<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission File Number: 0-13959
LML PAYMENT SYSTEMS INC.
(Exact name of registrant as specified in its charter)
Yukon Territory, Canada ###-##-####
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1680-1140 West Pender Street
Vancouver, British Columbia
Canada V6E 4G1
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (604) 689-4440
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 [ ]
The number of shares of the registrant's Common Stock outstanding as of
October 31, 2000 was 15,024,741.
================================================================================
<PAGE>
LML PAYMENT SYSTEMS INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION........................................................... 1
Item 1. Financial Statements............................................................ 1
Consolidated Balance Sheets at March 31, 2000 and September 30, 2000
(unaudited)..................................................................... 1
Consolidated Statements of Operations and Deficit (unaudited) for the Three
and Six Months Ended September 30, 1999 and 2000................................ 2
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended
September 30, 1999 and 2000..................................................... 3
Notes to Consolidated Financial Statements...................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 19
PART II. OTHER INFORMATION............................................................... 20
Item 1. Legal Proceedings............................................................... 20
Item 2. Changes in Securities and Use of Proceeds....................................... 20
Item 4. Submission of Matters to a Vote of Security Holders............................. 20
Item 6. Exhibits and Reports on Form 8-K................................................ 21
SIGNATURE PAGE.................................................................. 23
</TABLE>
In this Quarterly Report on Form 10-Q, unless otherwise indicated, all dollar
amounts are expressed in United States dollars.
<PAGE>
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
LML PAYMENT SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars)
<TABLE>
<CAPTION>
September 30 March 31
2000 2000
$ $
(Unaudited)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short term deposits 11,214,057 11,528,850
Accounts receivable 431,586 369,464
Prepaid expenses 512,264 459,999
--------------- ---------------
12,157,907 12,358,313
--------------- ---------------
REAL PROPERTY 1,523,816 1,378,467
CAPITAL ASSETS (Note 3) 7,590,824 2,157,326
PATENTS (Note 4) 1,766,718 602,491
OTHER ASSETS
Restricted cash (Note 2) 208,561 -
Goodwill, net (Note 5) 7,671,733 7,009,387
Non-Compete, net (Note 5) 137,509 -
Note receivable 233,176 224,376
Other assets - 7,221
--------------- ---------------
8,250,979 7,240,984
---------------------------------------------------------------------------------------------------------------
31,290,244 23,737,581
===============================================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 2,069,039 1,370,411
Settlement holdback (Note 10(b)) 350,000 -
Current portion of long term debt (Note 6) 336,745 1,151,751
--------------- ---------------
2,755,784 2,522,162
LONG TERM DEBT (Note 6) 381,206 69,613
--------------- ---------------
3,136,990 2,591,775
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 7) 29,710,237 44,047,550
DEFICIT (1,556,983) (22,901,744)
--------------- ---------------
28,153,254 21,145,806
---------------------------------------------------------------------------------------------------------------
31,290,244 23,737,581
===============================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
-1-
<PAGE>
LML PAYMENT SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(In U.S. Dollars, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
2000 1999 2000 1999
$ $ $ $
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE 2,462,683 58,264 4,608,228 148,417
OPERATING EXPENSES 1,898,286 140,441 3,640,635 294,493
------------- -------------- -------------- -------------
OPERATING INCOME (LOSS) 564,397 (82,177) 967,593 (146,076)
------------- -------------- -------------- -------------
SALES, GENERAL & ADMINISTRATIVE EXPENSES 916,629 175,132 1,589,937 370,203
OTHER ITEMS
Other expenses 21,100 (63,309) 6,122 (54,834)
Office relocation 90,504 - 90,504 -
Interest Income (187,323) - (390,253) -
LOSS BEFORE INTEREST, TAX, DEPRECIATION ------------- -------------- -------------- -------------
AND AMORTIZATION (276,513) (194,000) (328,717) (461,445)
------------- -------------- -------------- -------------
Amortization 718,348 127,648 1,145,094 251,335
Interest expense 1,124 54,201 83,172 96,218
------------- -------------- -------------- -------------
719,472 181,849 1,228,266 347,553
------------- -------------- -------------- -------------
NET LOSS (995,985) (375,849) (1,556,983) (808,998)
============= ============== ============== =============
DEFICIT, beginning of period (22,901,744) (20,554,245) (22,901,744) (20,554,245)
DEFICIT ADJUSTMENT (See Note 7(a)) 22,901,744 - 22,901,744 -
------------- -------------- -------------- -------------
AS ADJUSTED - (20,554,245) - (20,554,245)
------------- -------------- -------------- -------------
DEFICIT, end of period (995,985) (20,930,094) (1,556,983) (21,363,243)
============= ============== ============== =============
LOSS PER SHARE
Basic (0.06) (0.03) (0.10) (0.07)
============= ============== ============== =============
Diluted (0.06) (0.03) (0.10) (0.07)
============= ============== ============== =============
AVERAGE SHARES OUTSTANDING
Basic 15,105,306 11,119,066 15,105,306 11,119,066
Diluted n/a n/a n/a n/a
</TABLE>
See accompanying notes to the consolidated financial statements.
-2-
<PAGE>
LML PAYMENT SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended September 30
2000 1999
$ $
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Net loss (1,556,983) (808,998)
Add items not affecting cash
Amortization 1,145,094 251,335
Interest on long term debt - 54,427
Net changes in current assets and current liabilities
Accounts receivable (62,122) (77,819)
Prepaid expenses 35,062 (9,631)
Accounts payable and accrued liabilities 698,628 271,719
Settlement holdback 350,000 -
------------ -----------
Net Cash provided by (used for) Operating Activities 609,679 (318,967)
------------ -----------
INVESTING ACTIVITIES
Real property (187,326) (5,505)
Acquisition of capital assets (1,529,109) (129,154)
Patents (1,449,291) (17,466)
Restricted cash (208,561) -
Goodwill (386,246) -
Non-Compete (150,010) -
Note receivable (8,800) -
Intangible assets 7,221 -
Deferred costs - (162,738)
------------ -----------
Net cash used for Investing Activities (3,912,122) (314,863)
------------ -----------
FINANCING ACTIVITIES
Re-payment of long term debt (1,121,280) -
Proceeds from long term borrowing - 260,000
Re-payment of capital lease liability (14,820) (12,141)
Proceeds from exercise of stock options 4,123,750 444,000
------------ -----------
Net cash provided by Financing Activities 2,987,650 691,859
------------ -----------
INCREASE (DECREASE) IN CASH (314,793) 58,029
Cash and Cash Equivalents, beginning of period 11,528,850 41,928
------------ -----------
Cash and Cash Equivalents, end of period 11,214,057 99,957
============ ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
-3-
<PAGE>
LML PAYMENT SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated balance sheet as of September 30, 2000, the consolidated
statements of operations for the three months and the six months ended September
30, 1999 and 2000, and the consolidated statements of cash flows for the six
months ended September 30, 1999 and 2000 of LML Payment Systems Inc. and its
subsidiaries (collectively, the "Company") are unaudited. The Company's
consolidated balance sheet as of March 31, 2000 was derived from audited
financial statements. In the opinion of management, all adjustments necessary
for a fair presentation of such financial statements are included. Other than
those discussed in the notes below, such adjustments consist only of normal
recurring items. Interim results are not necessarily indicative of results for a
full year. The Company's consolidated financial statements and notes are
presented in accordance with generally accepted accounting principles in Canada
for interim financial information and in accordance with the instructions for
Form 10-Q and Article 10 of Regulation S-X, and do not contain certain
information included in the Company's consolidated audited annual financial
statements and notes. The Company's consolidated financial statements and notes
appearing in this report should be read in conjunction with the Company's
consolidated audited financial statements and related notes thereto, together
with management's discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report on Form 20-F for the fiscal
year ended March 31, 2000, as filed with the Securities and Exchange Commission
on September 29, 2000 (file no. 0-13959).
2. Restricted Cash
September 30, 2000
$
-------------------
Phoenix, EPS (a) 183,561
LHTW Properties Inc. (b) 25,000
-------------------
208,561
===================
a) During the six months ended September 30, 2000, the Company entered
into certain capital lease agreements for hardware, software and
maintenance services with IBM Credit Corporation. (See Notes 6(b) and
9(e) to the consolidated financial statements). The Company posted a
security deposit for the purpose of obtaining a more favorable rate of
interest under the capital lease agreements. The Company has provided
for the security deposit through an irrevocable letter of credit in
the amount of $183,561.00 which renews annually until the lease
obligations are satisfied in full. The Company placed funds equal to
$183,561.00 in an annual term deposit earning an interest rate of
6.475% per annum.
b) During the six months ended September 30, 2000, the Company obtained a
mobile home dealer's security bond in order to proceed with the sale
of real estate lots and mobile homes at its Wildwood Estates property.
