UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------------
FORM 10-Q
--------------------------------------------
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended June 30, 1999
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-15245
ELECTRONIC CLEARING HOUSE, INC.
(Exact name of registrant as specified in its charter)
Nevada 93-0946274
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
28001 Dorothy Drive,
Agoura Hills, California 91301
(Address of principal executive offices)
Telephone Number (818) 706-8999
www.echo-inc.com
(Registrant's telephone number, including area code; web site address)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes X No
As of July 31, 1999, there were 19,707,726 shares of the Registrant's
Common Stock outstanding.
ELECTRONIC CLEARING HOUSE, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet 3
June 30, 1999 and September 30, 1998
Consolidated Statement of Operations 4
Three months and nine months ended
June 30, 1999 and 1998
Consolidated Statement of Cash Flows 5
Nine months ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of
Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
ELECTRONIC CLEARING HOUSE, INC.
<TABLE>
CONSOLIDATED BALANCE SHEET
ASSETS
<CAPTION>
June 30 September 30
1999 1998
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 3,177,000 $ 2,486,000
Restricted cash . . . . . . . . . . . . . . . 685,000 651,000
Accounts receivable less allowance
of $2,183,000 and $1,829,000 . . . . . . . . 1,074,000 1,251,000
Inventory less allowance of
$202,000 and $202,000. . . . . . . . . . . . 573,000 718,000
Prepaid expenses and other assets . . . . . . 61,000 16,000
Notes receivable less allowance
of $148,000. . . . . . . . . . . . . . . . . 345,000 32,000
Total current assets. . . . . . . . . . 5,915,000 5,154,000
Noncurrent assets:
Long term receivables. . . . . . . . . . . . 17,000 320,000
Property and equipment, net .. . . . . . . . 1,846,000 1,606,000
Real estate held for investment, net . . . . 252,000 252,000
Other assets, net. . . . . . . . . . . . . . 1,009,000 693,000
Goodwill, net. . . . . . . . . . . . . . . . 1,922,000 -0-
$10,961,000 $8,025,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
portion of long-term debt . . . . . . . . . $ 153,000 $ 92,000
Accounts payable . . . . . . . . . . . . . . 130,000 173,000
Accrued expenses. . . . . . . . . . . . . . . 737,000 845,000
Deferred income . . . . . . . . . . . . . . . 10,000 433,000
Total current liabilities . . . . . . . 1,030,000 1,543,000
Long-term debt . . . . . . . . . . . . . . . . 622,000 639,000
Total liabilities . . . . . . . . . . . 1,652,000 2,182,000
Stockholders' equity:
Convertible preferred stock, $.01 par value,
5,000,000 shares authorized:
Series "H", 0 and 23,511 shares issued
and outstanding. . . . . . . . . . . . . . .
Series "K", 25,000 and 325,000 shares
issued and outstanding . . . . . . . . . . . 3,000
Series "L", 40,000 and 168,000 shares
issued and outstanding . . . . . . . . . . . 2,000
Common stock, $.01 par value,
36,000,000 authorized:
19,629,926 and 15,120,541 shares issued;
19,560,841 and
15,114,300 shares outstanding. . . . .. . . . 196,000 151,000
Additional paid-in capital. . . . . . . . . . 16,770,000 14,140,000
Accumulated deficit . . . . . . . . . . . . . (7,542,000) (8,453,000)
9,424,000 5,843,000
Less treasury stock at cost,
69,085 and 6,241 common shares . . . . . . . (115,000) -0-
Total stockholders' equity . . . . . . . 9,309,000 5,843,000
$10,961,000 $8,025,000
See accompanying notes to consolidated financial statements.
</TABLE>
ELECTRONIC CLEARING HOUSE, INC.
