Sales, general and administrative expenses consist primarily of personnel costs, commissions, office facilities, travel, promotional events such as trade shows, seminars and technical conferences and public relations. Sales, general and administrative expenses increased to approximately $670,000 from approximately $560,000 for the three months ended September 30, 2003 and 2002, respectively, an increase of approximately 19.6%. The increase in sales, general and administrative expense is primarily attributable to an increase in sales personnel. The declining value of the U.S. dollar has resulted in increases in Corporate administrative costs where a number of expenses are incurred in Canadian dollars.
Amortization and depreciation decreased to approximately $526,000 from approximately $616,000 for the three months ended September 30, 2003 and 2002, respectively. The decrease was primarily attributable to certain capital assets, acquired through previous years' acquisitions, which had become fully depreciated.
Interest expense decreased to a credit of approximately $3,000 from an expense of approximately $6,000 for the three months ended September 30, 2003 and 2002, respectively. This decrease was due to an adjustment of interest expense for our final payment of our capital lease obligation during the three months ended September 30, 2003. Interest income decreased to approximately $15,000 from approximately $18,000 for the three months ended September 30, 2003 and 2002, respectively. This decrease in interest earned was primarily attributed to a decrease in interest rates from an average of approximately 1.53% for the three months ended September 30, 2002 to approximately 1% for the three months ended September 30, 2003.
Loss from continuing operations increased to approximately $1.1 million from approximately $752,000 for the three months ended September 30, 2003 and 2002, respectively. The increase was primarily attributable to a decrease in electronic check recovery services revenue and an increase in cost of operations resulting from an increase in traditional check collection services as well as an increase in sales, general and administrative expenses resulting from an increase in sales personnel and general corporate expenses.
Basic and diluted loss per share from continuing operations were both approximately ($0.06) for the three months ended September 30, 2003, as compared to approximately ($0.04) for the three months ended September 30, 2002.
Six Months Ended September 30, 2003 results compared to Six Months Ended September 30, 2002
Total revenue was approximately $3.7 million for the six months ended September 30, 2003 as compared to approximately $3.8 million for the six months ended September 30, 2002. Revenue from our primary check collection business was approximately $1.7 million for the six months ended September 30, 2003 as compared to approximately $2 million for the six months ended September 30, 2002, a decrease of approximately 15%. This decrease was mainly attributable to us no longer providing electronic check recovery services to JC Penney, formerly one of our largest customers which was responsible for approximately 12.6% of our primary check collection revenue for the six months ended September 30, 2002. We are continuing to provide other primary collection services to JC Penney. Revenue from our secondary check collection business was approximately $1 million for the six months ended September 30, 2003 as compared to approximately $911,000 for the six months ended September 30, 2002, an incre
ase of approximately 9.8%. Revenue from electronic check verification increased approximately 25.5% from approximately
$491,000 for the six months ended September 30, 2002 to approximately $616,000 for the six months ended September 30, 2003. The increase is mainly attributable to the rollout of check processing services, including electronic check verification, to 49 multi-lane grocery stores with 268 locations in the Houston, Texas area during the third quarter of fiscal year 2003. Revenue from the licensing of certain modules of our software increased approximately $35,000 for the six months ended September 30, 2003. The increases in electronic check verification revenue and software licensing revenue is consistent with our strategic objective of acquiring electronic payment volume across all our financial payment processing services and strengthening our position as a financial payment processor.
During the six months ended September 30, 2003, revenue from and associated with our two largest customers amounted to approximately 37.2% of total revenue. We may be economically dependent on revenue from these customers. During the six months ended September 30, 2003, 7-Eleven, one of our largest customers, informed us that they would not be renewing their contract for check authorization and recovery services with us. During the past six quarters, we recorded revenue of approximately $480,000 per quarter directly attributable to this contract. The contract is scheduled to terminate at the end of November 2003.
On March 31, 2003, Fleming Retail Group ("Fleming"), one of our customers we previously provided transaction switching services to, filed for Chapter 11 reorganization in the United States Bankruptcy Court. During the six months ended September 30, 2003, Fleming notified us of its intention to commence closing and selling their remaining grocery retail store locations and by the conclusion of the six months ended September 30, 2003, Fleming had finalized the closing and selling of these remaining grocery retail store locations. Consequently, the transaction switching services previously provided by us to Fleming is no longer required and, therefore, the resulting impact on future revenue is a reduction of approximately $90,000 per quarter or approximately 4% of our total revenue.