In order to obtain this bond, the Company secured a one-year
irrevocable letter of credit in the amount of $25,000. The Company
placed funds equal to $25,000 in a term deposit earning an interest
rate of 6.105% per annum.
3. Capital Assets
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
$ $
------------------------------------------------------------ ----------------
Accumulated
Cost Amortization Net Net
------------------------------------------------------------ ----------------
<S> <C> <C> <C> <C>
Computer Equipment (a) 1,249,095 675,134 573,961 221,110
Computer Software (a) 1,123,404 551,595 571,809 437,267
Furniture and Fixtures 426,506 319,095 107,411 124,963
Leasehold Improvements 239,377 181,019 58,358 61,800
Office Equipment 1,251,751 850,585 401,166 388,796
Vehicles 102,898 46,625 56,273 69,135
Website & Trademarks 31,700 6,071 25,629 1,523
System & Software (b) 6,681,988 885,771 5,796,217 852,732
-------------- ------------- ---------------- ----------------
11,106,719 3,515,895 7,590,824 2,157,326
============== ============= ================ ================
</TABLE>
-4-
<PAGE>
LML PAYMENT SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
a) During the six months ended September 30, 2000, the Company entered
into a capital lease agreement with IBM Credit Corporation for
computer software and hardware in the amount of $167,526 and $383,225,
respectively. The computer software is to be amortized over one (1)
year and the hardware is to be amortized over a useful life of four
(4) years. No amortization has been recorded on these assets as they
were not yet in use.
b) During the six months ended September 30, 2000, the Company acquired,
as a result of its acquisition of Phoenix EPS, Inc. ("Phoenix"),
certain assets relating to transaction processing and routing system
software in the amount of $4,243,844. Also during this period, the
Company settled the legal action commenced against Mr. Robert R. Hills
and Mark Technologies Corporation ("MARK" (f/k/a ChequeMARK
Technologies Corporation)). (See Notes 7(e) and 10(b) to the
consolidated financial statements). As a result, the cash payment,
legal costs incurred and the value of the returned shares of the
Company's common stock originally issued to Mr. Hills and MARK for
$1.00 per share have been included in System & Software for a net
addition of $1,047,840.
Capital assets include $683,822 of assets which are financed under various
capital leases. Accumulated amortization on these assets totals $57,775.
(See Note 6(b) to the consolidated financial statements).
4. Patents
September 30, 2000 March 31, 2000
$ $
------------------- ---------------
Cost 1,891,224 689,627
Accumulated amortization 124,506 87,136
------------------- ---------------
1,766,718 602,491
=================== ===============
During the six months ended September 30, 2000, the Company capitalized
$17,141 in costs associated with a patent for the authorization of check
transactions over the internet. Also during the period, the Company settled
the legal action commenced against Mr. Hills and MARK. (See Notes 7(e) and
10(b) to the consolidated financial statements). As a result, the cash
payment, legal costs incurred and the value of the returned shares of the
Company's common stock originally issued to Mr. Hills and MARK for $1.00
per share have been included in Patents for a net addition of $1,184,456,
and such amount will be amortized over the remainder of the life of the
patent, 12 years and 8 months.
5. GOODWILL
<TABLE>
<CAPTION>
September 30, March 31,
Goodwill has been recorded as follows: 2000 2000
$ $
------------------------------------------------------- -------------
Total Accumulated
Goodwill Amortization Net Net
------------------------------------------------------- -------------
<S> <C> <C> <C> <C>
CFDC Holdings Corp. 4,334,368 361,197 3,973,171 4,189,889
National Recovery Systems, Ltd. of
America 2,891,793 216,884 2,674,909 2,819,498
Phoenix, EPS (a) 539,805 13,495 526,310 -
Check Technologies (b) 510,096 12,753 497,343 -
------------- -------------- ---------------- -------------
8,276,062 604,329 7,671,733 7,009,387
============= ============== ================ =============
</TABLE>
a) On July 9, 2000, the Company purchased all of the issued and
outstanding shares of Phoenix, located in Scottsdale, Arizona. Phoenix
engineers and markets electronic payment system software solutions to
the retail industry. The terms of the purchase agreement called for
the Company to issue to certain shareholders of Phoenix ("Phoenix
Shareholders") $4,500,000 of the Company's common stock. The Company
also agreed to pay a 3.5% finder's fee payable through the issuance of
an additional 7,730 shares of the Company's common stock (See Note
7(d) to the consolidated financial statements). The purchase price was
paid as follows:
-5-
<PAGE>
LML PAYMENT SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2000
Consideration $
---------------------
Vendors 220,857 shares @ $20.375/share 4,500,000
=====================
For the Phoenix acquisition, the Company used the purchase method of
accounting which resulted in the Company recording goodwill in the
amount of $539,805 and a transaction processing and routing system
software in the amount of $4,243,844. The following represents a
summary of the acquisition costs for Phoenix:
<TABLE>
<CAPTION>
September 30, 2000
$
-------------------
<S> <C> <C>
Purchase price 4,500,000
Net identifiable assets 4,243,900
Less liabilities assumed - (4,243,900)
-------------- -------------------
Excess of purchase price over net tangible assets 256,100
Finder's fee 7,730 shares @ $20.375/share 157,500
Acquisition costs 126,205
-------------------
539,805
===================
</TABLE>
b) On July 22, 2000, the Company purchased all of the issued and
outstanding shares of Check Technologies, Inc. ("Check Technologies")
located in Dallas, Texas. Check Technologies is a check verification
and recovery business. The terms of the agreement called for the
Company to issue to certain shareholders of Check Technologies ("Check
Technologies Shareholders") $250,000 of the Company's common stock and
$250,000 in cash. The Company also agreed to pay to a certain Check
Technologies Shareholder and employee $150,010 pursuant to a non-
compete agreement with additional consideration of $50,000 due in the
first year upon satisfaction of certain conditions and an additional,
unconditional $50,000 for each of the second and third years. The non-
compete agreement has a maximum term of three (3) years. The Company
also agreed to pay a 3.5% finder's fee in cash. The purchase price was
paid as follows:
September 30, 2000
Consideration $
------------------
Vendors 22,987 shares @ $10.875/share 250,000
Cash 250,000
Non-Compete 150,010
==================
650,010
==================
For the Check Technologies acquisition, the Company used the purchase
method of accounting, which resulted in the Company recording goodwill
in the amount of $510,096 and a valuation for the non-compete
agreement of $ 150,010. The following represents a summary of the
acquisition costs for Check Technologies:
<TABLE>
<CAPTION>
September 30, 2000
$
------------------
<S> <C> <C>
Purchase price 500,000
Net identifiable assets 140,168
Less Liabilities assumed 82,906 (57,262)
------------ ------------------
Excess of purchase price over net tangible assets 442,738
Finder's fee 24,270
Acquisition costs 43,088
------------------
510,096
==================
</TABLE>
-6-
<PAGE>
LML PAYMENT SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The purchase price for each of CFDC Holdings Corp., Phoenix and Check
Technologies was paid either entirely or partially with shares of the
Company's common stock. As part of each transaction, the Company agreed to
certain price protection covenants for the benefit of the former
stockholders of the acquired companies. In the event the value of the
shares of the Company's common stock exchanged for the shares of the
acquired company's stock decreases below the deemed issue price per share
of the Company's common stock, and the former shareholders of the acquired
company sell such shares of the Company's common stock at a lower price
after the expiration of any applicable hold period and within a specified
period of time thereafter, such shareholders would have a right to receive
additional shares of the Company's common stock.
Results of operations for the acquired companies from their respective
dates of acquisition are included in the Consolidated Statements of
Operations and Deficit.
