|
|
|
|
|
|
Jerry
McElhatton
|
|
Director
|
|
2007
|
|
|
|
|
|
Keith
Hall
|
|
Director
|
|
2007
|
CHARLES
J. HARRIS, age 45, joined ECHO in September 2005 as President, Chief
Operating Officer and a Director to serve on the Board of Directors of
ECHO. In July 2007, he was appointed Chief Executive Officer
when the then-current CEO retired. Prior to joining the Company, Mr. Harris
served in executive, operational and sales leadership positions at prominent
organizations including Paymentech and Electronic Data Systems. His
last position was as President of Merchant Link, a wholly-owned subsidiary
of
Paymentech, which supplies electronic payment technologies and outsourced
services to the point-of-sale market.
WILLIAM
WIED, age 39, joined ECHO in January 2006 as the Company’s Chief
Information Officer. Prior to joining ECHO, Mr. Wied was the Director
of Software Technology for TransCore LP/Roper Industries, Scottsdale, Arizona.
Prior to that, he served as Vice President of Engineering for CarrierPoint,
Inc., a division of the TransCore LP group of companies. Mr. Wied’s background
includes responsibility in the areas of design, development and deployment
of
enterprise software solutions in a number of different industries including
semiconductor, telecommunications, retail and transportation logistics. Mr.
Wied
resigned from the company on October 31, 2007.
ALICE
L.
CHEUNG, age 50, has served as Treasurer and Chief Financial Officer since July
1996. Ms. Cheung became a Certified Public Accountant in
May 1982. From February 1988 to January 1996, Ms. Cheung was the
Treasurer and Chief Financial Officer of American Mobile Systems (AMS). AMS
merged with Nextel Communications, Inc. in 1995. Ms. Cheung is an
active member of the American Institute of Certified Public Accountants and
Financial Executive Institute.
KARL
ASPLUND, age 46, joined ECHO in May 2006 in the newly established
position of Senior Vice President of Sales. Before joining
ECHO, Mr. Asplund was the Senior Vice President of Genpass Technologies
in Irving, Texas. Prior to that, he served as Group Manager of
Business Development for First USA/Paymentech and was the Founder and President
of Merchant Card Management Systems.
SHARAT
SHANKAR, age 37, joined ECHO in June 2003 as Vice President Risk
Management and Business Intelligence and in December 2003, he was promoted
to
Senior Vice President. In April 2005, Mr. Shankar was appointed to
hold the position of General Manager Check Services. In January 2006, he was
given the additional responsibility of building and leading the strategic
partnership group focused on growth through mutually beneficial
alliances. Prior to joining ECHO, Mr. Shankar worked at
TeleCheck for approximately eight years where he held a variety of positions
leading up to Vice President of Risk Management. Prior to TeleCheck, Mr. Shankar
held positions at MetLife as well as Hong Kong and Shanghai Bank, Madras, India.
PATRICIA
M. WILLIAMS, age 42, joined ECHO in September 1996, serving as Director
of Program Management. Ms. Williams was appointed Vice President Corporate
Program Management in October 1997 and Vice President Check Services
in October 2001. In June of 2003, Ms. Williams was appointed to the position
of
Vice President Sales and Marketing and in December 2003, was promoted
to Senior Vice President. In April 2005 Ms. Williams was appointed to hold
the
position of General Manager of Credit Card Services. 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.
JACK
WILSON, age 63, has served as Vice President of Merchant Services since June
1994 and was Director of Bankcard Relations for ECHO from October 1992
until May 1994. In December 2003, he was promoted to Senior Vice
President Merchant Services and in April 2005, he was appointed to the position
of Senior Vice President Credit Card Services. 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.
KRIS
WINCKLER, age 42, joined ECHO in April, 1999, as Vice President of
ECHO’s XPRESSCHEX
subsidiary. In December 2003, he was promoted to Senior Vice
President Product and Strategic Planning and in April 2005, he was appointed
to
the position of Senior Vice President Check Services. Prior to joining
ECHO, Mr. Winckler was a consultant at Andersen Consulting and the
President of Magic Software, a company specializing in check verification,
conversion, and ACH software. Mr. Winckler has been active in the
check and collection industry for over ten years and has been a member of the
Electronic Check Council of NACHA since 1998.
RICK
SLATER, age 46, joined ECHO 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, focusing on security, regulatory, process
improvement, and strategic technical planning. Prior to joining
ECHO, 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. Prior to this position, Mr. Slater
served as a group leader at Aiken Advanced Systems.
STEVE
HOOFRING, age 47, joined ECHO in October 2001 as Implementation Manager
for the Check Services group and was appointed Vice President Visa POS Check
and
Client Services in October 2003 and Senior Vice President Operations in August
2005. Mr. Hoofring was President of Running Dog Software, Inc., which developed
‘Enterprise’ software for small to medium size businesses. Prior to
this, Mr. Hoofring held several management positions with Emerson Power
Transmission, a subsidiary of Emerson Electric,
Inc.
SHAWN
ALIKIAN, age 37, joined ECHO as General Counsel in May 2007. Mr.
Alikian was the founder and Executive Vice President of After Hours Pediatrics,
Inc., an exclusive pediatric urgent care center. Prior to this, Mr.
Alikian was Division Counsel and Senior Vice President of Corporate Development
at Homestore, Inc. In addition, Mr. Alikian was the General Counsel at
Homes.com, Inc. and practiced as a corporate attorney at several large law
firms.
HERBERT
L. LUCAS, JR., age 81, has been a Director since 1991. 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., Scolr Pharma, Inc.
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, The
Morgan Library, National Association of Independent Schools and Winrock
International. He was formerly a member of the Board of Trustees of Princeton
University.
ARISTIDES
W. GEORGANTAS, age 63, has served as a Director since February
1999. Mr. Georgantas, prior to his retirement, was Executive Vice
President and Chief Operating Officer at Chase Manhattan Bank’s Global Asset
Management/Private Banking Division. He serves as a director of
Horizon Blue Cross Blue Shield of New Jersey, the Glenmede Corporation, the
Glenmede Trust Company, Mathematica Policy Research, Inc. the Pew Charitable
Trusts, and the Rita Allen Foundation.
RICHARD
D. FIELD, age 67, became a Director of ECHO in July 2004. Mr. Field has
worked in the financial services industry for over 40 years as an executive
of
the Bank of New York, Chase, and Citigroup, and a director of Mastercard
International and Chairman of its U.S. Board. Since retiring from
full time employment in 1997, he has continued his career in the specialty
financial areas as a co-founder and director of LendingTree, Inc. as well as
serving on the boards of Providian Financial Corporation and HPSC,
Inc.
KEITH
B.
HALL, age 54, became a director in October 2007. Mr. Hall recently
retired as the Senior Vice President and Chief Financial Officer of LendingTree,
Inc., which went public under his tutelage in 2000. LendingTree was
subsequently purchased by InterActive Corp. (IACI). Prior to
LendingTree, Mr. Hall held chief financial officer positions with three public
companies (Broadway & Seymour, Inc., Loctite Corporation, and Legent
Corporation), all of which were subsequently acquired. He also was employed
for
over twelve years in various financial positions at United Technologies
Corporation (UTX), including chief financial officer of Carrier Corporation’s
North American Operations. Mr. Hall currently serves on the Board of
privately-held NewRiver, Inc. and on the Board of Trustees at Coe
College.
JERRY
McELHATTON, age 68, became a Director of ECHO in July 2007. Mr.
McElhatton served as the President of Global Technology and Operations for
MasterCard International from 1994 to 2005 and as President and Chief Executive
Officer of Payment Systems Technology and Consulting from 1988 to
1994. Mr. McElhatton currently is President of Virtual
Resources, Inc. which provides strategic direction, consulting, and managed
services to numerous payment systems, technology clients and has a
management contract and holds the position of CEO of a major call center
company. Additionally, he serves as a director on the board of Center
for Security Technologies, Enterprise Bank and Trust, as well as serving on
the
Board of Advisors of the Washington University Business School and a Trustee
for
the University of Dallas.
All
directors are to be elected to three year terms by the stockholders and serve
until their respective terms have expired. The Annual Meeting of Stockholders
was held on July 2, 2007, and the election of directors was held at that
time. All officers serve at the pleasure of our Board of
Directors.
Code
of Ethical Conduct
Our
Board
of Directors has adopted a Code of Ethical Conduct (the "Code of Conduct").
We
require all employees, directors and officers, including our Chief Executive
Officer and Chief Financial Officer, to adhere to the Code of Conduct in
addressing legal and ethical issues encountered in conducting their
work. The Code of Conduct requires that these individuals avoid
conflicts of interest, comply with all laws and other legal requirements,
conduct business in an honest and ethical manner and otherwise act with
integrity and in our best interest. The Code of Conduct contains
additional provisions that apply specifically to our Chief Financial Officer
and
other financial officers with respect to full and accurate
reporting. The Code of Conduct is available on our website at
www.echo-inc.com.
Audit
Committee Financial Expert
Our
Board
of Directors has determined that Messrs. Aristides W. Georgantas and Keith
B.
Hall are both “audit committee financial experts” as defined in Item 401(h) of
Regulation S-K. Messrs. Georgantas and Hall are “independent” for
purposes of Rule 4200(a)(15) of the NASDAQ Marketplace Rules.
Identification
of Audit Committee
Our
Board
of Directors has a separately standing Audit Committee. The Audit
Committee currently consists of Richard D. Field, Aristides W. Georgantas,
Herbert L. Lucas, Jr., Jerry McElhatton, and Keith Hall. Messrs.
Field, Georgantas, Lucas, McElhatton and Hall are “independent
directors” within the meaning of Rule 10A-3 promulgated under the Securities
Exchange Act of 1934, as amended, and the NASDAQ Marketplace Rules. The Audit
Committee’s primary duties and responsibilities include appointment of the
independent auditors, evaluation of the performance and independence of such
auditors and review of the annual audited financial statements and the quarterly
financial statements, as well as the adequacy of our internal
controls.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
and executive officers and the holders of 10% or more of our Common Stock to
file with the Securities and Exchange Commission initial reports of ownership
and reports of changes in ownership of our equity securities. Based
solely on our review of the copies of the forms received by us and written
representations from certain reporting persons that they have complied with
the
relevant filing requirements, we believe that, during the year ended September
30, 2007, all of our executive officers, directors and the holders of 10% or
more of our Common Stock complied with all Section 16(a) filing requirements,
except for H. Eugene Lockhart, our director, Patricia Williams, our
Senior Vice President, and Kris Winckler, our Senior Vice President, each of
whom did not timely file one Form 4.
The
information concerning executive compensation will appear in our definitive
Proxy Statement to be filed pursuant to Regulation 14A within 120 days after
the
end of our last fiscal year (the “Proxy Statement”), and is incorporated herein
by reference.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The
information concerning the security ownership of certain beneficial owners
and
management and related stockholder matters will appear in our definitive Proxy
Statement and is incorporated herein by e\reference.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The
information concerning certain relationship and related transactions will appear
in our definitive Proxy Statement and is incorporated herein by
reference.
|
Principal
Accounting Fees and
Services
|
The
information concerning principal accounting fees and services will appear in
our
definitive Proxy Statement and is incorporated herein by reference.
PART
IV
|
Exhibits,
Financial Statement
Schedules
|
(a)
The
following documents are filed as part of this report:
(1) Consolidated
Financial Statements
|
|
Page
|
|
|
|
|
Reports
of Independent Registered Public Accounting
Firms
|
F-1
|
|
|
|
|
Consolidated
Balance Sheets at September 30, 2007 and 2006
|
F-4
|
|
|
|
|
Consolidated
Statements of Operations for each of the three years in the period
ended
September 30, 2007
|
F-5
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders' Equity for each of the three
years
in the period ended September 30, 2007
|
F-6
|
|
|
|
|
Consolidated
Statements of Cash Flows for each of the three years in the period
ended
September 30, 2007
|
F-7
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
|
|
|
(2)
Financial Statement Schedule:
|
|
|
|
|
|
Report
on Financial Statement Schedule
|
S-1
|
|
|
|
|
Schedule
II - Valuation and Qualifying Accounts and Reserves
|
S-2
|
All
other
schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes
thereto.
Exhibits:
Exhibit
Number
|
|
Description
of Document
|
|
|
|
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.[3]
|
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.[4]
|
2.3
|
|
Agreement
and Plan of Merger dated December 14, 2006 by and among Intuit Inc.,
Elan
Acquisition Corporation and Electronic Clearing House, Inc. [11]
|
2.4
|
|
Mutual
Termination and Release Agreement dated as of March 26, 2007 by and
among
Electronic Clearing House, Inc., Intuit Inc., and Elan Acquisition
Corporation. [12]
|
3.1
|
|
Articles
of Incorporation of Bio Recovery Technology, Inc., filed with the
Nevada
Secretary of State on December 11, 1981. [10]
|
3.1.1
|
|
Amendment
to the Articles of Incorporation of Electronic Clearing House, Inc.
filed
with the Nevada Secretary of State on June 21, 1990. [10]
|
3.1.2
|
|
Amendment
to the Articles of Incorporation of Electronic Clearing House, Inc.
filed
with the Nevada Secretary of State on September 27, 1991. [10]
|
3.1.3
|
|
Amendment
to the Articles of Incorporation of Electronic Clearing House, Inc.
filed
with the Nevada Secretary of State on August 5, 1993. [10]
|
3.1.4
|
|
Amendment
to the Articles of Incorporation of Electronic Clearing House, Inc.
filed
with the Nevada Secretary of State on April 7, 1995. [10]
|
3.1.5
|
|
Amendment
to the Articles of Incorporation of Electronic Clearing House, Inc.
filed
with the Nevada Secretary of State on April 7, 1997. [10]
|
3.1.6
|
|
Amendment
to the Articles of Incorporation of Electronic Clearing House, Inc.
filed
with the Nevada Secretary of State on March 13, 1998. [10]
|
3.1.7
|
|
Amendment
to the Articles of Incorporation of Electronic Clearing House, Inc.
filed
with the Nevada Secretary of State on June 21, 1999. [10]
|
3.1.8
|
|
Amendment
to the Articles of Incorporation of Electronic Clearing House, Inc.
filed
with the Nevada Secretary of State on September 6, 2001. [10]
|
3.2
|
|
By-Laws
of Bio Recovery Technology, Inc.[1]
|
3.2.1
|
|
Amendment
to the By-Laws of Electronic Clearing House, Inc., dated April 25,
2005.