Cost of operations
Costs of operations increased from approximately $3.1 million for the six months ended September 30, 2002, to approximately $3.4 million for the six months ended September 30, 2003, an increase of approximately 9.7%. Cost of operations consist of transaction processing costs, personnel costs, equipment related costs and telecommunication costs. The increase was partially attributable to an increase in traditional collection services versus a decrease in electronic check recovery services resulting from the removal of the electronic check recovery services previously provided to JC Penney. Services such as electronic check recovery, provide us with a greater gross margin due to utilization of more cost efficient electronic check recovery methods as compared to more labor-intensive traditional check recovery methods. The increase was also attributable to a provision for losses on accounts receivable from Fleming Retail Group of approximately $42,000 resulting from their bankruptcy. D
uring the six months ended September 30, 2003, we made certain adjustments including certain staff reductions which we expect to result in a reduction of our cost of operations by approximately $200,000 per quarter. We continue to seek ways to reduce costs of operations.
Sales, general and administrative expenses
Sales, general and administrative expenses consist primarily of personnel costs, commissions, office facilities, travel, promotional events such as trade shows, seminars and technical conferences and public relations. Sales, general and administrative expenses were approximately $1.3 million for the six months ended September 30, 2003 as compared to approximately $1.3 million for the six months ended September 30, 2002.
Amortization and depreciation
Amortization and depreciation decreased to approximately $1.1 million from approximately $1.2 million for the six months ended September 30, 2003 and 2002, respectively. The decrease was primarily attributable to certain capital assets, acquired through previous years' acquisitions, which had become fully depreciated.
Interest
Interest expense decreased to approximately $2,000 from approximately $14,000 for the six months ended September 30, 2003 and 2002, respectively. This decrease was due to the decrease in capital lease obligations. Interest income decreased to approximately $29,000 from approximately $38,000 for the six months ended September 30, 2003 and 2002, respectively. This decrease in interest earned was primarily attributed to a decrease in interest
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rates from an average of approximately 1.62% for the six months ended September 30, 2002 to approximately 1% for the six months ended September 30, 2003.
Loss from continuing operations
Loss from continuing operations increased to approximately $2.2 million from approximately $1.8 million for the six months ended September 30, 2003 and 2002, respectively. The increase was primarily attributable to an increase in cost of operations resulting from an increase in traditional check collection services as well as an increase in our provision for losses on accounts receivable.
Basic and diluted loss per share from continuing operations were both approximately ($0.11) for the six months ended September 30, 2003, as compared to approximately ($0.09) for the six months ended September 30, 2002.
Results of Operations - discontinued operations
During the six months ended September 30, 2003, we sold our Wildwood Estates property, previously reported in a separate business segment, for total gross proceeds of approximately $2.4 million cash. We recorded net profit of approximately $588,000, which was primarily attributed to a net gain of approximately $625,000 from the sale of real property and capital assets offset by a net loss of approximately $37,000 from discontinued operations. The decision to discontinue operations of this business segment resulted from an opportunity to sell the property and consequently remove a business segment which was no longer consistent with our business strategy.
Liquidity and Capital Resources
Our liquidity and financial position consisted of approximately $4.7 million in working capital as of September 30, 2003, compared to approximately $3.6 million in working capital as of March 31, 2003. The increase in working capital was attributable to cash flows provided by discontinued operations of approximately $2.2 million offset by cash used in operating activities of continuing operations of approximately $886,000. Cash used in operating activities of continuing operations related to normal operating activities and an increase in accounts payable and accrued liabilities of approximately $15,000, a decrease of prepaid expenses of approximately $71,000 and a decrease in accounts receivable of approximately $19,000. Cash flows used in continuing operations were approximately $886,000 as compared to approximately $600,000 for the six months ended September 30, 2003 and 2002, respectively. Cash used in investing activities of continuing operations was approximately $64,000 as co
mpared to approximately $155,000 for the six months ended September 30, 2003 and 2002, respectively. The decrease during the six months ended September 30, 2003 was due mainly to a reduction in capital asset expenditures. Cash used in financing activities of continuing operations was approximately $46,000 for the six months ended September 30, 2003, as compared to approximately $169,000 for the six months ended September 30, 2002. The decrease in cash used in financing activities is primarily due to the decrease in payments on capital leases.
We believe that existing cash and cash equivalent balances, and potential cash flows from operations should satisfy our working capital and capital expenditure requirements in the foreseeable future. However, any material acquisitions of complementary businesses, products or technologies, other arrangements, unexpected losses, or an economic slowdown in the retail industry could require us to obtain additional equity or debt financing. There can be no assurance that such financing would be available on acceptable terms, if at all.
Critical Accounting Policies
There have been no changes to our critical accounting policies since March 31, 2003. For a description of our critical accounting policies, see our Annual Report on Form 10-K for the year ended March 31, 2003 filed with the Securities and Exchange Commission.