6. Long term debt
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
$ $
------------------- ---------------
<S> <C> <C>
Destiny Petroleum Inc. (a) - 1,121,280
Obligations under capital lease agreement (b) 717,951 100,084
------------------- ---------------
717,951 1,221,364
Less current portion 336,745 1,151,751
------------------- ---------------
381,206 69,613
=================== ===============
</TABLE>
a) On June 8, 2000, the Company paid $1,201,117 to Destiny Petroleum
Inc., a company controlled by an affiliate ("Destiny") in full
satisfaction of a promissory note and mortgage on the Wildwood Estates
property.
b) During the six months ended September 30, 2000, the Company entered
into a thirty-six (36) month and twelve (12) month capital lease
agreement with IBM Credit Corporation for various hardware, software
and maintenance services. At the end of the thirty-six (36) month
lease agreement, the hardware, totaling $377,835 (inclusive of taxes),
can be purchased for fair market value. This lease agreement expires
in September 2003 and has an effective annual interest rate of 11.7%.
The software, totaling $167,526, has a term of twelve (12) months and
will be amortized over such twelve (12) month period. (See Note 3(a)
to the consolidated financial statements). This lease agreement
expires in September 2001 and has an effective annual interest rate of
4.6%. The maintenance services, totaling $87,326, are provided over a
term of thirty-six (36) months and will be expensed over the term of
the agreement. This agreement expires in September 2003 with an
effective annual interest rate of 12%.
The Company has various capital leases for computers, software,
equipment and vehicles expiring between July 2001 and September 2003.
(See Note 10(f) to the consolidated financial statements).
7. Share Capital
a) At the Company's Annual General Meeting held September 18, 2000, the
Company's shareholders approved a reduction in the stated capital of
the shares of the Company's common stock by $22,901,744 and to effect
such reduction by reducing the amount of the Company's deficit by the
same amount.
b) At the Company's Annual General Meeting held September 18, 2000, the
Company's shareholders approved an increase of the number of shares of
the Company's common stock that may be granted under the Company's
1996 Stock Option Plan ("1996 Plan") and 1998 Stock Incentive Plan
("1998 Plan"). The number of shares of the Company's common stock that
may be granted under the 1996 Plan increased from 2.5 million shares
to 3 million shares and under the 1998 Plan increased from 1 million
shares to 3 million shares
c) During the six months ended September 30, 2000, the Company granted
options to purchase 380,000 shares of the Company's common stock. The
Company granted options to purchase 250,000 shares of the Company's
common stock at $16.00 per share pursuant to the 1996 Plan and all of
these options were exercised during the period. The Company granted
options to purchase 130,000 shares of the Company's common stock at
$20.375 per share pursuant to the 1998 Plan. These options vest in
increments every six (6) months over a three (3) year period and
expire in July 2005.
-7-
<PAGE>
LML PAYMENT SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
d) During the six months ended September 30, 2000, a total of 220,857
shares of the Company's common stock were issued at a price of $20.375
per share for the purchase of Phoenix and 7,730 shares were issued at
a price of $20.375 per share for a finder's fee related to the
acquisition of Phoenix. (See Note 5(a) to the consolidated financial
statements). During the six months ended September 30, 2000, a total
of 22,987 shares of the Company's common stock were issued at a price
of $10.875 per share for the purchase of Check Technologies. (See Note
5(b) to the consolidated financial statements).
e) Effective August 22, 2000, the Company, Mr. Hills and MARK reached a
settlement with respect to the Company's legal action commenced
against Mr. Hills and MARK. Pursuant to the terms of the settlement,
466,820 of the 541,820 shares of the Company's common stock that were
originally issued to Mr. Hills and MARK and held in escrow were
returned to the Company for cancellation at the original issue price
of $1.00 per share. (See Notes 3(b), 4 and 10(b) to the consolidated
financial statements).
8. Supplemental Non-Cash Activities
During the six months ended September 30, 2000, the Company acquired hardware,
software and maintenance services totaling $632,687, which were financed under
certain capital lease agreements with IBM Credit Corporation. (See Note 6(b) to
the consolidated financial statements). Also, during the six months ended
September 30, 2000, the Company purchased Phoenix through the issuance of
220,857 shares of the Company's common stock, purchased Check Technologies
through the issuance of 22,987 shares of the Company's common stock and paid a
finder's fee through the issuance of 7,730 shares of the Company's common stock
related to the Phoenix acquisition. (See Note 7(d) to the consolidated financial
statements). In addition, during the six months ended September 30, 2000,
466,820 shares of the Company's common stock were returned to the Company for
cancellation pursuant to the settlement with Mr. Hills and MARK. (See Notes 7(e)
and 10(b) to the consolidated financial statements).
9. Industry and Geographic Segments
<TABLE>
<CAPTION>
Administrative Operations
Canada
Three months ended September 30 Six months ended September 30
--------------------------------- ----------------------------------
2000 1999 2000 1999
$ $ $ $
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue outside the Company - - - -
============== =============== =============== ==============
Segment operating loss (260,766) (43,510) (265,668) (190,438)
============== =============== =============== ==============
Identifiable assets 10,523,174 342,787 10,523,174 342,787
============== =============== =============== ==============
Capital expenditure 11,442 22,095 46,250 22,095
============== =============== =============== ==============
Amortization 10,265 5,333 18,235 10,732
============== =============== =============== ==============
<CAPTION>
Residential Real Estate Operations
U.S.
Three months ended September 30 Six months ended September 30
--------------------------------- ----------------------------------
2000 1999 2000 1999
$ $ $ $
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue outside the Company 44,494 42,498 90,578 83,934
============== =============== =============== ==============
Segment operating loss (16,572) (31,942) (138,411) (61,005)
============== =============== =============== ==============
Identifiable assets 1,527,987 1,417,987 1,527,987 1,417,987
============== =============== =============== ==============
Capital expenditure 17,273 406 187,326 5,505
============== =============== =============== ==============
Amortization 7,272 - 41,978 -
============== =============== =============== ==============
</TABLE>
-8-
<PAGE>
LML PAYMENT SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
Financial Payment Processing Operations
U.S.
Three months ended September 30 Six months ended September 30
--------------------------------- ----------------------------------
2000 1999 2000 1999
$ $ $ $
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue outside the Company 2,418,189 15,766 4,517,650 64,483
============== =============== =============== ==============
Revenue major customers 1,189,691 - 2,471,205 -
============== =============== =============== ==============
Segment operating loss (720,146) (300,397) (1,152,904) (557,555)
============== =============== =============== ==============
Identifiable assets 19,239,083 2,055,248 19,239,083 2,055,248
============== =============== =============== ==============
Goodwill, net 7,671,733 - 7,671,733 -
============== =============== =============== ==============
Non-compete, net 137,509 - 137,509 -
============== =============== =============== ==============
Capital expenditure 7,170,458 85,275 7,254,937 169,134
============== =============== =============== ==============
Amortization 702,310 122,315 1,084,881 240,603
============== =============== =============== ==============
<CAPTION>
TOTAL
Three months ended September 30 Six months ended September 30
--------------------------------- ----------------------------------
2000 1999 2000 1999
$ $ $ $
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue outside the Company 2,462,683 58,264 4,608,228 148,417
============== =============== =============== ==============
Revenue major customers 1,189,691 - 2,471,205 -
============== =============== =============== ==============
Segment operating loss (997,485) (375,849) (1,556,983) (808,998)
============== =============== =============== ==============
Identifiable assets 31,290,244 3,816,022 31,290,244 3,816,022
============== =============== =============== ==============
Goodwill, net 7,671,733 - 7,671,733 -
============== =============== =============== ==============
Non-compete, net 137,509 - 137,509 -
============== =============== =============== ==============
Capital expenditure 7,199,173 107,776 7,488,513 196,734
============== =============== =============== ==============
Amortization 719,847 127,648 1,145,094 251,335
============== =============== =============== ==============
</TABLE>
The Company employed a large amount of financial and managerial resources
relating to its Financial Payment Processing Operations. The Financial Payment
Processing Operations involve point-of-sale check authorization and check
recovery services. In previous years, the Company operated primarily in two
industries, the Administrative Operations and Residential Real Estate
Operations. Administrative Operations involved the point-of-sale merchant
discount business in Canada and currently includes the corporate administration
of the Company's headquarters. Residential Real Estate Operations involve the
development and sale of adult oriented residential real estate lots and homes in
the United States. There were no inter-segment sales.