[10]
|
3.2.2
|
|
Amendment
to the By-Laws of Electronic Clearing House, Inc., dated September
9,
2005. [10]
|
4.1
|
|
Amended
and Restated Rights Agreement between Electronic Clearing House,
Inc. and
OTR, Inc., dated January 29, 2003. [5]
|
4.1.1
|
|
Amendment
Number One to Amended and Restated Rights
Agreement dated September 27, 2004. [6]
|
4.1.2
|
|
Amendment
Number Two to Amended and Restated Rights Agreement dated December
14,
2006. [11]
|
4.1.3
|
|
Amendment
Number Three to Amended and Restated Rights Agreement dated April
24,
2007. [13]
|
4.2
|
|
Specimen
Common Stock Certificate. [2]
|
4.3
|
|
Amended
and Restated 2003 Incentive Stock Option Plan. [7]
|
4.4
|
|
Amended
and Restated 1992 Officers and Key Employees Incentive Stock Option
Plan.
[8]
|
10.35
|
|
Copy
of Merchant Marketing and Processing Services Agreement between Electronic
Clearing House, Inc. and First Regional Bank, dated June 24, 1997.
[14]
|
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.[4]
|
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.[4]
|
10.48
|
|
Copy
of POS Check Third-Party Services Agreement between Visa U.S.A.,
Inc. and
Electronic Clearing House, Inc., dated December 12, 2000.[15]
|
10.51
|
|
Copy
of First Amendment to the POS Check Third-Party Servicer Agreement
between
Visa U.S.A., Inc. and Electronic Clearing House, Inc. dated December
12,
2000. [16]
|
10.52
|
|
Copy
of Second Amendment to the POS Check Third-Party Servicer Agreement
between Visa U.S.A., and Electronic Clearing House, Inc. dated
December 12, 2000. [16]
|
10.53
|
|
Copy
of Third Amendment to the POS Check Third-Party Servicer Agreement
between
Visa U.S.A., and Electronic Clearing House, Inc.
dated December 12, 2000. [16]
|
10.56
|
|
Office
Lease dated May 21, 2003, by and between the Registrant and the 1989
Sheehan Family Trust dated October 24, 1989, with respect to principal
executive offices located at 730 Paseo Camarillo, Camarillo, California
93010.[17]
|
10.57
|
|
First
Amendment to Lease dated July 10, 2003, by and between the Registrant
and
the 1989 Sheehan Family Trust dated October 24, 1989, with respect
to
principal executive offices located at 730 Paseo Camarillo, Camarillo,
California 93010. [10]
|
10.58
|
|
Addendum
to Office Lease dated July 7, 2004, by and between the Registrant
and the
1989 Sheehan Family Trust dated October 24, 1989, with respect to
principal executive offices located at 730 Paseo Camarillo, Camarillo,
California 93010. [18]
|
10.60
|
|
Sample
Amended and Restated Separation Agreement between Electronic Clearing
House, Inc. and Company Executives.
|
10.61
|
|
Form
of Voting Agreement between Intuit Inc. and the Officers and Directors
of
Electronic Clearing House, Inc. [11]
|
10.62
|
|
Electronic
Clearing House, Inc. Non-Prosecution Agreement dated March 27, 2007,
with
the United States Attorney for the Southern District of New York.
[12]
|
10.63
|
|
Separation
and Release Agreement between Electronic Clearing House, Inc. and
Joel M.
Barry dated August 10, 2007 and effective July 2, 2007.
|
10.64
|
|
Form
of Indemnification Agreement.
|
11.1
|
|
Statement
re computation of per share earnings, incorporated herein by reference
to
Note 10 of the Notes to Consolidated Financial
Statements.
|
21.0
|
|
Subsidiaries
of Registrant as of September 30, 2006. [10]
|
23.1
|
|
Consent
of PricewaterhouseCoopers LLP
|
23.2
|
|
Consent
of BDO Seidman, LLP
|
24.1
|
|
Power
of Attorney [9]
|
31.1
|
|
Certificate
of Charles J. Harris, Chief Executive Officer of Electronic Clearing
House, Inc. pursuant to Rule 13a-14(b) under
the Securities and Exchange Act of 1934, as amended.
|
31.2
|
|
Certificate
of Alice L. Cheung, Chief Financial Officer of Electronic Clearing
House,
Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange
Act of
1934, as amended.
|
32.1
|
|
Certificate
of Charles J. Harris, Chief Executive Officer of Electronic Clearing
House, Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange
Act of 1934, as amended.
|
32.2
|
|
Certificate
of Alice L. Cheung, Chief Financial Officer of Electronic Clearing
House,
Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange
Act of
1934, as amended.
|
_________________________________
|
[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 Form S-1, Amendment No. 3, effective November 13,
1990 and
incorporated herein by reference.
|
|
[3]
|
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.
|
|
[4]
|
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.
|
|
[5]
|
Filed
as an Exhibit to
Registrant’s Form 8-A dated February 10, 2003 and incorporated herein by
reference.
|
|
[6]
|
Filed
as an Exhibit to Registrant’s Form 8-K dated September 30, 2004 and
incorporated herein by reference.
|
|
[7]
|
Filed
as an Exhibit to
Registrant’s Notice of Annual Meeting of Shareholders dated February 7,
2005 and incorporated herein by reference.
|
|
[8]
|
Filed
as an Exhibit to
Registrant’s Notice of Annual Meeting of Shareholders dated February 4,
1999 and incorporated herein by reference.
|
|
[9]
|
Included
on signature
page.
|
|
[10]
|
Filed
as an Exhibit to
Registrant’s Annual Report on Form 10-K for fiscal year ended September
30, 2005 and incorporated herein by reference.
|
|
[11]
|
Filed
as an Exhibit to
Registrant’s Form 8-K dated December 14, 2006 and incorporated herein by
reference.
|
|
[12]
|
Filed
as an Exhibit to
Registrant’s Quarterly Report on Form 10-Q for fiscal quarter ended March
31, 2007 and incorporated herein by reference.
|
|
[13]
|
Filed
as an Exhibit to
Registrant’s Form 8-K dated April 26, 2007 and incorporated herein by
reference.
|
|
[14]
|
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.
|
|
[15]
|
Filed
as an Exhibit to
Registrant’s Annual Report on Form 10-K for fiscal year ended September
30, 2001 and incorporated herein by reference.
|
|
[16]
|
Filed
as an Exhibit to
Registrant’s Annual Report on Form 10-K for fiscal year ended September
30, 2002 and incorporated herein by reference.
|
|
[17]
|
Filed
as an Exhibit to
Registrant’s Annual Report on Form 10-K for fiscal year ended September
30, 2003 and incorporated herein by reference.
|
|
[18]
|
Filed
as an Exhibit to
Registrant’s Annual Report on Form 10-K for fiscal year ended September
30, 2004 and incorporated herein by
reference.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
ELECTRONIC
CLEARING HOUSE, INC.
|
|
|
|
|
By:
|
/s/ Charles
J. Harris
|
|
|
|
Charles
J. Harris, Chief Executive Officer
|
POWER
OF
ATTORNEY
Each
person whose signature appears below constitutes and appoints Charles J. Harris
and Alice L. Cheung, and each of them, as their true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for them and in their name, place and stead, in any and all capacities, to
sign
any or all amendments to this Annual Report on Form 10-K and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their substitutes, may lawfully do or cause to
be
done by virtue hereof.
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/ Charles
J. Harris
|
|
Director, Chief
Executive
|
|
|
Charles
J. Harris
|
|
Officer
|
)
|
December
14, 2007
|
|
|
|
)
|
|
/s/ Aristides
W. Georgantas
|
|
Director
|
)
|
|
Aristides
W. Georgantas
|
|
|
)
|
|
|
|
|
)
|
|
/s/ Herbert
L. Lucas, Jr.
|
|
Director
|
)
|
|
Herbert
L. Lucas, Jr.
|
|
|
)
|
|
|
|
|
)
|
|
/s/ Richard
D. Field
|
|
Director
|
)
|
|
Richard
D. Field
|
|
|
)
|
|
|
|
|
)
|
|
/s/ Jerry
McElhatton
|
|
Director
|
)
|
|
Jerry
McElhatton
|
|
|
)
|
|
|
|
|
)
|
|
/s/ Keith Hall
|
|
Director
|
)
|
|
Keith Hall
|
|
Keith
Hall
|
)
|
|
|
|
|
)
|
|
/s/ Alice
L. Cheung
|
|
Chief
Financial Officer
|
)
|
|
Alice
L. Cheung
|
|
and
Treasurer
|
)
|
|
|
|
|
)
|
|
/s/
Jeffrey Jacobs
|
|
Director
of Accounting
|
)
|
|
Jeffrey
Jacobs
|
|
|
)
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Stockholders and Board of Directors of
Electronic
Clearing House, Inc.
Camarillo,
California
We
have
audited the accompanying consolidated balance sheets of Electronic Clearing
House, Inc. and subsidiaries (the “Company”) as of September 30, 2007 and 2006
and the related consolidated statements of operations, stockholders’ equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also 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, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Electronic Clearing House,
Inc. and subsidiaries as of September 30, 2007 and 2006 and the results of
their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
As
more
fully described in Note 1 to the consolidated financial statements, effective
October 1, 2005, the Company adopted the provisions of SFAS No. 123(R),
“Share-Based Payment.”
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Electronic Clearing House, Inc.’s internal
control over financial reporting as of September 30, 2007, based on criteria
established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria) and our report dated December 14, 2007 expressed an unqualified
opinion thereon.
/s/
BDO
Seidman, LLP
BDO
Seidman, LLP
Los
Angeles, CA
December
14, 2007
To
the
Stockholders and Board of Directors of
Electronic
Clearing House, Inc.
Camarillo,
California
We
have
audited Electronic Clearing House, Inc.’s internal control over financial
reporting as of September 30, 2007, based on criteria established
in Internal Control−Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). The
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Item 9A,
Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i)
pertain to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2007 based on the COSO
criteria.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s consolidated balance sheets as of
September 30, 2007 and 2006 and the related consolidated statements of
operations, stockholders’ equity, and cash flows for the years ended September
30, 2007and 2006 and our report dated December 14, 2007 expressed an unqualified
opinion on those financial statements.
/s/
BDO
Seidman, LLP
BDO
Seidman, LLP
Los
Angeles, California
December
14, 2007
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders:
In
our
opinion, the accompanying consolidated statements of operations, stockholders’
equity (deficit) and cash flows present fairly, in all material
respects, the results of operations and cash flows of Electronic
Clearing House, Inc. and its subsidiaries for the year ended September 30,
2005,
in conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule listed
in the index appearing under Item 15(a) 2 for the year ended September 30,
2005
presents 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 schedule are the
responsibility of the Company’s management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based
on
our audit. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards 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
audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
LLP
PricewaterhouseCoopers
LLP
Los
Angeles, California
December
7, 2005
ELECTRONIC
CLEARING HOUSE, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
10,752,000
|
|
|
$ |
11,604,000
|
|
Restricted
cash
|
|
|
1,168,000
|
|
|
|
1,594,000
|
|
Settlement
deposits and funds held in trust
|
|
|
4,588,000
|
|
|
|
23,282,000
|
|
Settlement
receivables less allowance of $58,000 and $16,000
|
|
|
1,163,000
|
|
|
|
1,499,000
|
|
Accounts
receivable less allowance of $321,000 and $392,000
|
|
|
3,322,000
|
|
|
|
2,914,000
|
|
Prepaid
expenses and other assets
|
|
|
522,000
|
|
|
|
494,000
|
|
Deferred
tax asset
|
|
|
425,000
|
|
|
|
506,000
|
|
Total
current assets
|
|
|
21,940,000
|
|
|
|
41,893,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
assets:
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
2,444,000
|
|
|
|
2,521,000
|
|
Software,
net
|
|
|
10,535,000
|
|
|
|
10,340,000
|
|
Other
assets, net
|
|
|
215,000
|
|
|
|
253,000
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
35,134,000
|
|
|
$ |
55,007,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short-term
borrowings and current portion of long-term debt
|
|
$ |
493,000
|
|
|
$ |
291,000
|
|
Accounts
payable
|
|
|
657,000
|
|
|
|
352,000
|
|
Accrued
expenses
|
|
|
1,989,000
|
|
|
|
1,643,000
|
|
Accrued
professional fees
|
|
|
902,000
|
|
|
|
614,000
|
|
Settlement
payable and trust payable
|
|
|
5,751,000
|
|
|
|
24,781,000
|
|
Accrued
compensation expenses
|
|
|
2,028,000
|
|
|
|
1,670,000
|
|
Total
current liabilities
|
|
|
11,820,000
|
|
|
|
29,351,000
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
liabilities:
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion
|
|
|
834,000
|
|
|
|
448,000
|
|
Deferred
tax liability
|
|
|
-0-
|
|
|
|
2,922,000
|
|
Total
liabilities
|
|
|
12,654,000
|
|
|
|
32,721,000
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (see Note 13)
|
|
|
-
|
|
|
|
-
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value, 5,000,000 shares authorized, none outstanding
at
September 30, 2007 and September 30, 2006
|
|
|
-0-
|
|
|
|
-0-
|
|
Common
stock, $.01 par value, 36,000,000 shares authorized; 7,056,848 and
6,839,333 shares issued, 7,018,579 and 6,801,064 shares outstanding,
respectively
|
|
|
70,000
|
|
|
|
68,000
|
|
Additional
paid-in capital
|
|
|
29,923,000
|
|
|
|
27,350,000
|
|
Accumulated
deficit
|
|
|
(7,047,000 |
) |
|
|
(4,666,000 |
) |
Less
treasury stock at cost, 38,269 and 38,269 common shares
|
|
|
(466,000 |
) |
|
|
(466,000 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
22,480,000
|
|
|
|
22,286,000
|
|
Total
liabilities and stockholders' equity
|
|
$ |
35,134,000
|
|
|
$ |
55,007,000
|
|
See
accompanying notes to consolidated financial statements.