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
Three Months Nine Months
Ended June 30 Ended June 30
1999 1998 1999 1998
(Unaudited) (Unaudited)
( -- in thousands --)
<S> <C> <C> <C> <C>
Revenues:
Bankcard processing revenue . . . . . . . . $3,433 $3,344 $9,882 $8,634
Bankcard transactions fees. . . . . . . . . 2,235 1,804 5,798 4,849
Terminal sales and lease revenue. . . . . . 346 927 1,918 1,919
Other revenue . . . . . . . . . . . . . . . 119 31 363 104
6,133 6,106 17,961 15,506
Costs and expenses:
Bankcard processing and transaction expense 3,808 4,055 11,016 10,247
Cost of terminals sold and leased . . . . . 169 582 1,048 1,270
Other operating costs . . . . . . . . . . 466 181 902 574
Selling, general and administrative . . . . 1,456 873 4,069 2,674
Amortization expense-acquisition costs. . . 39 -0- 39 -0-
5,938 5,691 17,074 14,765
Income from operations . . . . . . . . . 195 415 887 741
Interest income. . . . . . . . . . . . . . . 45 33 131 76
Interest expense . . . . . . . . . . . . . . (17) (26) (66)
(80) Forfeited deposit. . . . . . . . . . . -0- (35) -0-
(35)
Income before provision for income taxes 223 387 952 702
Provision for income taxes . . . . . . . . . (14) (4) (41)
(6)
Net income . . . . . . . . . . . . . . $ 209 $ 383 $ 911 $ 696
Earnings per share - Basic . . . . . $0.011 $0.026 $0.052 $0.047
Earnings per share - Diluted . . . . . $0.009 $0.018 $0.039 $0.032
See accompanying notes to Consolidated Financial Statements.
</TABLE>
ELECTRONIC CLEARING HOUSE, INC.
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Nine Months
Ended June 30,
1999 1998
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . $911,000 $696,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . 171,000 169,000
Amortization . . . . . . . . . . . . . . . . . . 105,000 69,000
Provisions for losses on accounts and
notes receivable . . . . . . . . . . . . . . . . . 354,000 779,000
Provision for obsolete inventory. . . . . . . . . . -0- 92,000
Fair value of stock issued in connection with
director's compensation . . . . . . . . . . . 45,000 -0-
Changes in assets and liabilities:
Restricted cash . . . . . . . . . . . . . . . . . . (34,000) (208,000)
Accounts receivable . . . . . . . . . . . . . . . . (223,000) (528,000)
Inventory . . . . . . . . . . . . . . . . . . 146,000 (25,000)
Prepaid expenses and other assets . . . . . . . . . (45,000) 4,000
Other assets . . . . . . . . . . . . . . . . . . (343,000) (63,000)
Accounts payable . . . . . . . . . . . . . . . . . (81,000) (71,000)
Accrued expenses. . . . . . . . . . . . . . . . . (135,000) 268,000
Deferred income . . . . . . . . . . . . . . . . . . (423,000) -0-
Net cash provided by operating activities. . . 448,000 1,182,000
Cash flows from investing activities:
Purchase of equipment.. . . . . . . . . . . . . . (312,000) (142,000)
Net cash used in investing activities. . (312,000) (142,000)
Cash flows from financing activities:
Decrease (increase) in notes receivable
from related parties . . . . . . . . . . . . . . . 5,000 (36,000)
Repayment of notes payable. . . . . . . . . . . . . (75,000) (122,000)
Proceeds from issuance of preferred stock . . . . . -0- 200,000
Proceeds from common stock warrants exercised . . . 260,000 50,000
Proceeds from exercise of stock options . . . . . . 365,000 13,000
Net cash provided by financing activities. . . 555,000 105,000
Net increase in cash . . . . . . . . . . . . . . . . 691,000 1,145,000
Cash and cash equivalents at beginning of period . . 2,486,000 772,000
Cash and cash equivalents at end of period . . . . .$3,177,000$1,917,000
See accompanying notes to consolidated financial statements.
</TABLE>
ELECTRONIC CLEARING HOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of presentation:
The accompanying consolidated financial statements as of June 30, 1999,
and for the three and nine month periods then ended are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the
financial position and the results of operations for the interim periods. The
consolidated financial statements herein should be read in conjunction with
the consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report to Stockholders
incorporated by reference in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998. The result of operations for the three
and nine months ended June 30, 1999 are not necessarily indicative of the
likely results for the entire fiscal year ending September 30, 1999.
NOTE 2 - Net income per share:
Net income per share is based on the weighted average number of common
shares and dilutive common equivalent shares outstanding during the period.