10. Commitments and Contingencies
a) At the six months ended September 30, 2000, unpaid dividends on LHTW
Properties Inc. Class A Preference shares totaled $372,585. Preference
share dividends are payable to Destiny, the preferred stock
shareholder, at the option of the board of directors of LHTW
Properties Inc.
b) Effective August 22, 2000, the Company, Mr. Hills and MARK reached a
settlement with respect to the Company's legal action commenced March
10, 1999 and other claims against Mr. Hills and MARK. Pursuant to the
terms of the settlement, 466,820 of the 541,820 shares of the
Company's common stock that were being held in escrow were returned to
the Company for cancellation. In addition, the Company was relieved of
its obligation to issue to Mr. Hills and MARK 1,828,560 earn-out
shares pursuant to certain agreements (which amount includes earn-out
shares issuable to Mr. Hills and Mr. Hills' portion of any earn-out-
shares issuable to MARK). The settlement does not affect the rights to
earn-out shares of shareholders of MARK, other than Mr. Hills. The
Company agreed to pay $2,500,000 cash and to allow 75,000 shares of
the Company's common stock to be released from escrow to Mr. Hills.
The Company is withholding $350,000 of the $2,500,000 cash settlement
proceeds for the purpose of defending or pursuing other legal claims
regarding ownership, license or infringement of certain intellectual
property of the Company, including U.S. Patent 5,484,988 (the
"Patent"), against persons other than Mr. Hills who
-9-
<PAGE>
LML PAYMENT SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
may claim rights directly or indirectly from Mr. Hills, including the
claims asserted by Global Transaction Systems, LLC. (See Note 10(c) to
the consolidated financial statements). If there is no such ongoing
litigation as of August 21, 2005, the portion of the $350,000 not used
by the Company for litigation expenses will be delivered to Mr. Hills.
The settlement also called for entry of an agreed permanent
injunction, which has been entered, in which Mr. Hills will not (a)
for a period of three (3) years from the date of the injunction, carry
on or engage in any business that is competitive with the products or
services of the Company, or which relate to the electronic payment and
collections industry, (b) engage in any acts constituting partial or
complete infringement of the Patent or the ChequeMARK system software,
(c) represent that anyone other than the Company is the holder of the
Patent, or (d) represent or imply that he holds any ownership interest
in the ChequeMARK system software or its underlying patents.
Subsequently, Mr. Hills has stated in a press release "that LML
through its subsidiaries are the owners of U.S. Patent No. 5,484,988
and any continuations thereto..." On September 22, 2000, the United
States District Court Middle District of Florida, Jacksonville
Division entered an order stating that Mr. Hills has had no ownership
interest or any other interest in the Patent or U.S. Patent
Application Nos. 08/775,400 or 09/562,303 since March 11, 1998.
c) On July 20, 2000, Global Transaction Systems, LLC, a Nevada limited
liability company ("Global"), filed a complaint against the Company in
the United States District Court, Southern District of Florida, for
patent and copyright infringement of the Patent. Global served an
amended complaint on the Company on September 7, 2000, seeking a
declaratory judgment. The amended complaint alleges that Global is the
rightful owner of the Patent as the result of an alleged assignment to
Global of the Patent by Mr. Hills. The Company purchased the Patent
from Messrs. Nichols and Hills on March 11, 1998. The Company filed a
motion with the court to dismiss the Global action on the grounds that
the defendant named in the suit was incorrect. This motion was
subsequently denied on October 31, 2000. The Company's management is
of the opinion that the complaint filed by Global has no basis and is
without merit and intends to defend it vigorously.
d) The Company continues to defend the claim in the United States
District Court for the Southern District of Florida, Ocala Division
regarding the release of approximately 254,000 shares of the Company's
common stock being held under the terms of the voluntary pooling
agreement established in connection with the acquisition of Wildwood
Estates. The plaintiffs are alleging that the Company is improperly
preventing the release of those shares. The outcome of this action is
unknown at this time.
e) The purchase price for each of CFDC Holdings Corp., Phoenix and Check
Technologies was paid either entirely or partially with shares of the
Company's common stock. As part of each transaction, the Company
agreed to certain price protection covenants for the benefit of the
former stockholders of the acquired companies. In the event the value
of the shares of the Company's common stock exchanged for the shares
of the acquired company's stock decreases below the deemed issue price
per share of the Company's common stock, and the former shareholders
of the acquired company sell such shares of the Company's common stock
at a lower price after the expiration of any applicable hold period
and within a specified period of time thereafter, such shareholders
would have a right to receive additional shares of the Company's
common stock.
f) Lease obligations
i) Capital Leases. The Company has entered into certain lease
commitments where title to the assets will, at the option of the
Company, transfer to the Company at the expiration of the lease.
These commitments have been recorded as capital leases. During
the six months ended September 30, 2000, the Company entered into
a thirty-six (36) month and twelve (12) month capital lease
agreement with IBM Credit Corporation for various hardware,
software and maintenance services. (See Note 6(b) to the
consolidated financial statements).
Future Minimum Payments Due
$
September 30, 2001 391,062
September 30, 2002 238,086
September 30, 2003 183,274
-----------
812,422
Less: amount representing interest 94,471
-----------
Net principal balance 717,951
-10-
<PAGE>
LML PAYMENT SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Less: amount included in current liabilities 336,745
-----------
381,206
===========
These lease agreements are secured by the equipment under lease.
ii) Operating Leases:
Future Minimum Payments Due
$
------------
2001 320,160
2002 308,185
2003 253,129
------------
881,474
============
During the six months ended September 30, 2000, the Jacksonville, Florida
offices were relocated to Dallas, Texas where the Company maintains processing
facilities. The Jacksonville office lease obligation was settled for $50,000,
saving the Company $33,596. In addition, the Company entered into a five (5)
year office lease in Scottsdale, Arizona for approximately 5,000 square feet at
a cost of $6,293 per month which expires on September 30, 2005. A security
deposit of $25,000 was required under the lease and will be placed in an
interest-bearing account with a minimum of a 6.3% annual interest rate. The
security deposit will be returned, with interest, to the Company at the end of
the twenty-fourth month of the lease term, provided that there is no material
default of this lease.
11. Related Party Transactions
During the six months ended September 30, 2000, the Company had the
following transactions with related parties:
a) A subsidiary of the Company leases office facilities from a company
controlled by a director of the subsidiary. The lease term expires
March 2002. Total lease expenses paid to this related party for the
six months ended September 30, 2000 were $22,500.
b) The Company paid to Destiny $1,076,530 of principal and $124,587 of
interest and penalties for a total of $1,201,117, in full satisfaction
of a promissory note and mortgage on the Wildwood Estates property.
(See Note 6(a) to the consolidated financial statements).
12. Reconciliation of United States to Canadian Generally Accepted Accounting
Principles
These financial statements are prepared using Canadian generally accepted
accounting principles ("CDN GAAP") which do not differ materially from
United States generally accepted accounting principles ("U.S. GAAP") with
respect to the accounting policies and disclosures in these financial
statements except as set out below:
a) Under U.S. GAAP, merchant contract costs, which have been deferred in
the accounts, would be recorded as operating expenses.
b) Under U.S. GAAP, the Company follows Financial Accounting Standards
No. 123 "Accounting for Stock Based Compensation" for options issued
to consultants. The Company's policy is to record the compensation
when the options vest. During the six month period ended September 30,
2000, options to purchase 53,332 shares of the Company's common stock
issued to a consultant vested.
c) Under U.S. GAAP, business combination costs incurred for the
completion of an amalgamation accounted for as a pooling of interests
would be recorded as operating expenses
-11-
<PAGE>
LML PAYMENT SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
d) Under U.S. GAAP, preferred shares of a subsidiary that are held by a
third party are not included in equity and are presented as a minority
interest.
Adjustments under U.S. GAAP result in changes to the Consolidated Statement of
Operations of the Company as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30 September 30
----------------------------- -------------------------------
2000 1999 2000 1999
$ $ $ $
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net loss - CDN GAAP (995,985) (375,849) (1,556,983) (808,998)
U.S. GAAP adjustments:
Add: amortization merchant contract costs (a) - 31,775 - 62,814
Merchant contract costs expensed (a) - - - (8,893)
Consultants stock based compensation (b) (166,229) - (221,668) -
------------- ------------ ------------ -------------
Net loss - U.S. GAAP (1,162,214) (344,074) (1,778,651) (755,077)
============= ============ ============ =============
Loss per share - U.S. GAAP
Basic (0.08) (0.03) (0.12) (0.07)
============= ============ ============ =============
Diluted (0.08) (0.03) (0.12) (0.07)
============= ============ ============ =============
</TABLE>
Adjustments under U.S. GAAP result in changes to the Consolidated Balance Sheet
of the Company as follows:
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
--------------------------------------------- ----------------------------------------------------
CDN. U.S. CDN. U.S.