ELECTRONIC
CLEARING HOUSE, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Year
ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$ |
76,884,000
|
|
|
$ |
75,311,000
|
|
|
$ |
55,551,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing
and transaction expense
|
|
|
54,158,000
|
|
|
|
50,072,000
|
|
|
|
35,867,000
|
|
Other
operating costs
|
|
|
6,523,000
|
|
|
|
5,775,000
|
|
|
|
5,653,000
|
|
Research
and development expense
|
|
|
2,134,000
|
|
|
|
1,539,000
|
|
|
|
1,609,000
|
|
Selling,
general and administrative expenses
|
|
|
14,036,000
|
|
|
|
12,162,000
|
|
|
|
8,944,000
|
|
Legal
settlements and fees
|
|
|
3,180,000
|
|
|
|
1,261,000
|
|
|
|
1,799,000
|
|
Merger
related costs
|
|
|
934,000
|
|
|
|
348,000
|
|
|
|
-0-
|
|
Severance
costs
|
|
|
1,031,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,996,000
|
|
|
|
71,157,000
|
|
|
|
53,872,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(5,112,000 |
) |
|
|
4,154,000
|
|
|
|
1,679,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
488,000
|
|
|
|
289,000
|
|
|
|
136,000
|
|
Interest
expense
|
|
|
(66,000 |
) |
|
|
(92,000 |
) |
|
|
(113,000 |
) |
(Loss)
income before benefit (provision) for income taxes
|
|
|
(4,690,000 |
) |
|
|
4,351,000
|
|
|
|
1,702,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
(provision) for income taxes
|
|
|
2,309,000
|
|
|
|
(2,034,000 |
) |
|
|
(669,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(2,381,000 |
) |
|
$ |
2,317,000
|
|
|
$ |
1,033,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net (loss) earnings per share
|
|
$ |
(0.35 |
) |
|
$ |
0.35
|
|
|
$ |
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net (loss) earnings per share
|
|
$ |
(0.35 |
) |
|
$ |
0.33
|
|
|
$ |
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,747,092
|
|
|
|
6,613,541
|
|
|
|
6,485,125
|
|
Diluted
|
|
|
6,747,092
|
|
|
|
7,004,557
|
|
|
|
6,939,381
|
|
See
accompanying notes to consolidated financial statements.
ELECTRONIC
CLEARING HOUSE, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
|
Stock
|
|
|
Common
|
|
|
Additional
Paid-in
|
|
|
Treasury
|
|
|
Unearned
Stock
|
|
|
Accumulated
|
|
|
|
|
|
|
Treasury
|
|
|
Common
|
|
|
Stock
|
|
|
Capital
|
|
|
Stock
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2004
|
|
|
38,269
|
|
|
|
6,451,331
|
|
|
|
64,000
|
|
|
$ |
24,658,000
|
|
|
$ |
(466,000 |
) |
|
$ |
-0-
|
|
|
$ |
(8,016,000 |
) |
|
$ |
16,240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
|
|
|
|
119,200
|
|
|
|
1,000
|
|
|
|
393,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
394,000
|
|
Issuance
of restricted stock
|
|
|
|
|
|
|
50,000
|
|
|
|
1,000
|
|
|
|
424,000
|
|
|
|
|
|
|
|
(419,000 |
) |
|
|
|
|
|
|
6,000
|
|
Expense
related to stock option issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
Tax
benefit from stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,000
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,033,000
|
|
|
|
1,033,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2005
|
|
|
38,269
|
|
|
|
6,620,531
|
|
|
|
66,000
|
|
|
|
25,574,000
|
|
|
|
(466,000 |
) |
|
|
(419,000 |
) |
|
|
(6,983,000 |
) |
|
|
17,772,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
|
|
|
|
131,200
|
|
|
|
1,000
|
|
|
|
579,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
580,000
|
|
Issuance
of restricted stock
|
|
|
|
|
|
|
83,088
|
|
|
|
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-0-
|
|
Amortization
of restricted stock grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207,000
|
|
Issuance
of restricted stock to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outside
director
|
|
|
|
|
|
|
4,514
|
|
|
|
1,000
|
|
|
|
49,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
Share-based
compensation expense – options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
909,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
909,000
|
|
Share-based
compensation expense – performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217,000
|
|
Reclassification
in connection with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adopting
SFAS No. 123R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(419,000 |
) |
|
|
|
|
|
|
(419,000 |
) |
|
|
|
|
|
|
-0-
|
|
Excess
tax benefit from stock-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234,000
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,317,000
|
|
|
|
2,317,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2006
|
|
|
38,269
|
|
|
|
6,839,333
|
|
|
|
68,000
|
|
|
|
27,350,000
|
|
|
|
(466,000 |
) |
|
|
-0-
|
|
|
|
(4,666,000 |
) |
|
|
22,286,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
|
|
|
|
188,450
|
|
|
|
2,000
|
|
|
|
836,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
838,000
|
|
Issuance
of restricted stock
|
|
|
|
|
|
|
27,500
|
|
|
|
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-0-
|
|
Forfeiture
of restricted stock grants
|
|
|
|
|
|
|
(14,012 |
) |
|
|
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-0-
|
|
Issuance
of restricted stock to outside directors
|
|
|
|
|
|
|
15,577
|
|
|
|
|
|
|
|
13,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,000
|
|
Amortization
of restricted stock grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
329,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
329,000
|
|
Share-based
compensation expense – options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
664,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
664,000
|
|
Share-based
compensation expense – performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354,000
|
|
Excess
tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139,000
|
|
Share-based
compensation expense related to severance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238,000
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,381,000 |
) |
|
|
(2,381,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2007
|
|
|
38,269
|
|
|
|
7,056,848
|
|
|
$ |
70,000
|
|
|
$ |
29,923,000
|
|
|
$ |
(466,000 |
) |
|
$ |
-0-
|
|
|
$ |
(7,047,000 |
) |
|
$ |
22,480,000
|
|
See
accompanying notes to consolidated financial statements.
ELECTRONIC
CLEARING HOUSE, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year
ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(2,381,000 |
) |
|
$ |
2,317,000
|
|
|
$ |
1,033,000
|
|
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on sale of assets
|
|
|
324,000
|
|
|
|
84,000
|
|
|
|
-0-
|
|
Depreciation
|
|
|
978,000
|
|
|
|
891,000
|
|
|
|
776,000
|
|
Amortization
of software and other intangibles
|
|
|
3,524,000
|
|
|
|
2,617,000
|
|
|
|
1,865,000
|
|
Provisions
for losses on accounts and notes receivable
|
|
|
311,000
|
|
|
|
380,000
|
|
|
|
43,000
|
|
Provision
for obsolete inventory
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
10,000
|
|
Deferred
income taxes
|
|
|
(2,841,000 |
) |
|
|
1,598,000
|
|
|
|
532,000
|
|
Stock-based
compensation
|
|
|
1,627,000
|
|
|
|
1,383,000
|
|
|
|
14,000
|
|
Tax
benefit from exercise of stock option
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
91,000
|
|
Excess
tax benefit from stock-based compensation
|
|
|
(139,000 |
) |
|
|
(234,000 |
) |
|
|
-0-
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
426,000
|
|
|
|
(146,000 |
) |
|
|
(424,000 |
) |
Settlement
deposits and funds held in trust
|
|
|
18,694,000
|
|
|
|
(6,188,000 |
) |
|
|
1,188,000
|
|
Accounts
receivable
|
|
|
(668,000 |
) |
|
|
(882,000 |
) |
|
|
(518,000 |
) |
Settlement
receivable
|
|
|
285,000
|
|
|
|
(612,000 |
) |
|
|
(484,000 |
) |
Settlement
payable and trust payable
|
|
|
(19,030,000 |
) |
|
|
6,809,000
|
|
|
|
(707,000 |
) |
Accrued
compensation expenses
|
|
|
329,000
|
|
|
|
789,000
|
|
|
|
181,000
|
|
Accounts
payable
|
|
|
305,000
|
|
|
|
47,000
|
|
|
|
-0-
|
|
Accrued
professional fees
|
|
|
288,000
|
|
|
|
117,000
|
|
|
|
286,000
|
|
Accrued
expenses
|
|
|
485,000
|
|
|
|
788,000
|
|
|
|
(3,000 |
) |
Prepaid
expenses
|
|
|
(28,000 |
) |
|
|
(109,000 |
) |
|
|
5,000
|
|
Net
cash provided by operating activities
|
|
|
2,489,000
|
|
|
|
9,649,000
|
|
|
|
3,888,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
-0-
|
|
|
|
3,000
|
|
|
|
4,000
|
|
Purchase
of equipment
|
|
|
(948,000 |
) |
|
|
(1,084,000 |
) |
|
|
(781,000 |
) |
Purchased
and capitalized software
|
|
|
(3,958,000 |
) |
|
|
(4,116,000 |
) |
|
|
(3,859,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(4,906,000 |
) |
|
|
(5,197,000 |
) |
|
|
(4,636,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of notes payable
|
|
|
932,000
|
|
|
|
-0-
|
|
|
|
400,000
|
|
Repayment
of notes payable
|
|
|
(344,000 |
) |
|
|
(282,000 |
) |
|
|
(438,000 |
) |
Repayment
of capitalized leases
|
|
|
-0-
|
|
|
|
(112,000 |
) |
|
|
(452,000 |
) |
Proceeds
from exercise of stock options
|
|
|
838,000
|
|
|
|
580,000
|
|
|
|
394,000
|
|
Excess
tax benefit from stock-based compensation
|
|
|
139,000
|
|
|
|
234,000
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
1,565,000
|
|
|
|
420,000
|
|
|
|
(96,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash
|
|
|
(852,000 |
) |
|
|
4,872,000
|
|
|
|
(844,000 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
11,604,000
|
|
|
|
6,732,000
|
|
|
|
7,576,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
10,752,000
|
|
|
$ |
11,604,000
|
|
|
$ |
6,732,000
|
|
See
accompanying notes to consolidated financial statements.
ELECTRONIC
CLEARING HOUSE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1
- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
Electronic
Clearing House, Inc. (ECHO or the Company) is a Nevada
corporation. The Company provides bankcard authorizations, electronic
deposit services, check guarantee, check verification, check conversion, and
check collection
services.
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.
Chargeback
Losses
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. The Company records a provision for estimated
chargeback losses at the time bankcard transactions are processed. A reserve
is
estimated based upon a historically-determined percentage of gross credit card
processing volume and actual losses experienced.
Settlement
Deposits, Receivables and Payables
Settlement
receivable/payable results from timing differences in the Company’s settlement
process with merchants. These timing differences are primarily due to the timing
between the funds received in the Company’s bank accounts and settlement
payments made to the merchants. Cash held by the Company associated
with this settlement process is classified as settlement deposits in the
consolidated balance sheets. Cash held by the Company in trust for
others is classified in settlement deposits with the related liability included
in settlement and trust payable.
Allowance
for Doubtful Accounts
We
make
ongoing assumptions relating to the collectibility of our accounts receivable.
The accounts receivable amount on our balance sheet includes an allowance for
accounts that might not be paid. We regularly review the allowance by
considering factors such as historical experience, credit quality, age of the
accounts receivable balances and current economic conditions that may affect
a
customer's ability to pay. Our reserves have generally been adequate
to cover our actual credit losses. However, since we cannot predict future
changes in the financial stability of our customers, we cannot guarantee that
our reserves will continue to be adequate. If actual credit losses are
significantly greater than the allowance we have established, our estimates
of
the recoverability of amounts due to us could be overstated, and additional
allowances could be required, which could have an adverse impact on our
operations. Conversely, if actual credit losses are significantly less than
our
allowance, this would eventually have a positive impact on our
operations. Receivables are charged against the allowance when
management believes the uncollectibility of a receivable balance, or portion
thereof, has been confirmed.
NOTE
1: (Continued)
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:
Computer
equipment and software
|
|
3-5
years
|
Furniture,
fixtures and equipment
|
|
5
years
|
Leasehold
improvements
|
|
Useful
life or life of lease, whichever is
shorter
|
Other
Assets
Other
assets consist primarily of deposits and intangible assets such as patents
and
trademarks. Costs related to obtaining a patent and trademark are capitalized
and amortized over the estimated life of the patent and trademark. Disclosures
regarding intangible assets as required under SFAS No. 142 are included in
Note
5.
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. Software developed or obtained
for
internal use is tested for impairment whenever events or changes in circumstance
indicates that its carrying amount may not be recoverable. Capitalized software
development costs are amortized using the straight-line method over the lesser
of three years or estimated useful life.
Costs
incurred to establish the technological feasibility of software and other
computer software maintenance costs are recorded as research and development
costs and are charged to expense when incurred.
Long-Lived
Assets
The
Company assesses potential impairments to its long-lived assets in accordance
with the provisions of SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-lived Assets.” An impairment review is performed whenever
events or changes in circumstances indicate that the carrying value may not
be
recoverable. Factors considered by the Company include, but are not limited
to:
significant underperformance relative to expected historical or projected future
operating results; significant changes in the manner of use of the acquired
assets or the strategy for the Company’s overall business; significant negative
industry or economic trends; a significant decline in the Company’s stock price
for a sustained period of time; and the Company’s market capitalization relative
to net book value. When the Company determines that the carrying value of a
long-lived asset may not be recoverable based upon the existence of one or
more
of the above indicators of impairment, the Company estimates the future
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future undiscounted cash flows
is less than the carrying amount of the asset, the Company recognizes an
impairment loss to reduce the carrying amount of the asset to its fair
value. There was no impairment recognized during the years ended
September 30, 2007, 2006 or 2005.
NOTE
1: (Continued)
Revenue
Recognition
The
Company earns revenue from services which include the following: debit and
credit card processing, check guarantee, check verification, check conversion,
check re-presentment, check collection and inventory tracking. All of
these services are performed pursuant to a contract with customers which states
the terms and fixed price for all contracted services. The price of a
service may be a fixed fee for each transaction and/or a percentage of the
transaction processed, depending on the service. At the time the
guarantee revenue is recognized, the Company provides a reserve for estimated
guarantee losses based upon its historical loss experience. The Company
generally collects its fee at the time it processes the transaction and
accordingly, collectibility is assured. Based on the Company’s underwriting
criteria and ongoing credit monitoring of customers, collectibility on service
transactions is reasonably assured.
Revenue
from debit and credit card (collectively called “bankcards”) and transaction
processing revenue is based on a percentage of the transaction value, commonly
referred to as a discount fee on a credit and debit card transaction processed
by the Company. In addition, there is a per transaction fee
associated with each bankcard transaction which is charged to the
merchant. The Company recognizes the processing and transaction
revenue when the services are performed.
Revenue
from check guarantee is derived from a percentage of the gross amount of the
check and guarantees payment of the check to the merchant in the event the
check
is not honored by the check writer’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. The Company recognizes revenue when the
checks are processed at the point of sale. In the event a check is
dishonored, the Company has the right to collect the full amount of the check
from the check writer. The Company establishes a receivable from the
delinquent check writer for the full amount of the guaranteed
check. The Company establishes a reserve against these receivables
based on historical loss experience. The check guarantee service also
earns revenue based on fees collected from delinquent check writers, which
collection fee is recognized when collected, as collectibility is not reasonably
assured until that point.
Revenue
from check verification is derived from fees collected from the merchants when
a
check is verified against the Company’s positive and negative check
database. This revenue is recognized when the transaction is
processed, since the Company has no further performance
obligations.