Contingencies
In addition to the legal matters previously reported in our Annual Report filed on Form 10-K for the year ended March 31, 2003, as filed with the Securities and Exchange Commission on June 27, 2003 (file no. 0-13959), we are party from time to time to ordinary litigation incidental to our business, none of which is expected to have a material adverse effect on our results of operations, financial position or liquidity.
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
From March 31, 2003, until September 30, 2003, there were no material changes from the information concerning market risk contained in our Annual Report on Form 10-K for the year ended March 31, 2003, as filed with the Securities and Exchange Commission on June 27, 2003 (file no. 0-13959).
ITEM 4. Controls and Procedures
The Corporation's disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the conclusions of the principal executive and principal financial officers, based on an evaluation of these controls and procedures, are that the controls and procedures are effective as of September 30, 2003 at the reasonable assurance level.
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PART II.
OTHER INFORMATION
ITEM 1. Legal Proceedings
There are no material changes with respect to the information concerning legal proceedings contained in our Annual Report on Form 10-K for the year ended March 31, 2003, as filed with the Securities and Exchange Commission on June 27, 2003 (file no. 0-13959). In addition to the legal matters as described herein and as previously reported in our most recent report on Form 10-K, we are party from time to time to ordinary litigation incidental to our business, none of which is expected to have a material adverse effect on our results of operations, financial position or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
At the Corporation's Annual General Meeting of Shareholders held August 20, 2003 (the "Meeting"), the following proposals were adopted by shareholders of the Corporation (the "Shareholders") by ordinary resolution: (1) to elect PATRICK H. GAINES, GREG A. MACRAE, L. WILLIAM SEIDMAN, ROBIN B. MARTIN and JACQUELINE PACE as directors of the Corporation for terms expiring at the Annual General Meeting of Shareholders in 2004, as described in the Corporation's Information Circular and Proxy Statement for the Meeting; and (2) to appoint Ernst & Young LLP as auditor of the Corporation to hold office until the Annual General Meeting of Shareholders in 2004.
The number of shares cast for, against, withheld and spoiled, as well as the number of abstentions and broker non-votes as to each of these matters, are as follows:
|
|
PROPOSAL |
SHARES
FOR
|
SHARES AGAINST
|
WITHHELD
|
SPOILED
|
ABSTENTIONS
|
BROKER NON-VOTES |
|
Ordinary Resolutions: |
|
1. |
Election of Directors : |
|
|
|
|
|
|
|
|
a. Patrick H. Gaines |
15,953,811 |
0 |
74 |
0 |
0 |
0 |
|
|
b. Greg A. MacRae
|
15,903,747 |
0 |
116 |
0 |
0 |
0 |
|
|
c. L. William Seidman
|
15,953,600 |
0 |
285 |
0 |
0 |
0 |
|
|
d. Robin B. Martin
|
15,953,811 |
0 |
74 |
0 |
0 |
0 |
|
|
e. Jacqueline Pace
|
15,903,747 |
0 |
116 |
0 |
0 |
0 |
|
2. |
Appointment of Ernst & Young LLP, as Auditors |
15,953,651 |
0 |
169 |
65 |
0 |
0 |
|
|
|
|
|
|
|
|
ITEM 6. Exhibits and Reports on Form 8-K
Exhibits:
|
Exhibit
Number |
Description of Document
|
|
3.1 |
Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for the period ended September 30, 2000, of LML Payment Systems Inc. (File No. 0-13959)). |
|
3.2 |
Bylaws (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 Payment Systems Inc. (File No. 0-13959)). |
|
|
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|
3.3 |
Amendment to Bylaws of LML Payment Systems Inc. (incorporated by reference to Exhibit 3.3 to the Quarterly Report on Form 10-Q for the period ended September 30, 2001, of LML Payment Systems Inc. (File No. 0-13959)). |
|
31.1 |
Rule 13a-14(a) Certification of Chief Executive Officer (filed herewith). |
|
31.2 |
Rule 13a-14(a) Certification of Principal Financial Officer (filed herewith). |
|
32.1 |
Section 1350 Certification of Chief Executive Officer (furnished herewith). |
|
32.2 |
Section 1350 Certification of Controller and Chief Accounting Officer (furnished herewith). |
Reports on Form 8-K
We filed the following Current Reports on Form 8-K with the Securities and Exchange Commission during the quarter ended September 30, 2003:
i) A current report on Form 8-K, dated June 18, 2003, was filed on July 3, 2003 (Items 2 and 7)
ii) A current report on Form 8-K, dated July 24, 2003, was filed on July 25, 2003 (Item 5)
iii) An amended current report on Form 8-K, dated June 18, 2003, was filed on August 21, 2003 (Item 7)
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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.
By: /s/ Richard R. Schulz
Chief Accounting Officer (Duly Authorized Officer and Chief Accounting Officer)
Date: November 14, 2003