GAAP $ ADJ. GAAP $ GAAP $ ADJ. GAAP $
---------------------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current Assets 12,157,907 - 12,157,907 12,358,313 - 12,358,313
Real Property 1,523,816 - 1,523,816 1,378,467 - 1,378,467
Capital Assets 7,590,824 - 7,590,824 2,157,326 - 2,157,326
Patent 1,766,718 - 1,766,718 602,491 - 602,491
Other Assets 8,250,979 - 8,250,979 7,240,984 - 7,240,984
---------------------------------------------- ----------------------------------------------------
31,290,244 - 31,290,244 23,737,581 - 23,737,581
============================================== ====================================================
Current Liabilities 2,755,784 - 2,755,784 2,522,162 - 2,522,162
Long Term Debt 381,206 - 381,206 69,613 - 69,613
---------------------------------------------- ----------------------------------------------------
TOTAL LIABILITIES 3,136,990 - 3,136,990 2,591,775 - 2,591,775
---------------------------------------------- ----------------------------------------------------
LHTW CLASS A
PREFERENCE SHARES (d) - 883,283/1/ 883,283 - 883,283/1/ 883,283
---------------------------------------------- ----------------------------------------------------
SHARE CAPITAL (b),
(c), (d) 29,710,237 (553,091)/1/ 29,157,146 44,047,550 (774,759)/1/ 43,272,791
---------------------------------------------- ----------------------------------------------------
DEFICIT (a), (b) (1,556,983) (330,192) (1,887,175)/2/ (22,901,744) (108,524) (23,010,268)/2/
---------------------------------------------- ----------------------------------------------------
31,290,244 - 31,290,244 23,737,581 - 23,737,581
============================================== ====================================================
</TABLE>
-12-
<PAGE>
LML PAYMENT SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
/1/ Share capital: September 30, 2000 March 31, 2000
$ $
------------------------ ---------------------
<S> <C> <C>
Add: Consultants stock based compensation (b) 221,668 -
Add: Business combination costs expensed (c) 108,524 108,524
Less: LHTW CLASS A Preference shares (d) (883,283) (883,283)
------------------------- ---------------------
Share capital - U.S. GAAP Adjustment (553,091) (774,759)
======================== =====================
/2/ Deficit: September 30, 2000 March 31, 2000
$ $
------------------------ ---------------------
Deficit, beginning of year (23,010,268) (20,662,769)
Deficit adjustment (see Note 7(a)) 22,901,744 -
------------------------ ---------------------
Adjusted Deficit, beginning of period (108,524) (20,662,769)
Net Loss per CDN GAAP (1,556,983) (2,347,499)
Consultants stock based compensation (b) (221,668) -
------------------------ ---------------------
Net Loss per US GAAP (1,778,651) (2,347,499)
------------------------ ---------------------
Deficit - U.S. GAAP (1,887,175) (23,010,268)
======================== =====================
</TABLE>
-13-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Unless the context otherwise requires, references in this report on
Form 10-Q to the "Company", "LML", "we", "us" or "our" refer to LML Payment
Systems Inc. and its direct and indirect subsidiaries. LML Payment Systems
Inc.'s direct subsidiaries include ChequeMARK Holdings Inc. ("ChequeMARK"),
Legacy Promotions Inc. and LHTW Properties Inc. ("LHTW"). LHTW's direct
subsidiary is Quail Roost Sales Corp. ChequeMARK's direct subsidiaries include
ChequeMARK Patent Inc., ChequeMARK Inc., Phoenix EPS, Inc. and CFDC Holdings
Corp. ("CFDC"). CFDC's direct subsidiaries include National Recovery Systems of
America d/b/a Check Center ("Check Center") and CF Data Corp. ("CF Data"). Check
Center's direct subsidiary is National Process Servers. CF Data's direct
subsidiary is Check Technologies Inc. Unless otherwise specified herein, all
references herein to dollars or "$" are to U.S. Dollars.
The following discussion and analysis should be read in conjunction with
the consolidated audited financial statements and related notes thereto
contained in the Company's Annual Report on Form 20-F for the fiscal year ended
March 31, 2000, filed with the Securities and Exchange Commission on September
29, 2000 (file no. 0-13959). The Company believes that all necessary adjustments
(consisting only of normal recurring adjustments) have been included in the
amounts stated below to present fairly the following quarterly information.
Quarterly operating results have varied significantly in the past and can be
expected to vary in the future. Results of operations for any particular quarter
are not necessarily indicative of results of operations for a full year.
Forward Looking Information
All statements other than statements of historical fact contained herein
are forward-looking statements. Forward-looking statements generally are
accompanied by words such as "anticipate," "believe," "project," "potential" or
"expect" or similar statements. The forward-looking statements were prepared on
the basis of certain assumptions which relate, among other things, to the demand
for and cost of marketing the Company's services, the volume and total value of
transactions processed by merchants utilizing the Company's services, the
technological adaptation of check verification end-users, the issuance of
additional patents necessary to protect the business enterprise, the renewal of
material contracts in the Company's business, the Company's ability to
anticipate and respond to technological changes, particularly with respect to
financial payments and e-commerce, in a highly competitive industry
characterized by rapid technological change and rapid rates of product
obsolescence, the Company's ability to develop and market new product
enhancements and new products and services that respond to technological change
or evolving industry standards, no unanticipated developments relating to
previously disclosed lawsuits against the Company, and the cost of protecting
the Company's intellectual property. Even if the assumptions on which the
forward-looking statements are based prove accurate and appropriate, the actual
results of the Company's operations in the future may vary widely due to
technological change, increased competition, additional government regulation or
intervention in the industry, general economic conditions, other risks described
in the Company's filings with the Securities and Exchange Commission and other
factors not yet known or anticipated. Accordingly, the actual results of the
Company's operations in the future may vary widely from the forward-looking
statements included herein. All forward-looking statements included herein are
expressly qualified in their entirety by the cautionary statements in this
paragraph.
Overview
The Company is a financial payment processor specializing in providing
end-to-end check processing solutions for national, regional and local retail
merchants in the United States. The Company's processing services include check
verification and collection services along with electronic processing services,
including Electronic Check Re-presentment or "RCK" (whereby returned checks are
re-presented for payment electronically) and Electronic Check Conversion or
"ECC" (whereby paper checks are converted into electronic transactions right at
the point of sale). The Company focuses on providing these services to
supermarkets, grocery stores, multi-lane retailers, convenience stores and other
retailers.
Acquisitions. On July 9, 2000, the Company acquired Phoenix which engineers
and markets host-based software products that provide centralized gateway
services for electronic payment authorized traffic between store registers and
authorized networks. Phoenix's flagship product REPS (Retail Electronic Payment
System) provides real-time transaction monitoring, authorization and selective
routing of debit card, credit card, EBT and check verification transactions. The
REPS architecture is scalable to support a wide range of electronic payment
transaction volume, and will be used to assist in building the Company's
infrastructure such that the Company will be able to offer integrated payment
processing solutions on a single and well-proven platform and product offerings
can be made side by side with credit cards, debit cards, EBT cards (food stamps)
and other electronic payment methods.
Pursuant to a Share Purchase Agreement between the Company, Phoenix and the
Phoenix Shareholders dated as of July 9, 2000, the Company agreed to purchase
all of the issued and outstanding shares of Phoenix from the Phoenix
Shareholders
-14-
<PAGE>
for a purchase price of $4,500,000 paid by the issuance to the Phoenix
Shareholders of an aggregate of 220,857 shares of the Company's common stock. As
part of this acquisition, the Company agreed to certain price protection
covenants for the benefit of the Phoenix Shareholders. In the event the value of
the shares of the Company's common stock exchanged for shares of Phoenix's stock
decreases below the deemed issue price per share of the Company's common stock,
and the Phoenix Shareholders sold such shares of the Company's common stock at a
lower price after the expiration of any applicable hold period and within a
specified period of time thereafter, such Phoenix Shareholders would have a
right to receive additional shares of the Company's common stock. The Company
also agreed to pay a 3.5% finder's fee in connection with this acquisition
through the issuance of an additional 7,730 shares of the Company's common
stock. (See Note 5(a) to the consolidated financial statements).
On July 22, 2000, the Company acquired Check Technologies Inc. ("Check
Technologies"), which is located in Dallas, Texas. Check Technologies is a check
verification and recovery company with a primary client base located in Texas
and Louisiana. Check Technologies' regional clients include Dominos Pizza,
Centennial Liquor, Whole Foods Market, Drug Emporium and Paragon Cable. The
Company is proceeding with the planned integration of Check Technologies'
operations into its processing facilities in Dallas, Texas and expects this to
be completed shortly.