Revenue
from check conversion is derived from fees collected from merchants to convert
the paper check received by merchants into an ACH transaction, which allows
the
Company to settle the transaction electronically for the
merchant. The Company recognizes the revenue related to check
conversion fees when the services are performed.
Revenue
from check re-presentment is derived from fees charged to check
writers. Check re-presentment is a service that allows merchants to
collect a paper check through the Automated Clearing House (“ACH”) network after
a check has previously been presented to the bank for collection unsuccessfully
at least once. The fees earned from check writer are recognized when
collected, as collectibility is not reasonably assured until that
point.
NOTE
1: (Continued)
Revenue
from check collection is derived from collection activities performed on behalf
of a merchant on uncollected checks. The merchant usually keeps the
face amount of the uncollected checks if the collection effort is
successful. The Company’s revenue is derived from the collection fee
collected from the check writer. If the Company refers the collection
item to another collection agency, the Company will receive a fee from the
collection agency
upon its successful efforts. Collection fee revenue is recognized when
collected, as collectibility is not reasonably assured until that
point.
Income
Taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 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, and
operating loss and tax credit carryforwards. A valuation allowance is
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The Company also determines its tax
contingencies in accordance with SFAS No. 5, Accounting for Contingencies (“SFAS
5”). The Company records estimated tax liabilities to the extent the
contingencies are probable and can be reasonably estimated.
Earnings
(Loss) Per Share
Earnings
(loss) per share are 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.
Stock-Based
Compensation
Effective
October 1, 2005, the Company began recording compensation expense associated
with stock options in accordance with SFAS No.123(R), Share-Based Payment.
Prior
to October 1, 2005, the Company accounted for stock-based compensation related
to stock options under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25; therefore, the Company measured compensation
expense for its stock option plan using the intrinsic value method, that is,
as
the excess, if any, of the fair market value of the Company’s stock at the grant
date over the amount required to be paid to acquire the stock, and provided
the
disclosures required by SFAS Nos. 123 and 148. The Company has adopted the
modified prospective transition method provided under SFAS No. 123(R), and
as a
result, has not retroactively adjusted results from prior periods. Under this
transition method, compensation expense associated with stock options recognized
in fiscal year 2006 includes expense related to the remaining unvested portion
of all stock option awards granted prior to October 1, 2005, based on the grant
date fair value estimated in accordance with the original provisions of SFAS
No.
123. The Company has not issued any stock options since the adoption of SFAS
No.
123(R). See Note 12 for information on the impact of our adoption of
SFAS No. 123(R) and the assumptions we use to calculate the fair value of
stock-based compensation.
Accounting
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
the
disclosure of contingent liabilities, and the reported amounts of revenues
and
expenses during the reporting period. Significant estimates include
allowance for chargeback losses and deferred tax assets. Actual results could
differ from those estimates.
NOTE
1: (Continued)
Fair
Value of Financial Instruments
The
amount recorded for financial instruments in the Company's consolidated
financial statements approximates their fair value as defined in SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments".
Reclassifications
Certain
amounts in the September 30, 2006 and 2005 consolidated financial statements
have been reclassified to conform to the current year presentation.
At
September 30, 2005, the Company reclassified a small portion of Settlement
Receivable relating to an accrual resulting in a corresponding reduction of
Settlement Payable. The Statement of Cash Flows was also adjusted
accordingly for the affected periods.
New
Accounting Pronouncements
In
2006,
the FASB issued SFAS No. 157, “Fair Value Measurement” (SFAS No.
157). SFAS No. 157 provides guidance for using fair value to measure
assets and liabilities. The standard expands required disclosures
about the extent to which companies measure assets and liabilities at fair
value, the information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS No. 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair
value. SFAS No. 157 does not expand the use of fair value in any new
circumstances. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company is currently evaluating the
impact of adopting SFAS No. 157 on its consolidated financial
statements..
In
2007,
the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-including an amendment of FASB Statement
No. 115 (“SFAS No. 159”)”. SFAS No. 159 permits entities to measure at
fair value many financial instruments and certain other items that are not
currently required to be measured at fair value, with unrealized gains and
losses related to these financial instruments reported in earnings at each
subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the impact of
adopting SFAS 159 on its consolidated financial statements.
In
2006,
the SEC issued Staff Accounting Bulletin No. 108 (SAB No. 108) “Considering
the Effects of Prior Year Restatements when Quantifying Misstatements in Current
Year Financial Statements”,which addresses quantifying the financial
statement effects of misstatements, specifically, how the effects of prior
year
uncorrected errors must be considered in quantifying misstatements in the
current year financial statements. SAB No. 108 is effective for
fiscal years ending after November 15, 2006. The Company adopted the
provisions of SAB No. 108 as of October 1, 2006, and it did not have a material
impact to its financial condition or results of operations.
In
2006,
the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement 109” (FIN 48). This
interpretation clarifies the accounting for uncertain taxes recognized in a
company’s financial statements in accordance with SFAS No. 109, “Accounting for
Income Taxes.” The interpretation requires us to analyze the amount at which
each tax position meets a “more likely than not” standard for sustainability
upon examination by taxing authorities. Only tax benefit amounts
meeting or exceeding this standard will be reflected in tax provision expense
and deferred tax asset balances. The interpretation also requires
that any differences between the amounts of tax benefits reported on tax returns
and tax benefits reported in the financial statements be recorded in a liability
for unrecognized tax benefits. The liability for unrecognized tax
benefits is reported separately from deferred tax assets and liabilities and
classified as current or noncurrent based upon the expected period of
payment. Additional disclosure in the footnotes to the audited
financial statements will be required concerning the income tax liability for
unrecognized tax benefits, any interest and penalties related to taxes that
are
included in the financial statements, and open statutes of limitations for
examination by major tax jurisdictions. FIN 48 is effective for
annual periods beginning after December 15, 2006 and any cumulative effect
of
adopting FIN 48 will be recorded as a change in accounting principle in the
financial statements for the three months ended December 31,
2007. Management of the Company does not expect the impact of FIN 48
to be material to the Company’s consolidated financial statements.
NOTE
1: (Continued)
In
2006,
the Emerging Issues Task Force (EITF) reached a consensus on EITF 06-3, “How
Taxes Collected From Customers and Remitted to Government Authorities Should
Be
Presented in the Income Statement (That is, Gross Versus Net
Presentation)”. EITF 06-3 discussed the correct accounting
treatment of taxes charged to a customer but collected and remitted by a
reporting entity. The Company currently reports its revenue net of
any sales tax collected on its Consolidated Statement of
Operations.
Concentration
of Business and Credit Risks
The
Company operates in the market for electronic payment processing in the United
States. The industry is characterized by ongoing technological
developments, frequent new product introductions and changes in end user
requirements. The Company’s future success will depend on its ability to
develop, introduce and market enhancements to its existing products and
services, to introduce new products and services in a timely manner that meet
customer requirements, and to respond to competitive pressures and technological
advances. Further, the emergence of new industry standards, whether
through adoption by regulatory agencies or widespread use by financial
institutions or other financial institution data processing vendors, could
require the Company to redesign its products and services. The Company currently
has two primary bankcard processing and sponsorship relationships. The Company
also maintains several banking relationships for ACH
processing. While we believe our banking relationships are sound, we
can not assure that these banks will not restrict our increasing processing
volume or that we will always be able to maintain these relationships or
establish new banking relationships.
During
the year ended September 30, 2007, one customer accounted for 10.1% of total
revenue. No customer accounted for 10% or more of total revenue for
the fiscal years 2006 and 2005. At September 30, 2007 and 2006, one customer
accounted for 19.0% and 12.2%, respectively, of the net accounts receivable
balance.
Bankcard
and transaction processing services accounted for approximately 81.4%, 75.7%
and
74.0% of total revenue for the years ended September 30, 2007, 2006 and 2005,
respectively. Check related revenue accounted for approximately
18.6%, 24.3% and 26.0% of total revenue for the years ended September 30, 2007,
2006, and 2005, respectively.
The
Company performs ongoing credit evaluations of its customers’ financial
condition and limits the amount of credit extended when deemed necessary, and
in
certain instances, requires collateral. Management believes that any
risk of loss is significantly reduced due to the nature of the customers as
well
as the number of its customers and geographic areas. The Company maintains
an
allowance for doubtful accounts for estimated losses associated with the
potential inability of its customers to make required payments or for resolution
of potential billing disputes. Receivables are charged against the
allowance when management believes the uncollectibility of a receivable balance,
or portion thereof, has been confirmed.
The
Company has cash in financial institutions that is insured by the Federal
Deposit Insurance Corporation (“FDIC”) up to $100,000 per
institution. At September 30, 2007 and 2006, the Company had cash and
cash equivalent accounts in excess of the FDIC insured limits in the amount
of
$14,414,000 and $11,644,000, respectively.
NOTE
2
-STATEMENT OF CASH FLOWS:
|
|
September
30
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
66,000
|
|
|
$ |
92,000
|
|
|
$ |
113,000
|
|
Income
taxes
|
|
|
310,000
|
|
|
|
126,000
|
|
|
|
154,000
|
|
Significant
non-cash transactions for fiscal 2007 are as follows:
|
·
|
Restricted
stock valued at $372,000 was issued to certain executives and
employees.
|
Significant
non-cash transactions for fiscal 2006 are as follows:
|
·
|
Restricted
stock valued at $1,060,000 was issued to certain executives and
employees.
|
|
·
|
Capital
equipment of $2,000 was acquired under a capital
lease.
|
Significant
non-cash transactions for fiscal 2005 are as follows:
|
·
|
A
note was issued for $39,000 for the purchase of capital
equipment.
|
|
·
|
Restricted
stock valued at $425,000 was issued to an executive of the
company.
|
NOTE
3
- PROPERTY AND EQUIPMENT:
Property
and equipment are comprised of the following:
|
|
September
30
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Computer
equipment
|
|
$ |
5,664,000
|
|
|
$ |
5,052,000
|
|
Furniture,
fixtures and equipment
|
|
|
1,224,000
|
|
|
|
1,066,000
|
|
Leasehold
improvements
|
|
|
263,000
|
|
|
|
195,000
|
|
Auto
|
|
|
17,000
|
|
|
|
56,000
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
7,168,000
|
|
|
|
6,369,000
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated
depreciation and amortization
|
|
|
(4,724,000 |
) |
|
|
(3,848,000 |
) |
|
|
|
|
|
|
|
|
|
Net
book value
|
|
$ |
2,444,000
|
|
|
$ |
2,521,000
|
|
Included
in property and equipment are assets under capital lease of $155,000 at
September 30, 2007 and 2006, with related accumulated depreciation of $123,000
and $92,000. Amortization of assets recorded under capital
leases is included with depreciation expense.
NOTE
4
– CAPITALIZED SOFTWARE
The
following table sets forth information regarding the costs associated with
software purchased and developed for internal use:
|
|
September
30
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Capitalized
software
|
|
$ |
21,238,000
|
|
|
$ |
18,775,000
|
|
|
|
|
|
|
|
|
|
|
Less:
accumulated amortization
|
|
|
(10,703,000 |
) |
|
|
(8,435,000 |
) |
|
|
|
|
|
|
|
|
|
Net
book value
|
|
$ |
10,535,000
|
|
|
$ |
10,340,000
|
|
NOTE
5
– OTHER ASSETS
Other
assets consist of the following:
|
|
September
30
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Patents
|
|
$ |
173,000
|
|
|
$ |
173,000
|
|
Trademarks
|
|
|
280,000
|
|
|
|
280,000
|
|
Other
|
|
|
160,000
|
|
|
|
160,000
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
613,000
|
|
|
|
613,000
|
|
Less:
accumulated amortization
|
|
|
(398,000 |
) |
|
|
(360,000 |
) |
|
|
|
|
|
|
|
|
|
Net
Book Value
|
|
$ |
215,000
|
|
|
$ |
253,000
|
|
Amortization
expense for each of the years ended September 30, 2007, 2006 and 2005 was
$38,000. Based on the current amount of intangible assets subject to
amortization, the estimated amortization expense for each of the five succeeding
years is $38,000.
NOTE
6
- INCOME TAXES
The
provision (benefit) for income taxes consists of the following
components:
|
|
September
30
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
662,000
|
|
|
$ |
258,000
|
|
|
$ |
-0-
|
|
State
|
|
|
(124,000 |
) |
|
|
193,000
|
|
|
|
5,000
|
|
Total
current provision
|
|
|
538,000
|
|
|
|
451,000
|
|
|
|
5,000
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,047,000 |
) |
|
|
1,369,000
|
|
|
|
537,000
|
|
State
|
|
|
(800,000 |
) |
|
|
214,000
|
|
|
|
127,000
|
|
Total
deferred provision (benefit)
|
|
|
(2,847,000 |
) |
|
|
1,583,000
|
|
|
|
664,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision (benefit)
|
|
$ |
(2,309,000 |
) |
|
$ |
2,034,000
|
|
|
$ |
669,000
|
|
NOTE
6: (Continued)
The
effective tax rate varies from the U.S. Federal statutory tax rate principally
due to the following:
|
|
September
30
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Federal statutory tax rate
|
|
|
(34.00 |
%) |
|
|
34.00 |
% |
|
|
34.00 |
% |
Add
(deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
2.60 |
% |
|
|
4.70 |
% |
|
|
-0-
|
|
State
and local taxes
|
|
|
(4.00 |
%) |
|
|
6.20 |
% |
|
|
5.10 |
% |
Change
in valuation allowance
|
|
|
2.60 |
% |
|
|
-0-
|
|
|
|
-0-
|
|
Research
and development credit
|
|
|
(16.80 |
%) |
|
|
-0-
|
|
|
|
-0-
|
|
All
other
|
|
|
0.40 |
% |
|
|
1.80 |
% |
|
|
0.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
(49.20 |
%) |
|
|
46.70 |
% |
|
|
39.30 |
% |
Components
of the deferred tax asset (liabilities) include:
|
|
September
30
|
|
|
|
2007
|
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss (“NOL”) carryforwards
|
|
$ |
1,116,000
|
|
|
$ |
-0-
|
|
Research
and development credit
|
|
|
1,464,000
|
|
|
|
-0-
|
|
Reserve
for bad debts
|
|
|
63,000
|
|
|
|
41,000
|
|
Performance
stock grant
|
|
|
263,000
|
|
|
|
99,000
|
|
Accrued
bonus and severance
|
|
|
585,000
|
|
|
|
317,000
|
|
State
tax expense
|
|
|
2,000
|
|
|
|
32,000
|
|
Business
credit
|
|
|
25,000
|
|
|
|
25,000
|
|
AMT
credit
|
|
|
164,000
|
|
|
|
90,000
|
|
Other
|
|
|
5,000
|
|
|
|
20,000
|
|
Total
gross deferred tax assets
|
|
|
3,687,000
|
|
|
|
624,000
|
|
|
|
|
|
|
|
|
|
|
Less
valuation allowance on deferred tax assets
|
|
|
(122,000 |
) |
|
|
-0-
|
|
Deferred
tax assets
|
|
|
3,565,000
|
|
|
|
624,000
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Capitalized
software
|
|
|
(3,140,000 |
) |
|
|
(3,040,000 |
) |
Net
deferred tax assets (liabilities)
|
|
$ |
425,000
|
|
|
$ |
(2,416,000 |
) |
The
Company, based upon a study conducted during the year ended September 30, 2007,
recorded certain research and development credits for fiscal years ended
September 30, 2003 through 2007. These research and development
credits resulted in an income tax benefit of $0.8 million, net of
reserve.