The shares issuable upon conversion of preferred stock and exercise of options
and warrants are included in the weighted average for the calculation of net
income per share except where it would be anti-dilutive. For the net income
per common share, the convertible preferred stock is not considered to be
equivalent to common stock. Earnings per share - basic amounts included in
the consolidated statement of operations are based upon average shares
outstanding of 19,293,683 and 15,026,783 in the three months and 17,582,713
and 14,931,486 in the nine months ended June 30, 1999 and 1998, respectively.
Earnings per share - diluted amounts included in the consolidated statements
of operations are based upon average shares outstanding of 23,625,089 and
21,933,804 in the three months and 23,158,504 and 21,818,830 in the nine
months ended June 30, 1999 and 1998, respectively. Earnings per share -
diluted, assuming full dilution for the nine months ended June 30, 1999, were
determined on the assumption that the convertible preferred stock was
converted, and the warrants and all the options were exercised on October 1,
1998 or the issuance date, whichever is later.
NOTE 3 - Non-cash transactions:
Significant non-cash transactions for the nine months ended June 30, 1999 were
as follows:
- Capital equipment of $43,000 was acquired under capital leases.
- 1,000,000 shares of common stock valued at $2,000,000 was issued for the
acquisition of Magic Software Development, Inc.
- 63,000 shares of treasury stock was acquired for repayment of certain
former merchant chargeback receivables.
Significant non-cash transaction for the nine months ended June 30, 1998 was
as follows:
- Capital equipment of $57,000 was acquired under capital leases.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
When used in the Management's Discussion and Analysis of Financial Condition
and Results of Operations or elsewhere in this document, the word "believes",
"anticipates", "contemplates", and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks and uncertainties, which could cause actual results to differ materially
from those projected. Those risks and uncertainties include changes in laws
and regulations affecting the Company's primary lines of business. The
Company undertakes no obligation to publicly release the results of any
revisions to those forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
New Developments:
On April 20, 1999, the Company completed the acquisition of Magic Software
Development, Inc. (Magic), based in Albuquerque, New Mexico. Magic will
operate as a wholly owned subsidiary of the Company.
Under the terms of the acquisition, the Company issued a total of 1,000,000
shares of common stock as "Base Shares" to the Selling Shareholders of Magic.
The shares will be held in escrow and 500,000 shares will be released to the
Magic Selling Shareholders on April 1, 2001 and 500,000 shares will be
released on April 1, 2002.
The Company has also agreed to issue up to 1,000,000 of additional
"Performance Shares" to the Selling Shareholders of Magic upon the achievement
of certain predetermined earnings goals for fiscal year 2000 and 2001. Any
"Performance Shares" issued will be held in escrow and 50% will be released on
April 1, 2003 and the balance to be released on April 1, 2004.
Magic is a provider of electronic check verification, electronic check re-
presentment, check conversion, and check guarantee solutions to financial
services companies and retailers across the nation. Magic processes over 75
million check verification transactions per year, totaling over two billion
dollars. Magic currently employs about 15 full-time employees, primarily
programmers and engineers.
At the present, a majority of Magic's revenue is generated from electronic
check verification. Electronic check verification is the process of using an
electronic device to verify information about a check being presented for
payment. The information is verified against data, which have previously been
collected and stored in a database. A verification compares information to a
negative database, a positive database, or combination of both.
Generally speaking, today's average merchant wants the ability to accept
several forms of payment through their processor. The typical merchant
accepts payment at his retail location or through his mail order/telephone
order business in the form of cash, checks and/or credit cards from his
customer. In some instances, the merchant may have an Internet web site and
wish to accept payment over the Internet, either in the form of a credit card
or a check transaction.
The Company provides credit card payment services in the retail, mail order
and Internet environments. In order to meet the needs of the typical merchant
and maintain the position of the sole provider of financial services with a
merchant, management felt it was strategically sound to secure a national
check processor that brought a full suite of check products and services to
the Company's merchants. The acquisition of Magic is intended to meet this
need.
The decision to acquire Magic was also motivated by the favorable gross margin
comparison between check clearing and credit card clearing. On a typical
transaction of $100 processed by a merchant, a credit card processor can
expect a gross margin in the range of 30 to 50 basis points, $.30 to $.50.