Pursuant to a Share Purchase Agreement between the Company and the Check
Technologies Shareholders dated as of July 22, 2000, the Company agreed to
purchase all of the issued and outstanding shares of Check Technologies from the
Check Technologies Shareholders for a purchase price of $500,000 paid by
$250,000 in cash and the issuance to the Check Technologies Shareholders of an
aggregate of 22,987 shares of the Company's common stock. In connection with the
purchase of Check Technologies and in exchange for certain cash consideration,
one of the Check Technologies Shareholders and an employee of Check Technologies
entered into separate non-compete agreements with the Company. As part of this
acquisition, the Company agreed to certain price protection covenants for the
benefit of the Check Technologies Shareholders. In the event the value of the
shares of the Company's common stock exchanged for shares of Check Technologies'
stock decreases below the deemed issue price per share of the Company's common
stock, and the Check Technologies Shareholders sold such shares of the Company's
common stock at a lower price after the expiration of any applicable hold period
and within a specified period of time thereafter, such Check Technologies
Shareholders would have a right to receive additional shares of the Company's
common stock. The Company also agreed to pay a 3.5% finder's fee in cash in
connection with this acquisition. (See Note 5(b) to the consolidated financial
statements).
Facilities. During the six months ended September 30, 2000, the Company
has been moving forward with the implementation of plans to establish a primary
processing center in Scottsdale, Arizona, which will complement the existing
processing facilities in Dallas, Texas. The Company made significant investments
in connection with these plans including entering into a five (5) year office
lease in Scottsdale, Arizona for approximately 5,000 square feet of office space
to house this new processing center. The Company also entered into certain
capital lease agreements with a total value of more than $600,000 in August
2000, to obtain additional hardware, software and maintenance services in
connection with the facilities in Scottsdale, Arizona. In addition, the Company
completed the relocation of its Jacksonville, Florida offices to Dallas, Texas
during the six months ended September 30, 2000.
Other Operations. The Company has continued implementing steps necessary to
resume sales and marketing activities at its development property known as
Wildwood Estates. In order to conduct mobile home sales at Wildwood Estates, the
Company has taken steps to obtain a `Mobile Home Dealer's License' and has also
begun investigating the acquisition of model home inventory which would be made
available for viewing by potential home purchasers. The Company also initiated
magazine advertising to promote the sale of homes at Wildwood Estates. Further,
the Company has retained a real estate agent to sell homes and real estate lots
at Wildwood Estates. These steps, in addition to the recent connection of the
City of Wildwood, Florida's water and wastewater facilities to the property,
should enhance opportunities for the potential development of new and existing
home sites. The Company will continue to list the property for sale while
evaluating its options for further development of the undeveloped portion of the
property or possible disposition of the property if a transaction can be
consummated on acceptable terms.
Results of Operations
Three Months Ended September 30, 2000 Results Compared to Three Months Ended
September 30, 1999 (All References Are To Fiscal Years)
Increases in revenues, expenses and income for the three months ended
September 30, 2000 were primarily attributable to the inclusion of financial
results for CFDC (including CF Data and Check Center) and two (2) months
financial results for Phoenix and Check Technologies. Total revenue for the
three months ended September 30, 2000, increased to approximately $2,462,683, an
increase of approximately $2,404,419 (4,126.8%) from total revenue of
approximately $58,264 for the three months ended September 30, 1999. CF Data
accounted for approximately $880,163 or 35.7% of total revenue, Check Center
-15-
<PAGE>
accounted for approximately $1,071,145 or 43.5% of total revenue, Phoenix
accounted for approximately $332,946 or 13.5% of total revenue, and Check
Technologies accounted for approximately $117,880 or 4.8% of total revenue.
Operating income for the three months ended September 30, 2000, was
approximately $564,397, an increase of approximately $646,574 from the operating
loss of approximately ($82,177) for the three months ended September 30, 1999.
Operating expenses for the three months ended September 30, 2000, exclusive of
non-cash items, were approximately $1,898,285, an increase of approximately
$1,757,844 (1251.7%) compared to approximately $140,441 for the three months
ended September 30, 1999. CF Data accounted for approximately $733,252 or 41.7%
of the increase in operating expenses which amount included approximately
$480,752 for salaries and employee related costs, $168,297 for its equipment and
operating leases, insurance, maintenance and dues, and $82,197 in travel and
communication costs. Check Center accounted for approximately $699,653 or 39.8%
of the increase in operating expenses which amount included approximately
$466,934 for salaries and employee related costs, $173,587 for its operating
lease, insurance, maintenance and dues, and $33,413 in travel and communication
costs. Phoenix accounted for approximately $189,620 or 10.8% of the increase in
operating expenses which amount included approximately $166,724 for salaries and
employee related costs. Check Technologies accounted for approximately $134,873
or 4.0% of the increase in operating expenses which amount included
approximately $64,576 for salaries and employee related costs, $36,597 for its
operating lease, insurance, maintenance and dues, and $22,114 in travel and
communication costs. Sales, general and administrative expenses for the three
months ended September 30, 2000, exc1usive of non-cash items, were approximately
$916,629, an increase of approximately $741,497 (423.4%) compared to
approximately $175,132 for the three months ended September 30, 1999. CF Data
accounted for approximately $194,646 of the increase, Check Center accounted for
approximately $173,008 of the increase, Phoenix accounted for approximately
$37,075 of the increase, and Check Technologies accounted for approximately
$37,995 of the increase. The Company's corporate office accounted for
approximately $270,353 of the increase in sales, general and administrative
expenses which amount included approximately $183,187 for legal costs and
$87,166 for shareholder and related costs.
Other expenses for the three months ended September 30, 2000, were
approximately $21,100, compared to other expenses for the three months ended
September 30, 1999 which were reported as a gain of approximately ($63,309),
consisting mainly of a foreign exchange gain of approximately ($59,097), and
other income of approximately ($3,688). An additional expense of approximately
$90,504 for the three months ended September 30, 2000, was for the cost to
relocate the Jacksonville, Florida office to Dallas, Texas. This cost includes
the operating lease obligation for the Jacksonville, Florida office that was
settled for $50,000, saving the Company $33,596. Interest income for the three
months ended September 30, 2000, was approximately $187,323, which consisted of
interest earned for funds placed in term deposits or short-term commercial
paper.
Amortization expense for the three months ended September 30, 2000,
increased to approximately $719,848, an increase of approximately $592,200
(463.9%) from approximately $127,648 for the three months ended September 30,
1999. The increase was primarily attributable to approximately $541,020 of
amortization expense related to the Company's acquisitions of CFDC, Check
Center, Phoenix and Check Technologies and approximately $38,975 of amortization
expense related to the ChequeMARK system software and the Patent. Interest
expense for the three months ended September 30, 2000, decreased to
approximately $1,124, a decrease of approximately $53,077 from approximately
$54,201 for the three months ended September 30, 1999. The decrease in interest
is attributable to the payment in full of the mortgage and promissory note to
Destiny and short-term borrowings.
For the three months ended September 30, 2000, the Company reported a loss
before interest, tax, depreciation and amortization, or "EBITDA," of
approximately ($276,513) or approximately ($.02) per share compared to an EBITDA
loss of approximately ($194,000) or approximately ($.02) per share for the three
months ended September 30, 1999 and a net loss of approximately ($997,485) or
approximately ($.06) per share for the three months ended September 30, 2000,
compared to a net loss of approximately ($375,849) or approximately ($.03) per
share reported for the three months ended September 30, 1999.
Six Months Ended September 30, 2000 Results Compared To Six Months Ended
September 30, 1999 (All References Are To Fiscal Years)
Increases in revenues, expenses and income for the six months ended
September 30, 2000 were primarily attributable to the inclusion of financial
results for CFDC (including CF Data and Check Center) and two (2) months
financial results for Phoenix and Check Technologies. Total revenue for the six
months ended September 30, 2000, increased to approximately $4,608,228, an
increase of approximately $4,459,811 (3,005.0%) from approximately $148,417 for
the six months ended September 30, 1999. CF Data accounted for approximately
$1,837,716 or 39.9% of total revenue, Check Center accounted for approximately
$2,205,199 or 47.9% of total revenue, Phoenix accounted for approximately
$332,946 or 7.2% of total revenue, and Check Technologies accounted for
approximately $117,880 or 2.6% of total revenue.