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the Company’s deferred
tax assets will not be realized. The ultimate realization of the Company’s
deferred tax assets is dependent upon the future utilization of the resulting
research and development credit carryforwards. As of September 30,
2007, the Company recognized a valuation allowance of $122,000 on some portion
of the Company’s deferred tax assets.
NOTE
6: (Continued)
The
Company had total federal and state NOL carryforwards of approximately $3.3
million each available to offset future taxable income at September 30,
2007. If not used to offset future taxable income, the federal NOLs
will expire between the fiscal years 2024 and 2026 and the state NOLs wil expire
between the fiscal years 2011 and 2026. The Company has research and development
credits of $1.5 million at September 30, 2007 expiring between fiscal years
2022
and 2026, except for the state research and development credit of $0.8 million,
which has no limit on the carryforward period.
NOTE
7
- SHORT-TERM BORROWINGS AND LONG-TERM DEBT:
Short-term
borrowings and long-term debt consist of the following:
|
|
September
30
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Term
loan, collateralized by various assets of the Company, due July,
2011,
interest at 7.62% at September 30, 2007
|
|
$ |
899,000
|
|
|
$ |
-0-
|
|
|
|
|
|
|
|
|
|
|
Term
loan, collateralized by various assets of the Company, due October
2008,
interest at prime rate plus .50%, 8.25% at September 30,
2007
|
|
|
162,000
|
|
|
|
312,000
|
|
|
|
|
|
|
|
|
|
|
Term
loan, collateralized by various assets of the Company, due January
2010,
interest at 7.32%
|
|
|
233,000
|
|
|
|
333,000
|
|
|
|
|
|
|
|
|
|
|
Term
loan, collateralized by an asset of the Company, due March 2010,
interest
at 2%, paid in full during 2007
|
|
|
-0-
|
|
|
|
28,000
|
|
|
|
|
|
|
|
|
|
|
Capital
leases
|
|
|
33,000
|
|
|
|
66,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,327,000
|
|
|
|
739,000
|
|
Less: current
portion
|
|
|
(493,000 |
) |
|
|
(291,000 |
) |
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$ |
834,000
|
|
|
$ |
448,000
|
|
The
weighted average interest rate on the prime rate term loans for the period
they
were outstanding during the year ended September 30, 2007 was
8.74%.
The
term
loans contain restrictive debt covenants consisting of quick ratio, cash flow
to
debt ratio, debt service coverage ratio and tangible net worth requirements.
The
Company obtained a modification for the cash flow to debt ratio covenant with
which it was not in compliance at June 30, 2007 and for the remainder of the
fiscal year.. The Company has a $3,000,000 credit line with a bank, which was
unused during fiscal year 2007. The credit line matures in April 2008
and is collateralized by assets of the Company. The credit line also
contains restrictive covenants, including quick ratio, debt service coverage
ratio and tangible net worth requirements. The Company was in
compliance with each of these covenants as of September 30, 2007.
NOTE
7: (Continued)
Future
maturities of debt are as follows:
Fiscal
year ended September 30
|
|
|
|
|
|
|
|
2008
|
|
$ |
493,000
|
|
2009
|
|
|
339,000
|
|
2010
|
|
|
277,000
|
|
2011
|
|
|
218,000
|
|
|
|
$ |
1,327,000
|
|
NOTE
8
– SETTLEMENTS PAYABLE AND DEPOSITS
Settlement
receivable/payable results from timing differences in the Company’s settlement
process with merchants. These timing differences are primarily due to the timing
between the funds received in the Company’s bank accounts and settlement
payments made to the merchants. Cash held by the Company associated with this
settlement process is classified as settlement deposits in the consolidated
balance sheets. Cash held by the Company in trust for others is
classified in settlement deposits with the related liability included in trust
payable.
Included
in settlement deposits was $733,000 and $983,000 of funds held in trust at
September 30, 2007 and 2006, respectively. In addition, included in
settlement payable was $733,000 and $983,000 of trust payable at September
30,
2007 and 2006, respectively.
NOTE
9
– ACCRUED EXPENSES:
Accrued
expenses are comprised of the following:
|
|
September
30
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Accrued
bankcard fees
|
|
$ |
588,000
|
|
|
$ |
435,000
|
|
Accrued
communication costs
|
|
|
173,000
|
|
|
|
113,000
|
|
Accrued
commission
|
|
|
316,000 |
|
|
|
294,000
|
|
Accrued
merchant deposits
|
|
|
565,000
|
|
|
|
565,000
|
|
Income
tax payable
|
|
|
-0-
|
|
|
|
54,000
|
|
Other
|
|
|
347,000
|
|
|
|
182,000
|
|
|
|
$ |
1,989,000
|
|
|
|
1,643,000
|
|
NOTE
10 – 401(K) PLAN
Employees
who are eligible to participate in the Electronic Clearing House, Inc. 401(k)
Plan may contribute up to 90% of their pre-tax salary to the Plan, subject
to
limitations imposed by the Internal Revenue Code. Full-time and
part-time employees who work at least 500 hours per year are eligible to enroll
if they are at least 21 years of age and have worked for the Company for six
months. The Plan allows the Company to make matching
contributions. During fiscal 2006, we matched employee contributions
of 50% of the first 6% of salary contributed by the employee, subject to IRS
limitations. Twenty percent of matching contributions vest after two
years of service by the employee and 20% of matching contributions vests yearly
thereafter. Matching contributions were $245,000 in fiscal 2007,
$196,000 in fiscal 2006 and $158,000 in fiscal 2005. Participating
employees who are age 50 or older may also make catch-up contributions; however,
these contributions are not matched.
NOTE
11 - STOCKHOLDERS' EQUITY:
Amended
and Restated Rights Agreement
The
Company is a party to an Amended and Restated Rights Agreement dated January
29,
2003 as amended. As amended, the Rights Agreement provides that all
stockholders have one preferred share purchase right (a "Right") for each
outstanding share of common stock of the Company. Each Right entitles the
registered holder to purchase from the Company four one-hundredths of a share
of
Series A Junior Participating Preferred Stock, $0.01 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"). However, the Rights are not
immediately exercisable and will become exercisable only upon the occurrence
of
certain events.
Generally,
if a person or group acquires, or announces a tender or exchange offer that
would result in the acquisition of 20% or more of the Company’s common stock
while the Rights Agreement remains in place, then, unless the Rights are
redeemed by the Company, the Rights will become exercisable by all holders
of
rights other than the acquiring person or group for the Company’s shares or
shares of the third party acquirer having a value of eight times the Right’s
then-current exercise price. The Rights Agreement is designed to
guard against partial tender offers and other coercive tactics to gain control
of the Company without offering a fair and adequate price and terms to all
of
the Company’s shareholders. The Rights Agreement was not adopted in
response to any efforts to acquire the Company.
Prior
to
September 30, 2006, two Rights existed for each outstanding share of common
stock of the Company. On September 30, 2006, one of the Rights
expired. The remaining Right will expire on January 29, 2013, unless
such Right is earlier redeemed or exchanged by the Company as described in
the
Rights Agreement.
Each
1/100th of a
share of Preferred Stock carries with it the following principal rights (at
such
time as, and only if, a Right becomes exercisable): (a) one vote, voting
together with the Common Stock, (b) a minimum preferential dividend payment
of
one times the dividend declared for the Common Stock (when, as and if declared),
(c) in the event of a merger, consolidation, or other transaction in which
Common Stock is exchanged, each 1/100th of a
share of
Preferred Stock will be entitled to receive the amount received per share
of
Common Stock, and (d) in the event of a liquidation, each 1/100th of a share
of
Preferred Stock will receive a $1.00 minimum preferential liquidation payment,
in addition to the payment made for each share of Common Stock.
Earnings
Per Share
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
September
30
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
(2,381,000 |
) |
|
$ |
2,317,000
|
|
|
$ |
1,033,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding for basic (loss) earnings per
share
|
|
|
6,747,092
|
|
|
|
6,613,541
|
|
|
|
6,485,125
|
|
Effect
of dilutive stock options and restricted stock units
|
|
|
-0-
|
|
|
|
391,016
|
|
|
|
454,256
|
|
Adjusted
weighted average shares outstanding for diluted (loss) earnings per
share
|
|
|
6,747,092
|
|
|
|
7,004,557
|
|
|
|
6,939,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net (loss) earnings per share
|
|
$ |
(0.35 |
) |
|
$ |
0.35
|
|
|
$ |
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net (loss) earnings per share
|
|
$ |
(0.35 |
) |
|
$ |
0.33
|
|
|
$ |
0.15
|
|
Due
to
the net loss for the fiscal year ended September 30, 2007, the diluted share
calculation result was antidilutive. Thus, the basic weighted average
shares were used and potential common shares of approximately 888,000 shares
were excluded from the calculations. For the years ended September 30, 2006
and
2005, approximately 14,000 and 72,500 shares, respectively,
attributable to the exercise of outstanding options and restricted stock grants,
were excluded from the calculation of diluted EPS because the effect was
antidilutive.
NOTE
12 - COMMON STOCK OPTIONS AND RESTRICTED STOCK:
As
a
result of the adoption of SFAS No. 123 (R), the Company’s net income for the
years ended September 30, 2007 and 2006 includes $1,627,000 and $1,383,000
of
compensation expense and $14,000 and $13,000, respectively, of income tax
benefits related to the Company’s stock options for the years then
ended. The effect of adopting SFAS No. 123 (R) had a negative effect
to basic and diluted earnings per common share for the year ended September
30,
2007 of $0.15, and $0.13 and $0.12 for basic and diluted earnings, respectively,
for the year ended September 30, 2006. The compensation expense related to
all
of the Company’s stock-based compensation arrangements is recorded as a
component of selling, general and administrative expenses. Prior to
the Company’s adoption of SFAS No. 123(R), the Company presented tax benefits
resulting from the disqualified dispositions of stock options as cash flows
from
operating activities on the Company’s consolidated statements of cash
flows. SFAS No. 123(R) requires that cash flows resulting from tax
deductions in excess of the cumulative compensation cost recognized for options
exercised (excess tax benefits) be classified as cash inflows from financing
activities and cash outflows from operating activities.
Stock
Options:
At
September 30, 2007, the Company had one stock option plan. Under the
Company’s current stock option plan, the Board of Directors may grant options to
purchase up to 1,150,000 shares of the Company’s common stock to officers, key
employees and non-employee directors of the Company. At September 30,
2007, only 74,324 shares remained available for future grant under the
plan. Options cancelled due to forfeiture or expiration return to the
pool available for grant. The plan is administered by the Board of
Directors or its designees and provides that options granted under the plan
will
be exercisable at such times and under such conditions as may be determined
by
the Board of Directors at the time of grant of such options; however, options
may not be granted for terms in excess of ten years. Compensation
expense related to stock options granted is recognized ratably over the service
vesting period for the entire option award. The total number of stock
option awards expected to vest is adjusted by estimated forfeiture
rates. The terms of the plan provide for the granting of options at
an exercise price not less than 100% of the fair market value of the stock
at
the date of grant, as determined by the closing market
value stock price on the grant date. All options outstanding at
September 30, 2007 were issued at 100% of the fair market value of the stock
at
the date of grant (except for certain option grants with measurement date errors
– see Note 14) and have five-year vesting terms.
The
estimated fair value of each option award granted was determined on the date
of
grant using the Black-Scholes option valuation model with the following
weighted-average assumptions for option grants during the year ended September
30, 2005. There were no options granted during the years ended
September 30, 2006 and 2007.
|
|
Year
Ended
|
|
|
|
September
30, 2005
|
|
|
|
|
|
Risk-free
interest rate
|
|
3%
|
|
Expected
volatility of common stock
|
|
76.6%
|
|
Dividend
yield
|
|
-0-
|
|
Expected
option term
|
|
7
years
|
|
The
computation of the expected term is based on a weighted average calculation
combining the average life of options that have already been exercised or
cancelled with the estimated life of all unexercised options. The
expected volatility is based on the historical volatility of the Company’s
stock. The risk-free interest rate is based on the implied yield on U.S.
Treasury constant maturities with a remaining term equal to the expected term
of
the option. The dividend yield is projected to be zero.
A
summary
of the status of the Company’s stock option plan as of September 30, 2006 and
2007 and of changes in options outstanding under the plan during the years
ended
September 30, 2006 and 2007 is as follows:
NOTE
12: (Continued)
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Average Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Price
per
|
|
|
Contractual
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Share
|
|
|
(in
years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at September 30, 2005
|
|
|
1,116,125
|
|
|
$ |
5.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
(131,200 |
) |
|
$ |
4.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
forfeited or expired
|
|
|
(12,650 |
) |
|
$ |
9.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at September 30, 2006
|
|
|
972,275
|
|
|
$ |
5.61
|
|
|
|
6.4
|
|
|
$ |
12,099,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
(188,450 |
) |
|
$ |
4.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
forfeited or expired
|
|
|
(15,900 |
) |
|
$ |
8.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at September 30, 2007
|
|
|
767,925
|
|
|
$ |
5.94
|
|
|
|
5.0
|
|
|
$ |
3,733,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
vested and exercisable at September 30, 2006
|
|
|
481,675
|
|
|
$ |
5.03
|
|
|
|
5.3
|
|
|
$ |
6,272,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
vested and exercisable at September 30, 2007
|
|
|
517,525
|
|
|
$ |
5.55
|
|
|
|
4.1
|
|
|
$ |
2,719,000
|
|
Nonvested
share activity under our Stock Option Plan for the years ended September 30,
2006 and 2007 is summarized as follows:
|
|
|
|
|
Weighted
|
|
|
|
Nonvested
|
|
|
Average
|
|
|
|
Number
|
|
|
Grant-Date
|
|
|
|
Of
Shares
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
Nonvested
balance at October 1, 2005
|
|
|
684,625
|
|
|
$ |
4.28
|
|
Vested
|
|
|
(193,625 |
) |
|
$ |
3.80
|
|
Forfeited
|
|
|
(400 |
) |
|
$ |
0.93
|
|
|
|
|
|
|
|
|
|
|
Nonvested
balance at September 30, 2006
|
|
|
490,600
|
|
|
$ |
4.47
|
|
Vested
|
|
|
(230,800 |
) |
|
$ |
3.98
|
|
Forfeited
|
|
|
(9,400 |
) |
|
$ |
5.62
|
|
|
|
|
|
|
|
|
|
|
Nonvested
balance at September 30, 2007
|
|
|
250,400
|
|
|
$ |
4.68
|
|
NOTE
12: (Continued)
As
of
September 30, 2007, there was $802,000 of unamortized compensation cost related
to non-vested stock option awards, which is expected to be recognized over
a
remaining weighted-average vesting period of 2.2 years.