For the same amount processed as a check, the margin can be between 90 and 125
basis points, $.90 to $1.25.
Finally, recent clearing cost increases by both Visa USA and MasterCard
International that became effective in April, 1999, have made accepting checks
financially more desirable than accepting credit cards to retail, mail order
and Internet-based merchants. The credit card settlement cost increases
affected all processors. However, check clearing costs have not gone up and
there are very few national check services. The Company feels that owning one
of the few processors provides it with a long-term advantage in the coming
years as credit card margins continue to diminish and check services are
actively marketed to merchants as an alternative. Magic was acquired to
better assure the Company's overall competitiveness in both pricing and
bundling of products and services that will become the norm in the years
ahead.
Magic is currently in the process of finalizing the development of the
following check services:
Electronic Check Conversion (ECC). A merchant scans a customer check
upon presentment, converting it to an electronic image, and returns the check
to the customer immediately. The benefits of this service center on preferred
settlement and less handling cost for the merchant.
Electronic Check Truncation/Lockbox Services. Businesses who
traditionally receive thousands of checks via mail (utility companies, etc.)
can convert the paper forms to electronic images for settlement, a sizeable
savings in both cost and time to the business.
Electronic Check Verification Over the Internet. ECHO was one of the
first to offer credit card settlement over the Internet and, with the addition
of the Magic services, will soon include check verification over the Internet.
Check verification allows the merchant to submit a check to a national
database of bad check writers to confirm that the check writer is not in the
negative database.
Electronic Check Settlement and Representment Via the Internet. When a
check is presented over the Internet and it clears the verification process,
Magic will settle the check electronically for the merchant, eliminating the
need for the merchant to secure a paper check from the customer, a major
convenience to both the merchant and their customer. Additionally, when a
check rejects for any reason, Magic automatically represents the transaction
for settlement at the specified time of the merchant's choosing. The merchant
can choose the time of representment which provides them the flexibility of
matching expected pay days with representment of the checks (i.e., 1st, 16th)
thereby increasing the likelihood of collection significantly.
Electronic Check Guarantee. When a merchant desires 100% assurance that
every check accepted will be paid in full, Magic will provide such a guarantee
for a percentage of the check face amount.
The Company will be marketing all of the above services and products to its
core merchant base once it has completed all the developmental and functional
phases.
Result of Operations
Three Months Ended June 30, 1999 and 1998
Revenues. Electronic Clearing House, Inc. recorded a net income of $209,000
for the third quarter of fiscal year 1999 as compared to a net income of
$383,000 in the same period for the prior year, a 45% decrease. This decrease
was mainly attributable to the gross profit generated from the U-Haul
equipment delivery in the comparable quarter last year. Additionally, the
Company incurred higher operating costs as a result of the Magic acquisition,
which was consummated in April 1999. Despite these differences between period,
revenue for the third quarter exceeded last year, from $6,106,000 to
$6,133,000.
Revenues derived from the electronic processing of transactions are recognized
at the time the transactions are processed by the merchant. The principal
contributors to the 10% increase in bankcard processing revenue and
transaction revenue are the increase revenue from the Magic acquisition and
the incremental effect of the pass through of higher interchange rates from
the credit card associations, which was effective April 1999. This increase
was partially offset by the decrease in transaction revenue from U-Haul
despite an increase in the number of dealers and transactions processed. This
was mainly due to certain one-time adjustments recorded in the comparable
quarter of last year. As of June 1999, the Company processed for over 19,000
active retail merchant accounts and equipment rental dealers located around
the country.
In July 1999, U-Haul International awarded the Company a bid for credit card
processing service for its independent dealers who participate in the
Preferred Dealer Program. After further discussions with U-Haul, the Company
is allowed to promote its credit card processing service to the 11,000 dealers
who are currently using the Company's terminals for its daily inventory
tracking and credit card authorization activities. The Company is now in the
process of enhancing the software in the terminals to include credit card
processing for the dealer's non-U-Haul activities. This will reduce the amount
of equipment the dealer must have on his counter and simplify the dealer's
day-to-day operations. However, there's no assurance that these independent
dealers will sign-up with the Company's credit card processing program.