-16-
<PAGE>
Operating income for the six months ended September 30, 2000 was
approximately $967,593, an increase of approximately $1,113,669 from the
operating loss of approximately ($146,076) for the six months ended September
30, 1999. Operating expenses for the six months ended September 30, 2000,
exclusive of non-cash items, were approximately $3,640,634, an increase of
approximately $3,346,141 (1,136.2%) compared to approximately $294,493 for the
six months ended September 30, 1999. CF Data accounted for approximately
$1,550,750 or 46.3% of the increase in operating expenses which amount included
approximately $919,336 for salaries and employee related costs, $361,328 for its
equipment and operating leases, insurance, maintenance and dues, and $251,986 in
travel and communication costs. Check Center accounted for approximately
$1,483,820 or 44.3% of the increase in operating expenses which amount included
approximately $1,022,061 for salaries and employee related costs, $351,426 for
its operating lease, insurance, maintenance and dues, and $72,182 in travel and
communication costs. Phoenix accounted for approximately $189,620 or 5.7% of the
increase in operating expenses which amount included approximately $166,724 for
salaries and employee related costs. Check Technologies accounted for
approximately $134,873 or 4.0% of the increase in operating expenses which
amount included approximately $64,576 for salaries and employee related costs,
$36,597 for its operating lease, insurance, maintenance and dues, and $22,114 in
travel and communication costs. Sales, general and administrative expenses for
the six months ended September 30, 2000, exc1usive of non-cash items, were
approximately $1,589,937, an increase of approximately $1,219,734 (76.7%)
compared to approximately $370,203 for the six months ended September 30, 1999.
CF Data accounted for approximately $433,713 of the increase, Check Center
accounted for approximately $329,695 of the increase, Phoenix accounted for
approximately $37,075 of the increase, and Check Technologies accounted for
approximately $37,995 of the increase. The Company's corporate office accounted
for approximately $376,539 of the increase in sales, general and administrative
expenses which amount included approximately $221,181 for legal and professional
costs, $97,685 for shareholder and related costs and $57,673 for insurance,
office and sundry costs.
Other expenses for the six months ended September 30, 2000, were
approximately $6,122, compared to other expenses for the six months ended
September 30, 1999 which were reported as a gain of approximately ($54,834),
consisting mainly of a foreign exchange gain of approximately ($48,659), and
other income of approximately ($5,651). An additional expense of approximately
$90,504 for the six months ended September 30, 2000, was for the cost to
relocate the Jacksonville, Florida office to Dallas, Texas. This cost includes
the operating lease obligation for the Jacksonville, Florida office that was
settled for $50,000, saving the Company $33,596. Interest income for the six
months ended September 30, 2000 was approximately $390,253, which consisted of
interest earned during the six months for funds placed in term deposits or
short-term commercial paper.
Amortization expense for the six months ended September 30, 2000, increased
to approximately $1,145,094, an increase of approximately $893,759 (355.6%) from
approximately $251,335 for the six months ended September 30, 1999. The increase
was primarily attributable to approximately $828,471 of amortization expense
related to the Company's acquisitions of CFDC, Check Center, Phoenix and Check
Technologies and approximately $65,288 of amortization expense related to the
ChequeMARK system software and the Patent. Interest expense for the six months
ended September 30, 2000, decreased to approximately $83,172, a decrease of
approximately $13,046 from approximately $96,218 for the six months ended
September 30, 1999. The decrease in interest is attributable to the payment in
full of the mortgage and promissory note to Destiny and short-term borrowings.
For the six months ended September 30, 2000, the Company reported a loss
before interest, tax, depreciation and amortization, or "EBITDA," of
approximately ($328,717) or approximately ($.02) per share compared to an EBITDA
loss of approximately ($461,445) or approximately ($.04) per share for the six
months ended September 30, 1999 and a net loss of approximately ($1,556,983) or
approximately ($.10) per share for the six months ended September 30, 2000,
compared to a net loss of approximately ($808,998) or approximately ($.07) per
share reported for the six months ended September 30, 1999.
Liquidity and Capital Resources
As of September 30, 2000, the Company had available cash of approximately
$11,214,057.
Net cash provided by operating activities, excluding non-cash items such as
amortization, was approximately $609,679 for the six months ended September 30,
2000. Changes in accounts payable and accrued liabilities resulted from the
Company's acquisitions. During the six months ended September 30, 2000 a
settlement holdback was set up in the amount of approximately $350,000. (See
Note 10 (b) to the consolidated financial statements). Net cash used in
operating activities during the six months ended September 30, 1999, was
approximately $318,967.
During the six months ended September 30, 2000, cash used for investing
activities was approximately $3,912,122, compared to approximately $314,863 for
the six months ended September 30, 1999. Significant investments during the six
months ended September 30, 2000, included approximately $536,256 for corporate
acquisitions, approximately $1,529,109
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<PAGE>
for acquiring capital assets, including approximately $828,715 for a legal
settlement, and approximately $1,449,291 for the patents, including
approximately $936,761 for a legal settlement. (See Notes 3(b), 4 and 10(b) to
the consolidated financial statements). Also included in significant investments
is approximately $187,326 for the connection to the City of Wildwood's water and
wastewater facilities on the property known as Wildwood Estates.
During the six months ended September 30, 2000, net cash provided by
financing activities was approximately $2,987,650, compared to approximately
$691,859 for the six months ended September 30, 1999. During the six months
ended September 30, 2000, the Company paid in full the mortgage and promissory
note approximately ($1,121,280) on the property known as Wildwood Estates.
Financing activities also included proceeds of approximately $4,123,750 from
exercised stock options.
At the Company's Annual General Meeting held September 18, 2000, the
Company's shareholders approved a reduction in the stated capital of the shares
of the Company's common stock by $22,901,744 and approved a proposal to effect
such reduction by reducing the amount of the Company's deficit by the same
amount. Also, at the Company's Annual General Meeting held September 18, 2000,
the Company's shareholders approved an increase of the number of shares of the
Company's common stock that may be granted under the Company's 1996 Stock Option
Plan ("1996 Plan") and 1998 Stock Incentive Plan ("1998 Plan"). The number of
shares of the Company's common stock that may be granted under the 1996 Plan
increased from 2.5 million shares to 3 million shares and the 1998 Plan
increased from 1 million shares to 3 million shares.
Recently Issued Accounting Standards
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. Among other
provisions, SFAS No. 133 requires that entities recognize all derivatives as
either assets or liabilities in the balance sheet and measure those financial
instruments at fair value. Accounting for changes in fair value is dependent on
the use of the derivatives and whether such use qualifies as hedging activity.
The new standard, as amended, becomes effective for the Company in fiscal 2001,
and management believes that it will have no impact on the Company's financial
position and results of operations.
Contingencies
Effective August 22, 2000, the Company, Mr. Hills and MARK reached a
settlement with respect to the Company's legal action commenced March 10, 1999
and other claims against Mr. Hills and MARK. Pursuant to the terms of the
settlement, 466,820 of the 541,820 shares of the Company's common stock that
were being held in escrow were returned to the Company for cancellation. In
addition, the Company was relieved of its obligation to issue to Mr. Hills and
MARK 1,828,560 earn-out shares pursuant to certain agreements (which amount
includes earn-out shares issuable to Mr. Hills and Mr. Hills' portion of any
earn-out shares issuable to MARK). The settlement does not affect the rights to
earn-out shares of shareholders of MARK, other than Mr. Hills. The Company
agreed to pay $2,500,000 cash and to allow 75,000 shares of the Company's common
stock to be released from escrow to Mr. Hills. The Company is withholding
$350,000 of the $2,500,000 cash settlement proceeds for the purpose of defending
or pursuing other legal claims regarding ownership, license or infringement of
certain intellectual property of the Company, including the Patent, against
persons other than Mr. Hills who may claim rights directly or indirectly from
Mr. Hills, including the claims asserted by Global, discussed below. If there is
no such ongoing litigation as of August 21, 2005, the portion of the $350,000
not used by the Company for litigation expenses will be delivered to Mr. Hills.
The settlement also called for entry of an agreed permanent injunction, which
has been entered, in which Mr. Hills will not (a) for a period of three (3)
years from the date of the injunction, carry on or engage in any business that
is competitive with the products or services of the Company, or which relate to
the electronic payment and collections industry, (b) engage in any acts
constituting partial or complete infringement of the Patent or the ChequeMARK
system software, (c) represent that anyone other than the Company is the holder
of the Patent or any continuation patent thereto, or (d) represent or imply that
he holds any ownership interest in the ChequeMARK system software or its
underlying patents. (See Note 10(b) of the consolidated financial statements).