Cash
received from stock option exercises for the years ended September 30, 2007,
2006, and 2005 was $838,000, $580,000 and $394,000, respectively. The
income tax benefits from stock option exercises totaled $139,000, $234,000,
and
$91,000 for the years ended September 30, 2007, 2006, and 2005,
respectively.
For
stock options granted
prior to the adoption
of
SFAS No. 123(R),
the following table illustrates the
pro forma effect on net income and earnings per common share as if the Company
had applied the fair value recognition
provisions of SFAS No.
123(R)
in determining stock-based
compensation for awards
under the plan:
|
|
For the Fiscal Year Ended
|
|
|
|
September
30,
|
|
|
|
2005
|
|
|
|
|
|
Net
income, as reported
|
|
$ |
1,033,000
|
|
|
|
|
|
|
Add:
Stock-based compensation expense included in reported net income, net
of related tax effects
|
|
|
5,000
|
|
|
|
|
|
|
Deduct:
Total stock-based compensation expense determined under fair
value-based method for all awards, net of related tax
effects
|
|
|
(529,000 |
) |
|
|
|
|
|
Pro
forma net income
|
|
$ |
509,000
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
Basic
– as reported
|
|
$ |
0.16
|
|
Basic
– pro forma
|
|
$ |
0.08.
|
|
|
|
|
|
|
Diluted
– as reported
|
|
$ |
0.15
|
|
Diluted
– pro forma
|
|
$ |
0.07
|
|
Restricted
Stock:
Restricted
Stock is granted under the 2003 Plan. Compensation expense related to
restricted stock issued is recognized ratably over the service vesting
period. Restricted stock grants are normally vested over a five-year
period.
In
accordance with SFAS No. 123(R), the fair value of restricted stock awards
is
estimated based on the closing market value stock price on the date of share
issuance. The total number of restricted stock awards expected to vest is
adjusted by estimated forfeiture rates. As of September 30, 2007,
there was $1,315,000 of unamortized compensation cost related to non-vested
restricted stock awards, which is expected to be recognized over a remaining
weighted-average vesting period of 3.85 years.
NOTE
12: (Continued)
A
summary
of the status of the Company’s restricted stock awards as of September 30, 2006
and 2007, and of changes in restricted stock nonvested under the plan during
the
years ended September 30, 2006 and 2007, is as follows:
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant
Date
|
|
|
|
Number
|
|
|
Fair
Value
|
|
|
|
Of
Shares
|
|
|
Per
Share
|
|
|
|
|
|
|
|
|
Restricted
stock awards nonvested at September 30, 2005
|
|
|
50,000
|
|
|
$ |
8.50
|
|
|
|
|
|
|
|
|
|
|
Shares
issued
|
|
|
87,602
|
|
|
$ |
12.67
|
|
Shares
vested
|
|
|
(22,029 |
) |
|
$ |
9.62
|
|
Shares
forfeited
|
|
|
-0-
|
|
|
$ |
-0-
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock awards nonvested at September 30, 2006
|
|
|
115,573
|
|
|
$ |
11.44
|
|
|
|
|
|
|
|
|
|
|
Shares
issued
|
|
|
43,077
|
|
|
$ |
12.27
|
|
Shares
vested
|
|
|
(24,940 |
) |
|
$ |
11.28
|
|
Shares
forfeited
|
|
|
(14,012 |
) |
|
$ |
10.25
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock awards nonvested at September 30, 2007
|
|
|
119,698
|
|
|
$ |
11.92
|
|
The
Company issued 1,077 and 4,514 shares of restricted stock as compensation in
lieu of cash payments to one outside director during 2007 and 2006,
respectively. The Company issued an additional 14,500 shares of
restricted stock to its outside directors as compensation during
2007.
Common
Stock issued and outstanding in Stockholders’ Equity includes 161,076 and
133,088 shares of restricted stock grants at September 30, 2007 and September
30, 2006, respectively, of which 119,698 and 115,573 were unvested at each
respective year end.
The
Company had a 1992 Officers and Key Employees Incentive Stock Option Plan (the
“1992 Plan”), which provided 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. In May 2002, the 1992 Plan
expired.
The
2003
Incentive Stock Option Plan was approved at the Annual Shareholders’ Meeting in
February 2003. The 2003 Incentive Stock Option Plan has similar provisions
as
the 1992 Plan. In February 2005, the shareholders approved an
amendment and restatement of the 2003 Incentive Stock Option Plan to, among
other matters, (i) increase the number of shares to be issued under the 2003
Incentive Stock Option Plan from 900,000 shares to 1,150,000 shares, and (ii)
permit the grant of restricted stock under the plan.
NOTE
12: (Continued)
Stock
option and restricted stock activity during 2007, 2006, and 2005 was as
follows:
|
|
|
|
|
Exercise
Price
|
|
Options
outstanding September 30, 2004
|
|
|
1,133,925
|
|
|
$ |
1.29
|
|
|
|
-
|
|
|
$ |
16.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
260,000
|
|
|
|
7.60
|
|
|
|
-
|
|
|
|
9.16
|
|
Forfeited
|
|
|
(158,600 |
) |
|
|
1.29
|
|
|
|
-
|
|
|
|
9.56
|
|
Exercised
|
|
|
(119,200 |
) |
|
|
1.30
|
|
|
|
-
|
|
|
|
7.00
|
|
Options
outstanding September 30, 2005
|
|
|
1,116,125
|
|
|
$ |
1.30
|
|
|
|
-
|
|
|
$ |
16.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(12,650 |
) |
|
|
1.30
|
|
|
|
-
|
|
|
|
16.48
|
|
Exercised
|
|
|
(131,200 |
) |
|
|
1.30
|
|
|
|
-
|
|
|
|
9.56
|
|
Options
outstanding September 30, 2006
|
|
|
972,275
|
|
|
$ |
1.30
|
|
|
|
-
|
|
|
$ |
16.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(15,900 |
) |
|
|
2.10
|
|
|
|
-
|
|
|
|
10.24
|
|
Exercised
|
|
|
(188,450 |
) |
|
|
1.30
|
|
|
|
-
|
|
|
|
16.48
|
|
Options
outstanding September 30, 2007
|
|
|
767,925
|
|
|
$ |
1.30
|
|
|
|
-
|
|
|
$ |
10.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at September 30, 2005
|
|
|
440,500
|
|
|
$ |
1.30
|
|
|
|
-
|
|
|
$ |
16.48
|
|
Options
exercisable at September 30, 2006
|
|
|
481,675
|
|
|
$ |
1.30
|
|
|
|
-
|
|
|
$ |
16.48
|
|
Options
exercisable at September 30, 2007
|
|
|
517,525
|
|
|
$ |
1.30
|
|
|
|
-
|
|
|
$ |
10.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock nonvested
|
|
|
50,000
|
|
|
$ |
8.50
|
|
|
|
|
|
|
|
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
87,602
|
|
|
$ |
10.25
|
|
|
|
-
|
|
|
$ |
17.45
|
|
Vested
|
|
|
(22,029 |
) |
|
|
8.50
|
|
|
|
-
|
|
|
|
10.25
|
|
Restricted
stock nonvested September 30, 2006
|
|
|
115,573
|
|
|
$ |
8.50
|
|
|
|
-
|
|
|
$ |
17.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
43,077
|
|
|
$ |
10.41
|
|
|
|
-
|
|
|
$ |
14.00
|
|
Vested
|
|
|
(24,940 |
) |
|
|
8.50
|
|
|
|
-
|
|
|
|
17.45
|
|
Forfeited
|
|
|
(14,012 |
) |
|
|
10.25
|
|
|
|
|
|
|
|
|
|
Restricted
stock nonvested September 30, 2007
|
|
|
119,698
|
|
|
$ |
8.50
|
|
|
|
-
|
|
|
$ |
17.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
shares available for grant at September 30, 2005
|
|
|
285,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
shares available for grant at September 30, 2006
|
|
|
147,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
shares available for grant at September 30, 2007
|
|
|
74,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
12: (Continued)
Both
options and restricted stock are granted under the 2003 Plan. The
exercise price of the incentive stock options shall be 100% of the fair market
value on the date the option is granted. 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. Restricted
stock grants are normally vested over a five-year period.
The
following table summarizes information about stock options outstanding at
September 30, 2007:
|
|
|
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, 2007
|
|
|
Life/Years
|
|
|
Price
|
|
|
Sept.
30, 2007
|
|
|
Price
|
|
$ |
1.30
|
|
|
|
-
|
|
|
$ |
2.10
|
|
|
|
72,400
|
|
|
|
5.13
|
|
|
$ |
1.83
|
|
|
|
53,000
|
|
|
$ |
1.73
|
|
$ |
2.15
|
|
|
|
-
|
|
|
$ |
3.96
|
|
|
|
142,075
|
|
|
|
3.59
|
|
|
$ |
2.85
|
|
|
|
128,075
|
|
|
$ |
2.73
|
|
$ |
4.00
|
|
|
|
-
|
|
|
$ |
5.88
|
|
|
|
10,000
|
|
|
|
0.87
|
|
|
$ |
4.19
|
|
|
|
10,000
|
|
|
$ |
4.19
|
|
$ |
6.85
|
|
|
|
-
|
|
|
$ |
10.24
|
|
|
|
543,450
|
|
|
|
5.40
|
|
|
$ |
7.33
|
|
|
|
326,450
|
|
|
$ |
7.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
767,925
|
|
|
|
4.98
|
|
|
$ |
5.94
|
|
|
|
517,525
|
|
|
$ |
5.55
|
|
In
May
2006, the Company entered into an agreement with certain of its employees and
executives to potentially grant 80,000 shares of restricted stock and 10,000
equivalent shares payable in cash. The restricted stock would only be
granted and cash only be paid if the Company achieves predetermined cumulative
Earnings Before Income Taxes and Depreciation and Amortization (“EBITDA”) for
the fiscal years ending 2006, 2007 and 2008 or upon a change in
control. Cumulative EBITDA results must be reached or a reduced
number of shares will be granted, if any. As required by SFAS 123(R),
80,000 shares of this award have been treated as an equity award, with the
fair
value measured at the grant date and 10,000 shares have been treated as a
liability award, with the fair value measured at the grant date and remeasured
at the end of each reporting period (marked to market). In June 2007,
the cumulative EBITDA targets were reduced and this was treated as a
modification of an award under SFAS No. 123(R). During 2007, 25,000
shares of restricted stock and 4,000 shares payable in cash were
forfeited. As the Company believes the cumulative EBITDA targets will
be achieved, the Company recognized compensation expense of $178,000 and
$255,000 for the years ended September 30, 2007 and 2006,
respectively.
In
June
2007, the Company entered into an agreement with certain of its employees and
executives to potentially grant 100,000 shares of restricted stock and 21,000
equivalent shares payable in cash. The restricted stock will only be
granted and cash only be paid if the Company achieves predetermined cumulative
EBITDA for the fiscal years ending 2007, 2008 and 2009 or upon a change in
control. Cumulative EBITDA results must be reached or a reduced
number of shares will be granted, if any. As required by SFAS 123(R),
100,000 shares of this award have been treated as an equity award, with the
fair
value measured at the grant date and 21,000 shares have been treated as a
liability award, with the fair value measured at the grant date and remeasured
at the end of each reporting period (marked to market). During 2007,
2,000 shares payable in cash were forfeited. As the Company believes the
cumulative EBITDA targets will be achieved, the Company recognized $205,000
of
compensation expense related to this award for the year ended September 30,
2007.
NOTE
13 – 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 require
the Company to assume and compensate the banks for bearing the risk of
“chargeback” losses. Under the rules of Visa and MasterCard, when a merchant
processor acquires card transactions, it has certain contingent liabilities
for
the transactions processed. This contingent liability arises in the
event of a billing dispute between the merchant and a cardholder that is
ultimately resolved in the cardholder’s favor. In such a case, the
disputed transaction is charged back to the merchant and the disputed amount
is
credited or otherwise refunded to the cardholder. If the Company is
unable to collect this amount from the merchant’s account, and if the merchant
refuses or is unable to reimburse the Company for the chargeback due to merchant
fraud, insolvency or other reasons,
the Company will bear the loss for the amount of the refund paid to the
cardholders. The Company is also exposed to financial risk in
providing Automated Clearing House (“ACH”) services to the
merchants. As the Third-Party processor for multiple originating
banks, the Company is liable for any fraudulent activities committed by the
merchants initiating the ACH activities. The Company utilizes stringent
underwriting guidelines combined with a number of systems and procedures to
manage merchant risk. In addition, the Company requires cash deposits by certain
merchants, which are held by the Company’s sponsoring banks to minimize the risk
related to merchant frauds and chargebacks.
A
cardholder, through its issuing bank, generally has until the later of up to
four months after the date a transaction is processed or the delivery of the
product or service to present a chargeback to the Company’s sponsoring bank as
the merchant processor. Therefore, management believes that the maximum
potential exposure for the chargebacks would not exceed the total amount of
transactions processed through Visa and MasterCard for the last four months
and
other unresolved chargebacks in the process of resolution. For the
last four months through September 30, 2007, this potential exposure totaled
approximately $650 million. At September 30, 2007, the Company, through its
sponsoring banks, had approximately $75,000 of unresolved chargebacks that
were
in the process of resolution. At September 30, 2007, the Company,
through its sponsoring banks, had access to $20.3 million belonging
to our merchants. This money has been deposited at the sponsoring
bank by the merchants to cover any potential chargeback losses.
For
the
fiscal years 2007 and 2006, the Company processed approximately $2.0 billion
(2007) and $1.8 billion (2006) of Visa and MasterCard transactions, which
resulted in $11.1 million in gross chargeback activities for the fiscal year
ended 2007 and $9.8 million in gross chargeback activities for the fiscal year
ended 2006. Substantially all of these chargebacks were recovered from the
merchants.