Revenue related to terminal sales is recognized when the equipment is shipped.
Terminal sales and lease revenue for the three months ended June 30, 1999 were
$346,000, which represented a 63% decrease over the same fiscal quarter last
year. This decrease was mainly attributable to the delivery of 1,600 U-Haul
system over the same quarter last year. At the present, the total number of
active U-Haul systems in the field is approximately 11,500.
Other revenue, which consist mainly of research and development revenue,
increased from $31,000 to $119,000 compared with the same period last year, a
284% increase. This increase was the result of software development work
performed for U-Haul and the United States Postal Service.
The Company provided software and hardware to the United States Postal Service
(USPS) for the development and deployment of automated money order dispensing
systems under a pilot program awarded to Computer Based Controls Inc. (CBC), a
wholly owned subsidiary of the Company. The USPS extended the pilot program
in January 1998 to add features into the overall systems. CBC designed and
implemented the requested features and a successful First Article Test of the
new features was completed by the USPS in late June of 1998.
In May 1999, the USPS advised the Company that it is in the process of
evaluating the numerous USPS projects to 1) meet their strategic goals; 2)
reduce duplication of effort; 3) confirm all projects are Y2K compliant; and
4) provide potential cost savings. Until this evaluation is complete, all
further development is on hold. The Company has invoiced the USPS for all
development work completed to date in accordance with the USPS request. It
was emphasized to the Company that the delay of active development under the
pilot program should not imply that a decision has been made on the merits of
the pilot program but that other issues are requiring the full resources of
the USPS at this time. No commitment or indication was given regarding when
the USPS would complete its evaluations and dedicate resources to the pilot
program but it was evident, in management's opinion, the USPS is still
interested in the Company's system that was designed to serve the small volume
USPS offices.
Cost and Expenses. Bankcard processing expenses have generally remained
constant as a percentage of processing revenue. Most of the Company's
bankcard processing expenses are fixed as a percentage of each transaction
amount, with the remaining costs being based on a fixed rate applied to the
transactions processed. Processing-related expenses, consisting of bankcard
processing expense, transaction expense and customer service expense,
decreased 6% in the third fiscal quarter over the same fiscal period last
year. This decrease was the result of two factors: 1) lower communication
costs as a percentage of processing revenue due to lower pricing from
telecommunication carriers; and 2) lower chargeback losses recorded in the
current quarter as compared to the prior year. This decrease was partially
offset by the increase in interchange rates from the credit card associations.
Cost of terminals sold and leased decreased 71% in the third quarter of fiscal
year 1999 as compared to the same fiscal quarter last year. This relates
directly to the 63% decrease in terminal sales and lease revenue during the
third quarter.
Since the beginning of this fiscal year, the Company has invested a
substantial amount of research and development capital in the development of
certain casino cash advance technology. The Company is also investing
substantially in all new check products since the acquisition of Magic. The
Company is currently finalizing an agreement regarding the casino cash advance
venture.
Selling, and general and administrative expenses increased 67% in the third
fiscal quarter as compared to the same fiscal quarter last year. This was the
result of the following: 1) the increase in operating costs due to the Magic
acquisition ; 2) investment in several sales programs which started this
fiscal year; and 3) investment in administrative resources related to all the
check services and the casino cash advance program currently underway.
Six Months Ended June 30, 1999 and 1998
Revenue. Electronic Clearing House, Inc. recorded a net income of $911,000
for the nine months ended June 30, 1999 as compared to a net income of
$696,000 for the same period last fiscal year, an increase of 31%. This is
primarily the result of a 16% increase in total revenue over the same period
last year. Bankcard processing and transaction revenue increased from
$13,483,000 to $15,680,000, a 16% increase. As a percentage of total revenue,
processing and transaction revenue accounted for 87% of the total revenue for
the nine month period ended June 30, 1999 and June 30, 1998. Terminal sales
and lease revenue accounted for 11% of the total revenue for the nine months
ended June 30, 1999 as compared to 12% for the same period last year.
Other revenue increased from $104,000 for the nine months ended June 30, 1998
to $363,000 for the nine months ended June 30, 1999, an increase of 249%.