Subsequently, Mr. Hills has stated in a press release "that LML through its
subsidiaries are the owners of U.S. Patent No. 5,484,988 and any continuations
thereto..." On September 22, 2000, the United States District Court Middle
District of Florida, Jacksonville Division entered an order stating that Mr.
Hills has had no ownership interest or any other interest in the Patent or U.S.
Patent Application Nos. 08/775,400 or 09/562,303 since March 11, 1998.
On July 20, 2000, Global filed a complaint against the Company in the
United States District Court, Southern District of Florida, for patent and
copyright infringement of the Patent. Global served an amended complaint on the
Company on September 7, 2000, seeking a declaratory judgment. The amended
complaint alleges that Global is the rightful owner of the Patent as the result
of an assignment to Global of the Patent by Mr. Hills. The Company purchased the
Patent from Messrs. Nichols and Hills on March 11, 1998. The Company filed a
motion with the court to dismiss the Global action on the grounds that the
defendant named in the suit was incorrect. This
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<PAGE>
motion was subsequently denied on October 31, 2000. The Company's management is
of the opinion that the complaint filed by Global against it has no basis and is
without merit and intends to defend it vigorously. (See Note 10(c) of the
consolidated financial statements).
The Company continues to defend the claim in the United States District
Court for the Southern District of Florida, Ocala Division regarding the release
of approximately 254,000 shares of the Company's common stock being held under
the terms of the voluntary pooling agreement established in connection with the
acquisition of Wildwood Estates. The plaintiffs are alleging that the Company is
improperly preventing the release of those shares. The outcome of this action is
unknown at this time. (See Note 10(d) of the consolidated financial statements).
The Company is also party from time to time to ordinary litigation
incidental to its business. No currently pending litigation is expected to have
a material adverse effect on the Company's business, financial condition,
results of operations and cash flows.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
From March 31, 2000, until September 30, 2000, there were no material
changes from the information concerning market risk contained in the Company's
Annual Report on Form 20-F for the year ended March 31, 2000, as filed with the
Securities and Exchange Commission on September 29, 2000 (file no. 0-13959).
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<PAGE>
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
Information pertaining to this item is incorporated herein from Part I.
Financial Information (Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Contingencies).
Item 2. Changes in Securities and Use of Proceeds
During the three months ended September 30, 2000, the Company issued the
following shares of its common stock:
. On July 9, 2000, 220,857 shares of the Company's common stock were
issued at a deemed issue price of $20.375 pursuant to the acquisition
of Phoenix, in exchange for the outstanding capital shares of Phoenix
held by three (3) Phoenix Shareholders.
. On July 9, 2000, 7,730 shares of the Company's common stock were issued
at a deemed issue price of $20.375 per share for a finder's fee related
to the acquisition of Phoenix.
. On July 22, 2000, 22,987 shares of the Company's common stock were
issued at a deemed issue price of $10.875 per share pursuant to the
acquisition of Check Technologies, in exchange for the outstanding
capital shares of Check Technologies held by two (2) Check Technologies
Shareholders.
The shares of the Company's common stock were issued pursuant to an exemption by
reason of Section 4(2) of the Securities Act of 1933. These sales were made
without general solicitation or advertising. Each purchaser represented that he,
she or it was acquiring the shares without a view to distribute and that he, she
or it was afforded an opportunity to review all publicly filed documents and to
ask questions, and receive answers from, officers of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual General and Special Meeting of Shareholders held
September 18, 2000 (the "Meeting"), the following proposals were adopted by
shareholders of the Company (the "Shareholders") by ordinary resolution: (1) to
elect PATRICK H. GAINES, WENDY J. OGILVIE, GREG A. MACRAE, and L. WILLIAM
SEIDMAN, as directors of the Company for terms expiring at the Annual General
Meeting of Shareholders in 2001, as described in the Company's Information
Circular and Proxy Statement for the Meeting; (2) to appoint Dale, Matheson,
Carr-Hilton, Chartered Accountants, as auditor of the Company to hold office
until the Annual General Meeting of Shareholders in 2001; (3) to authorize the
directors to fix the remuneration of the auditors; (4) to approve an amendment
to the Company's 1996 Stock Option Plan to increase the number of common share
purchase options available for issuance thereunder from 2,500,000 common shares
to 3,000,000 common shares; and (5) to approve an amendment to the Corporation's
1998 Stock Incentive Plan to increase the number of common share purchase
options available for issuance thereunder from 1,000,000 common shares to
3,000,000 common shares.
In addition, the following proposals were adopted by Shareholders by
special resolution: (1) to approve a reduction in the stated capital of the
shares of the Company's common stock by $22,901,744, and to effect such
reduction by reducing the amount of the Company's deficit by the same amount;
(2) to approve an amendment to the Company's Articles of Incorporation to permit
shareholder meetings to be held in Dallas, Texas or Phoenix, Arizona, in
addition to the currently permitted Vancouver, B.C. and Whitehorse, Yukon; and
(3) to approve the restatement of the Company's Articles of Incorporation,
including the amendment regarding the location of shareholder meetings.
The number of shares cast for, against and withheld, as well as the number
of abstentions and broker non-votes as to each of these matters are as follows:
<TABLE>
<CAPTION>
SHARES BROKER
PROPOSAL SHARES FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
<S> <C> <C> <C> <C> <C>
Ordinary Resolutions:
1. Election of Directors:
a. Patrick H. Gaines 4,187,502 3,345 3,765 4,221 0
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SHARES BROKER
PROPOSAL SHARES FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
<S> <C> <C> <C> <C> <C>
b. Wendy J. Ogilvie 3,877,920 2,445 315,727 2,741 0
c. Greg A. MacRae 4,189,908 2,445 3,839 2,641 0
d. L. William Seidman 4,193,112 2,230 950 2,541 0
2. Appointment of Auditors 4,186,302 6,600 3,390 2,541 0
3. Fix Remuneration 4,184,181 7,611 0 7,041 0
4. Amendment of 1996 Stock 4,173,118 19,674 0 6,041 0
Option Plan
5. Amendment of 1998 Stock 4,172,109 20,683 0 6,041 0
Incentive Plan
Special Resolutions:
1. Reduction of Stated Capital 4,184,717 11,475 0 2,641 0
2. Amendment of articles of 4,193,080 3,212 0 2,541 0
incorporation re-garding
location of meetings
3. Restate articles of 4,192,995 3,797 0 2,041 0
in-corporation
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
e) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
-- -----------
<S> <C>
+3.1 -- Restated Articles of Incorporation of LML.
3.2 -- Bylaws of LML (incorporated by reference to Exhibit 1.2 to the Annual Report on Form 20-F
for the fiscal year ended March 31, 1998 of LML (File No. 0-13959)).
+10.1 -- Form of Share Purchase Agreement between LML Payment Systems Inc. and Roger Jahnel and Ed Campbell
dated as of July 22, 2000.
+10.2 -- Form of Share Purchase Agreement between LML Payment Systems Inc and Phoenix EPS, Inc.
and Robert E. Peyton, Joseph M Bandiera and Peter D. Stenhjem dated as of July 9, 2000.
+10. 3 -- Office Lease Agreement executed August 2000 for Granite Reef Centre.
+10.4 -- Settlement Agreement dated July 14, 2000 by, between and among LML Payment Systems, Inc.,
ChequeMARK Holdings, Inc., ChequeMARK Patent, Inc., ChequeMARK, Inc., Robert R. Hills and
ChequeMARK Technologies Corporation n/k/a MARK Technologies, Inc.
+10.5 -- Amendment to Settlement Agreement dated August 22, 2000 by, between and among LML Payment
Systems, Inc., ChequeMARK Holdings, Inc., ChequeMARK Patent, Inc., ChequeMARK, Inc., Robert
R. Hills and ChequeMARK Technologies Corporation n/k/a MARK Technologies, Inc.
+27 -- Financial Data Schedule
</TABLE>
----------
+ Filed herewith.
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<PAGE>
f) Reports on Form 8-K
None.
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<PAGE>
LML PAYMENT SYSTEMS INC.
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.
LML PAYMENT SYSTEMS INC.
/s/ Wendy J. Ogilvie
By:____________________________________
Wendy J. Ogilvie
Controller (Duly Authorized Officer
and Chief Accounting Officer)
Date: November 14, 2000
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