The
Company’s contingent obligation with respect to chargebacks constitutes a
guarantee as defined in Financial Accounting Interpretation No. 45, “Guarantor’s
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Others” (“FIN 45”). FIN 45 requires that guarantees
issued or modified subsequent to December 31, 2002 be initially recorded as
liabilities in the Statement of Financial Position at fair
value. Since the Company’s agreement with its sponsoring bank which
establishes the guarantee obligation was entered into prior to December 31,
2002
and has not been modified since that date, the measurement provisions of FIN
45
are not applicable to this guarantee arrangement. The Company also
entered into an arrangement with another sponsoring bank during the fourth
quarter of the 2007 fiscal year; however, the only transactions processed
through this new bank were for transactions with no potential of chargebacks.
Therefore, no additional liabilities are considered to be applicable under
FIN
45 for the year ended September 30, 2007. The Company will record any
FIN 45 liability that is applicable for fiscal 2008 under the new sponsoring
bank agreement.
In
accordance with SFAS No. 5, “Accounting for Contingencies”, the Company records
a reserve for chargeback losses based on its processing volume and historical
trends and data. As of September 30, 2007 and 2006, the allowance for
chargeback losses, which is classified as a component of the allowance for
uncollectible accounts receivable, was $219,000 and $304,000,
respectively. The expense associated with the chargeback allowance is
included in processing and transaction expense in the accompanying consolidated
statements of income. The Company expensed $210,000, $315,000, and
$13,000 for the years ended September 30, 2007, 2006 and 2005, respectively,
for
bankcard processing chargeback losses.
NOTE
13: (Continued)
The
Company has a 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 check
writer’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 September 30, 2007, the Company estimates that
its
maximum potential dishonored check exposure was approximately
$2,590,000.
For
the
fiscal years ended 2007 and 2006, the Company guaranteed approximately
$94,575,000 (2007) and $67,855,000 (2006) of merchant checks, which resulted
in
$516,000 or 0.5% (2007) and $561,000 or 0.8% (2006) of dishonored checks
presented to the Company for payments. The Company has the right to
collect the full amount of the check from the check writer. The
Company establishes a reserve for this activity based on historical and
projected loss experience. The expense associated with the guarantee costs
is
included in processing and transaction expense in the accompanying consolidated
statements of income.
In
May
2006, we entered into separation agreements with each of our principal executive
officers (CEO, CFO and COO) and each of our senior vice presidents whereby,
in
the event of a change in control of ECHO (as defined in each agreement)
each such executive officer would be entitled, to the extent they remain
employed by us at the time of such change in control, to the following: (i)
an
acceleration of vesting with respect to all stock option and restricted stock
grants then outstanding and not yet vested, (ii) a portion of such executive’s
anticipated cash or sales commission-based bonus, as applicable, for the fiscal
year in which the change in control occurred, and (iii) in the event that the
executive is terminated without cause (as defined in each agreement), or ceases
to provide services to us (or our successor) as a result of an involuntary
termination (as defined in each agreement) within the two year period following
the change in control, then the executive would be entitled to a one-time lump
sum cash payment equal to a percentage of the executive’s anticipated total
compensation for the fiscal year in which the change in control occurred, plus
continued medical benefits for a period of time following such
termination. The amount of lump sum payout ranges from 1 ½ to 2 years of
anticipated total compensation, and duration of continued medical benefits
ranges between 1 ½ and 2 years depending on position held by the principal
executive or senior vice president.
Lease
Commitments
The
Company leases equipment and real property under agreements, which expire at
various times next year. The Company's future minimum rental payments
for capital and operating leases at September 30, 2007 are as
follows:
Fiscal
Year
|
|
Capital
Leases
|
|
|
Operating
Leases
|
|
|
|
|
|
|
|
|
2008
|
|
$ |
34,000
|
|
|
$ |
499,000
|
|
|
|
|
|
|
|
|
|
|
Total
minimum lease payments
|
|
|
34,000
|
|
|
$ |
499,000
|
|
|
|
|
|
|
|
|
|
|
Less:
imputed interest of 7.23%
|
|
|
(1,000 |
) |
|
|
|
|
Present
value of net minimum lease payment
|
|
$ |
33,000
|
|
|
|
|
|
Rent
expense for the years ended September 30, 2007, 2006, and 2005 totaled $
771,000, $775,000 and $663,000, respectively. Certain operating leases have
renewal options at the end of the lease term solely at the Company’s
discretion. In May 2003, the Company leased new corporate office
space in Camarillo, California. The lease is for a period of five
years at a current monthly rate of $38,000. Subsequent to September 30, 2007,
we
entered into new
NOTE
13: (Continued)
leases
in
new locations for our Albuquerque, New Mexico and Lakewood, Colorado facilities.
See Footnote 17 for additional detail on the new leases.
At
September 30, 2007, the Company had long-term contracts with minimum commitments
with vendors that provide various services. These contracts include
minimum annual commitments as follows:
2008
|
|
$ |
250,000
|
|
|
|
|
|
|
Total
vendor commitments
|
|
$ |
250,000
|
|
Payments
made under these contracts amounted to $300,000 for each of the years ended
September 30, 2007, 2006, and 2005, respectively.
NOTE
14 – LEGAL PROCEEDINGS
On
March
27, 2007, the Company entered into a Non-Prosecution Agreement pursuant to
which
the Office of the United States Attorney for the Southern District of New York
agreed not to pursue actions against us or our subsidiaries for activities
related to its provision of payment processing services to Internet wallets
that
provided services to online gaming websites during the period from January
2001
through and including the date of the signing of the Non-Prosecution
Agreement. Pursuant to the terms of the Non-Prosecution Agreement,
the Company agreed to pay estimated profits to the United States in the amount
of a $2,300,000 civil disgorgement settlement upon the execution of the
Non-Prosecution Agreement, which represented management’s estimate of the
Company’s profits from processing and collection services provided to Internet
wallets since 2001. Management agreed to maintain a permanent
restriction upon providing automated clearing house services to any business
entity providing Internet gambling services to customers in the United States,
so long as the processing services and gambling services are illegal under
the
laws of the United States. Additionally, management agreed to, among
other matters, cooperate fully and actively with the U.S. Attorney’s Office, the
Federal Bureau of Investigation, and with any other agency of the government
designated by the U.S. Attorney’s Office, and to not commit any violations of
law. The Company’s cooperation obligations will continue until the later of one
year from the date of the signing of the Non-Prosecution Agreement or the date
upon which all prosecutions arising out of the conduct described in the
Non-Prosecution Agreement are final. Also included in legal
settlements and fees are approximately $880,000 for legal fees and expenses
related to the settlement. For the year ended September 30, 2006, the
Company settled a patent related lawsuit for $600,000 and also incurred $661,000
of related legal expenses. For the year ended September 30, 2005, the Company
defended and settled various lawsuits, incurring $1,349,000 of legal expenses
and a lawsuit settlement of $450,000.
The
Company is involved in various lawsuits arising in the ordinary course of
business. Based upon current information, management, after
consultation with legal counsel, believes the ultimate disposition of these
lawsuits will have no material effect upon either the Company’s results of
operations, financial position, or cash flows.
NOTE
15 – MERGER TRANSACTION
On
December 14, 2006, the Company entered into an Agreement and Plan of Merger
(the
Merger Agreement) to be acquired by Intuit, Inc. (Intuit) in a merger
transaction in which ECHO would have become a wholly owned subsidiary
of Intuit (the merger). Pursuant to the terms of the Merger Agreement
and subject to the conditions thereof, Intuit would have acquired all of the
outstanding shares of the Company’s common stock and all outstanding equity
awards (which would have vested in connection with the transactions) for a
cash
amount of $18.75 per share (less the applicable exercise price in the case
of
ECHO options), for a total purchase price of approximately $142 million
on a fully diluted basis. The transaction was subject to regulatory
review, the Company’s shareholder approval and other customary closing
conditions. On March 26, 2007, the Company mutually agreed with Intuit and
Elan
Acquisition Corporation, a Nevada corporation and wholly owned subsidiary of
Intuit (“Elan”), to terminate the Merger Agreement. The parties determined that
it was in the mutual best interest of each party to terminate the proposed
agreement. In connection with the termination, the Company, Intuit
and Elan agreed to release each other from all claims arising under or related
to the terminated merger agreement. The Company also cancelled its previously
adjourned special stockholders’ meeting relating to the proposed acquisition,
which was scheduled to reconvene on March 27, 2007. As of result of
the termination of the merger agreement, the Company recorded approximately
$934,000 of costs related to the merger for the year ended September 30,
2007.
NOTE
16 – CEO RETIREMENT AND SEPARATION
In
connection with the retirement of our Chairman and Chief Executive Officer,
Joel
M. (“Jody”) Barry on July 2, 2007 (the “Effective Date”), the Company entered
into a separation agreement (the “Agreement”) with him on August 10,
2007. The agreement resulted in a charge of approximately $1.0
million to the Company. Under the Agreement, Mr. Barry is entitled to cash
severance payments totaling $742,800 to be paid as follows: (a) an initial
lump
sum payment of $300,000 that was paid within three days of August 10, 2007
and
(b) two payments of $221,400 each to be paid on January 2, 2008 and 2009, which
payments may be accelerated and become payable within three business days upon
Mr. Barry’s written request. All stock options issued to Mr. Barry
under the Company’s 1992 Plan will expire in accordance with their terms as of
the Effective Date. All unvested stock options issued to Mr. Barry
under the Company’s 2003 Plan vested immediately as of the Effective Date and
will expire on the 360th day
thereafter. The Company paid an amount of approximately $21,930 in
respect to the payoff amount for Mr. Barry’s company vehicle, which he will be
entitled to retain. The Company will also make equivalent medical
benefits available to Mr. Barry for a two year period. Mr. Barry has
agreed to certain noncompetition and nonsolicitation provisions for a 12 month
period. In exchange for his severance benefits, Mr. Barry has
relinquished his right to make claims against the Company. As part of
the agreement, Mr. Barry also forfeited his unvested restricted stock with
compensation previously recorded of $146,000. Amounts still due Mr. Barry under
the Agreement totaled approximately $450,000 at September 30, 2007 and are
included in accrued compensation expenses.
NOTE
17: SUBSEQUENT EVENTS
Operating
Leases:
Subsequent
to September 30, 2007, the Company entered into new leases for its Albuquerque,
New Mexico (Albuquerque) and Lakewood, Colorado (Lakewood)
facilities. The new Albuquerque lease is for a term of five
years with an option to extend for an additional five year term and the Lakewood
lease is for a term of three years and three months with an option to extend
for
an additional three year term.
Indemnification
Rights of Directors:
On
December 11, 2007, the Company entered into indemnification agreements with
each
of its principal executive officers (CEO and CFO), senior vice presidents and
directors. Pursuant to the terms of the indemnification agreements,
the Company has agreed to provide indemnification for, and the advancement
of
expenses to, our executive officers, senior vice presidents and directors,
under
certain circumstances and in accordance with Nevada law, all as more completely
described within the agreements.
Amended
and Restated Separation Agreements:
On
December 11, 2007, the Company entered into amended and restated separation
agreements with each of its principal executive officers (CEO and CFO) and
each
of its senior vice presidents whereby, in the event of a change in control
of
the Company (as defined in each agreement) each such executive officer would
be
entitled, to the extent they remain employed by the Company at the time of
such
change in control, to the following: (i) an acceleration of vesting with
respect to all stock option and restricted stock grants then outstanding and
not
yet vested, (ii) a portion of such executive’s anticipated cash or sales
commission-based bonus, as applicable, for the fiscal year in which the change
in control occurred, and (iii) in the event that the executive is terminated
without cause (as defined in each agreement), or ceases to provide services
to
the Company (or its successor) as a result of an involuntary termination (as
defined in each agreement) within the two year period following the change
in
control, then the executive would be entitled to a one-time lump sum cash
payment equal to a percentage of the executive’s anticipated total compensation
for the fiscal year in which the change in control occurred, plus continued
medical benefits for a period of time following such termination. The
amount of the lump sum payout ranges from 1 ½ to 2 years of anticipated total
compensation, and the duration of continued medical benefits ranges between
1 ½
and 2 years depending on the position held by the principal executive or senior
vice president. These agreements amend and restate separation
agreements previously entered into with each of these executives.
In
November 2007, the Board of Directors approved a cash-based Stock Appreciation
Rights Plan. The plan has 150,000 stock appreciation units reserved
for issuance to all non-Executive employees of the Company. No units
have been issued to date, and there are currently no planned
grants. Additionally, there is no timeframe for when the units will
be granted. In addition, there has been no determination as to how
these units will be allocated among employees.
NOTE
18 - SEGMENT INFORMATION
The
Company has adopted SFAS 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 two business segments: Bankcard and Transaction
Processing and Check Related Products, all of which are located in the United
States. The Company also has certain corporate expenses such as salaries and
benefits, legal and professional fees, rent, and litigation accrual expenses
which are not allocated to the two business segments.
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
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Bankcard
and Transaction Processing
|
|
$ |
62,580,000
|
|
|
$ |
56,983,000
|
|
|
$ |
41,093,000
|
|
Check
Related Products
|
|
|
14,304,000
|
|
|
|
18,328,000
|
|
|
|
14,458,000
|
|
|
|
$ |
76,884,000
|
|
|
$ |
75,311,000
|
|
|
$ |
55,551,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankcard
and Transaction Processing
|
|
$ |
9,236,000
|
|
|
$ |
8,495,000
|
|
|
$ |
5,829,000
|
|
Check
Related Products
|
|
|
(1,116,000 |
) |
|
|
4,384,000
|
|
|
|
2,204,000
|
|
Other
– Corporate Expenses
|
|
|
(13,232,000 |
) |
|
|
(8,725,000 |
) |
|
|
(6,354,000 |
) |
|
|
$ |
(5,112,000 |
) |
|
$ |
4,154,000
|
|
|
$ |
1,679,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankcard
and Transaction Processing
|
|
$ |
1,828,000
|
|
|
$ |
1,009,000
|
|
|
$ |
954,000
|
|
Check
Related Products
|
|
|
2,673,000
|
|
|
|
2,499,000
|
|
|
|
1,702,000
|
|
|
|
$ |
4,501,000
|
|
|
$ |
3,508,000
|
|
|
$ |
2,656,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankcard
and Transaction Processing
|
|
$ |
2,683,000
|
|
|
$ |
3,386,000
|
|
|
$ |
2,167,000
|
|
Check
Related Products
|
|
|
2,279,000
|
|
|
|
1,829,000
|
|
|
|
2,505,000
|
|
|
|
$ |
4,962,000
|
|
|
$ |
5,215,000
|
|
|
$ |
4,672,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankcard
and Transaction Processing
|
|
$ |
11,904,000
|
|
|
$ |
12,707,000
|
|
|
$ |
9,452,000
|
|
Check
Related Products
|
|
|
13,233,000
|
|
|
|
31,412,000
|
|
|
|
24,616,000
|
|
Other
|
|
|
9,997,000
|
|
|
|
10,888,000
|
|
|
|
6,646,000
|
|
|
|
$ |
35,134,000
|
|
|
$ |
55,007,000
|
|
|
$ |
40,714,000
|
|
NOTE
18: (Continued)
In
2007, the Company refocused its sales and service strategy to
provide merchants, banks, technology partners and collection agencies with
electronic payment services that combine credit card, debit card and electronic
check and collection services. The Company believes this “All-In-One”
offering represents a significant competitive differentiator. In addition,
the
Company’s services enable merchants to maximize revenue by offering a wide
variety of payment options, minimize costs by dealing with one source and
improve their bad debt collection rates through use of the Company’s integrated
collection and risk management services. As such, the Company
will be combining its Bankcard and Transaction Processing with its Check Related
Products segments into one “payment processing” segment for
2008. The Company believes one segment is more representative
of how the Company is structured and will be operated for 2008.