This increase is attributable to software development work for a casino cash
advance provider and the USPS.
Cost and Expenses. Processing and transaction expenses increased 8% for the
nine months ended June 30, 1999 as compared to the same nine month period last
year. This is directly related to the 16% increase in processing and
transaction revenue for the same nine months period. Additionally, gross
margin on processing and transaction activities has improved from 24% for the
nine month period ended June 30, 1998 to 30% for the nine months period ended
June 30, 1999.
Cost of terminals sold and leased decreased 17% for the nine month period
ended June 30, 1999 as compared to the same nine month period last year even
though terminal sales and lease revenue remained constant. Gross margin from
terminal sales improved from 34% for the nine month period ended June 30, 1998
to 45% for the nine month period ended June 30, 1999.
Other operating costs increased 57% for the nine-month period ended June 30,
1999 over the same period last year. This was the result of the research and
development expenses on the cash advance project and the development costs of
the check products and services.
Selling, general and administrative expenses increased 52% for the nine months
ended June 30, 1999 over the same nine months period last year. As a
percentage of total revenue, selling, general and administrative expenses
increased from 17% for the nine months ended June 30, 1998 to 23% for the nine
months ended June 30, 1999. This was primarily attributable to the expansion
of the Company's sales and marketing program and the inclusion of Magic's
operations this fiscal year. Additionally, the increase was also attributable
to the higher employee-related costs to support the growth of the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had available cash of $3,117,000, restricted
cash of $685,000 in reserve with its primary processing banks and a working
capital of $4,885,000.
Accounts receivable net of allowance for doubtful accounts decreased $177,000
during the nine month period ended June 30, 1999.
At the present, the Company's cash flows from operations is sufficient to
support the current level of research and developments costs and marketing
costs which would allow the Company to further develop its suite of check
products, Internet products, and services which is essential to the Company's
future growth.
The Company's current ratio improved significantly from 3.6 to 1 at June 30,
1998 to 5.7 to 1 at June 30, 1999. The Company's debt to equity ratio also
improved from .34 to 1 at June 30, 1998 to .18 to 1 at June 30, 1999.
OTHER - YEAR 2000 ISSUE
Many existing computer systems and related software applications, and other
control devices, use only two digits to identify a year in a date field,
without considering the impact of the upcoming change in the century. Such
systems, applications and/or devices could fail or create erroneous results
unless corrected so that they can process data related to the Year 2000. The
Company relies on such computer systems, applications and devices in operating
and monitoring all major aspects of its business, including, but not limited
to, its financial systems, customer services, internal networks and
telecommunication equipment, and end products. The Company also relies,
directly and indirectly, on the external systems or various independent
business enterprises, such as its customers, sponsoring banks, suppliers,
creditors, financial organizations, and of governments for the accurate
exchange of data and related information.
All programs, including merchants systems, have been modified and successfully
tested. Additionally, interface requirements and testing have been
successfully completed with Visa, MasterCard, Discover and American Express.
Key management has been reassigned to implement the plan and, other than the
cost of such management and the resultant loss of their contribution to other
revenue generating activities of the Company, substantial new costs are not
anticipated to be incurred. Therefore, management's current estimate is that
the costs associated with the Year 2000 issue was approximately $250,000 and
are not believed to have a material adverse affect on the results of
operations or financial position of the Company. However, despite
management's plan to address the Year 2000 impact on the Company's internal
systems, no assurance can be given that management has fully identified such
impact or that management can resolve it without disruption of the business
and without incurring significant expenses. In addition, even if the internal
systems of the Company are not materially affected by the Year 2000 issue, the
Company could be affected adversely as a result of any disruption in the
operation of the various third-party enterprises with which the Company
interacts.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended June 30,
1999:
Date of Filing Item Reported
May 11, 1999 Acquisition of Magic Software Development, Inc. into a wholly
owned subsidiary of the Company.
May 12, 1999 Resignation of Larry Thomas as President of the Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELECTRONIC CLEARING HOUSE, INC.
(Registrant)
Date: August 11, 1999 By: \s\ Alice Cheung
Alice Cheung, Treasurer and
Chief Financial Officer
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