NOTE
19- QUARTERLY FINANCIAL DATA (Unaudited)
The
following summarizes the quarterly financial results of the Company for the
fiscal years ended September 30, 2007 and September 30, 2006 (in thousands,
except share data):
|
|
Year
Ended September 30, 2007
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$ |
19,379
|
|
|
$ |
19,993
|
|
|
$ |
19,029
|
|
|
$ |
18,483
|
|
Gross
profit
|
|
|
6,429
|
|
|
|
6,045
|
|
|
|
5,226
|
|
|
|
5,026
|
|
Profit
(loss) from operations
|
|
|
560
|
|
|
|
(3,169 |
) |
|
|
(1,668 |
) |
|
|
(835 |
) |
Net
income (loss)
|
|
|
339
|
|
|
|
(1,925 |
) |
|
|
(682 |
) |
|
|
(113 |
) |
Earnings
(loss) per share - basic
|
|
$ |
0.05
|
|
|
$ |
(0.29 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.02 |
) |
Earnings
(loss) per share - diluted
|
|
$ |
0.05
|
|
|
$ |
(0.29 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.02 |
) |
|
|
Year
Ended September 30, 2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$ |
16,926
|
|
|
$ |
19,228
|
|
|
$ |
19,869
|
|
|
$ |
19,288
|
|
Gross
profit
|
|
|
5,783
|
|
|
|
6,313
|
|
|
|
6,570
|
|
|
|
6,573
|
|
Profit
from operations
|
|
|
1,061
|
|
|
|
781
|
|
|
|
1,785
|
|
|
|
527
|
|
Net
income
|
|
|
592
|
|
|
|
424
|
|
|
|
1,010
|
|
|
|
291
|
|
Earnings
per share - basic
|
|
$ |
0.09
|
|
|
$ |
0.06
|
|
|
$ |
0.15
|
|
|
$ |
0.04
|
|
Earnings
per share - diluted
|
|
$ |
0.09
|
|
|
$ |
0.06
|
|
|
$ |
0.14
|
|
|
$ |
0.04
|
|
REPORT
ON FINANCIAL STATEMENT SCHEDULE
Board
of
Directors and Stockholders
Electronic
Clearing House, Inc.
The
audit
referred to in our report dated December 14, 2007 relating to the consolidated
financial statements for the years ended September 30, 2007 and 2006 of
Electronic Clearing House, Inc., which is presented on the page set forth in
Item 15 of this Form 10−K, included the audit of the financial statement
schedule presented on page S-2 of this Form 10-K. This financial statement
schedule is the responsibility of the Company’s management. Our responsibility
is to express an opinion on this financial statement schedule based upon our
audit.
In
our
opinion, such financial statement schedule presents fairly, in all material
respects, the information set forth therein.
/s/
BDO
Seidman, LLP
BDO
Seidman, LLP
Los
Angeles, California
December
14, 2007
ELECTRONIC
CLEARING HOUSE, INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE
II TO FORM 10K
RULE
12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
DESCRIPTION
|
|
BALANCE AT
09/30/2004
|
|
|
CHARGED TO
EXPENSE
|
|
|
REDUCTION IN
RESERVE
AND ACCOUNTS
RECEIVABLE
|
|
|
BALANCE AT
09/30/2005
|
|
|
CHARGED TO
EXPENSE
|
|
|
REDUCTION IN
RESERVE
AND
ACCOUNTS
RECEIVABLE
|
|
|
BALANCE AT
09/30/2006
|
|
|
CHARGED TO
EXPENSE
|
|
|
REDUCTION IN
RESERVE
AND
ACCOUNTS
RECEIVABLE
|
|
|
BALANCE AT
09/30/2007
|
|
Allowance
for trade receivables/ chargeback /settlement
receivables
|
|
$ |
133,000
|
|
|
$ |
295,000
|
|
|
$ |
311,000
|
|
|
$ |
117,000
|
|
|
$ |
380,000
|
|
|
$ |
89,000
|
|
|
$ |
408,000
|
|
|
$ |
311,000
|
|
|
$ |
340,000
|
|
|
$ |
379,000
|
|
Allowance
for obsolete inventories
|
|
$ |
46,000
|
|
|
$ |
10,000
|
|
|
$ |
56,000
|
|
|
$ |
-0-
|
|
|
$ |
-0-
|
|
|
$ |
-0-
|
|
|
$ |
-0-
|
|
|
$ |
-0-
|
|
|
$ |
-0-
|
|
|
$ |
-0-
|
|
Exhibit
Number
|
|
Description
of Document
|
|
|
|
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.[3]
|
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.[4]
|
2.3
|
|
Agreement
and Plan of Merger dated December 14, 2006 by and among Intuit Inc.,
Elan
Acquisition Corporation and Electronic Clearing House, Inc. [11]
|
2.4
|
|
Mutual
Termination and Release Agreement dated as of March 26, 2007 by and
among
Electronic Clearing House, Inc., Intuit Inc., and Elan Acquisition
Corporation. [12]
|
3.1
|
|
Articles
of Incorporation of Bio Recovery Technology, Inc., filed with the
Nevada
Secretary of State on December 11, 1981. [10]
|
3.1.1
|
|
Amendment
to the Articles of Incorporation of Electronic Clearing House, Inc.
filed
with the Nevada Secretary of State on June 21, 1990. [10]
|
3.1.2
|
|
Amendment
to the Articles of Incorporation of Electronic Clearing House, Inc.
filed
with the Nevada Secretary of State on September 27, 1991. [10]
|
3.1.3
|
|
Amendment
to the Articles of Incorporation of Electronic Clearing House, Inc.
filed
with the Nevada Secretary of State on August 5, 1993. [10]
|
3.1.4
|
|
Amendment
to the Articles of Incorporation of Electronic Clearing House, Inc.
filed
with the Nevada Secretary of State on April 7, 1995. [10]
|
3.1.5
|
|
Amendment
to the Articles of Incorporation of Electronic Clearing House, Inc.
filed
with the Nevada Secretary of State on April 7, 1997. [10]
|
3.1.6
|
|
Amendment
to the Articles of Incorporation of Electronic Clearing House, Inc.
filed
with the Nevada Secretary of State on March 13, 1998. [10]
|
3.1.7
|
|
Amendment
to the Articles of Incorporation of Electronic Clearing House, Inc.
filed
with the Nevada Secretary of State on June 21, 1999. [10]
|
3.1.8
|
|
Amendment
to the Articles of Incorporation of Electronic Clearing House, Inc.
filed
with the Nevada Secretary of State on September 6, 2001. [10]
|
3.2
|
|
By-Laws
of Bio Recovery Technology, Inc.[1]
|
3.2.1
|
|
Amendment
to the By-Laws of Electronic Clearing House, Inc., dated April 25,
2005.
[10]
|
3.2.2
|
|
Amendment
to the By-Laws of Electronic Clearing House, Inc., dated September
9,
2005. [10]
|
4.1
|
|
Amended
and Restated Rights Agreement between Electronic Clearing House,
Inc. and
OTR, Inc., dated January 29, 2003. [5]
|
4.1.1
|
|
Amendment
Number One to Amended and Restated Rights
Agreement dated September 27, 2004. [6]
|
4.1.2
|
|
Amendment
Number Two to Amended and Restated Rights Agreement dated December
14,
2006. [11]
|
4.1.3
|
|
Amendment
Number Three to Amended and Restated Rights Agreement dated April
24,
2007. [13]
|
4.2
|
|
Specimen
Common Stock Certificate. [2]
|
4.3
|
|
Amended
and Restated 2003 Incentive Stock Option Plan. [7]
|
4.4
|
|
Amended
and Restated 1992 Officers and Key Employees Incentive Stock Option
Plan.
[8]
|
10.35
|
|
Copy
of Merchant Marketing and Processing Services Agreement between Electronic
Clearing House, Inc. and First Regional Bank, dated June 24, 1997.
[14]
|
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.[4]
|
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.[4]
|
10.48
|
|
Copy
of POS Check Third-Party Services Agreement between Visa U.S.A.,
Inc. and
Electronic Clearing House, Inc., dated December 12, 2000.[15]
|
10.51
|
|
Copy
of First Amendment to the POS Check Third-Party Servicer Agreement
between
Visa U.S.A., Inc. and Electronic Clearing House, Inc. dated December
12,
2000. [16]
|
10.52
|
|
Copy
of Second Amendment to the POS Check Third-Party Servicer Agreement
between Visa U.S.A., and Electronic Clearing House, Inc. dated
December 12, 2000. [16]
|
10.53
|
|
Copy
of Third Amendment to the POS Check Third-Party Servicer Agreement
between
Visa U.S.A., and Electronic Clearing House, Inc.
dated December 12, 2000. [16]
|
10.56
|
|
Office
Lease dated May 21, 2003, by and between the Registrant and the 1989
Sheehan Family Trust dated October 24, 1989, with respect to principal
executive offices located at 730 Paseo Camarillo, Camarillo, California
93010.[17]
|
10.57
|
|
First
Amendment to Lease dated July 10, 2003, by and between the Registrant
and
the 1989 Sheehan Family Trust dated October 24, 1989, with respect
to
principal executive offices located at 730 Paseo Camarillo, Camarillo,
California 93010. [10]
|
10.58
|
|
Addendum
to Office Lease dated July 7, 2004, by and between the Registrant
and the
1989 Sheehan Family Trust dated October 24, 1989, with respect to
principal executive offices located at 730 Paseo Camarillo, Camarillo,
California 93010. [18]
|
|
|
Sample
Amended and Restated Separation Agreement between Electronic Clearing
House, Inc. and Company Executives.
|
10.61
|
|
Form
of Voting Agreement between Intuit Inc. and the Officers and Directors
of
Electronic Clearing House, Inc. [11]
|
10.62
|
|
Electronic
Clearing House, Inc. Non-Prosecution Agreement dated March 27, 2007,
with
the United States Attorney for the Southern District of New York.
[12]
|
|
|
Separation
and Release Agreement between Electronic Clearing House, Inc. and
Joel M.
Barry dated August 10, 2007 and effective July 2, 2007.
|
|
|
Form
of Indemnification Agreement.
|
11.1
|
|
Statement
re computation of per share earnings, incorporated herein by reference
to
Note 10 of the Notes to Consolidated Financial
Statements.
|
21.0
|
|
Subsidiaries
of Registrant as of September 30, 2006. [10]
|
|
|
Consent
of PricewaterhouseCoopers LLP
|
|
|
Consent
of BDO Seidman, LLP
|
24.1
|
|
Power
of Attorney [9]
|
|
|
Certificate
of Charles J. Harris, Chief Executive Officer of Electronic Clearing
House, Inc. pursuant to Rule 13a-14(b) under
the Securities and Exchange Act of 1934, as amended.
|
|
|
Certificate
of Alice L. Cheung, Chief Financial Officer of Electronic Clearing
House,
Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange
Act of
1934, as amended.
|
|
|
Certificate
of Charles J. Harris, Chief Executive Officer of Electronic Clearing
House, Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange
Act of 1934, as amended.
|
|
|
Certificate
of Alice L. Cheung, Chief Financial Officer of Electronic Clearing
House,
Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange
Act of
1934, as amended.
|
_________________________________
|
[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 Form S-1, Amendment No. 3, effective November 13,
1990 and
incorporated herein by reference.
|
|
[3]
|
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.
|
|
[4]
|
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.
|
|
[5]
|
Filed
as an Exhibit to
Registrant’s Form 8-A dated February 10, 2003 and incorporated herein by
reference.
|
|
[6]
|
Filed
as an Exhibit to Registrant’s Form 8-K dated September 30, 2004 and
incorporated herein by reference.
|
|
[7]
|
Filed
as an Exhibit to
Registrant’s Notice of Annual Meeting of Shareholders dated February 7,
2005 and incorporated herein by reference.
|
|
[8]
|
Filed
as an Exhibit to
Registrant’s Notice of Annual Meeting of Shareholders dated February 4,
1999 and incorporated herein by reference.
|
|
[9]
|
Included
on signature
page.
|
|
[10]
|
Filed
as an Exhibit to
Registrant’s Annual Report on Form 10-K for fiscal year ended September
30, 2005 and incorporated herein by reference.
|
|
[11]
|
Filed
as an Exhibit to
Registrant’s Form 8-K dated December 14, 2006 and incorporated herein by
reference.
|
|
[12]
|
Filed
as an Exhibit to
Registrant’s Quarterly Report on Form 10-Q for fiscal quarter ended March
31, 2007 and incorporated herein by reference.
|
|
[13]
|
Filed
as an Exhibit to
Registrant’s Form 8-K dated April 26, 2007 and incorporated herein by
reference.
|
|
[14]
|
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.
|
|
[15]
|
Filed
as an Exhibit to
Registrant’s Annual Report on Form 10-K for fiscal year ended September
30, 2001 and incorporated herein by reference.
|
|
[16]
|
Filed
as an Exhibit to
Registrant’s Annual Report on Form 10-K for fiscal year ended September
30, 2002 and incorporated herein by reference.
|
|
[17]
|
Filed
as an Exhibit to
Registrant’s Annual Report on Form 10-K for fiscal year ended September
30, 2003 and incorporated herein by reference.
|
|
[18]
|
Filed
as an Exhibit to
Registrant’s Annual Report on Form 10-K for fiscal year ended September
30, 2004 and incorporated herein by
reference.
|