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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission file number 0-28572
OPTIMAL ROBOTICS CORP.
(Exact name of registrant as specified in its charter)
CANADA 98-0160833
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
4700 de la Savane, Suite 101, Montreal, Quebec, Canada H4P 1T7
(514) 738-8885
(Registrant's Telephone Number, including Area Code)
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
At April 28, 2003, the registrant had 14,936,235 Class "A" shares (without
nominal or par value) outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
2
OPTIMAL ROBOTICS CORP.
Consolidated Balance Sheets
(Unaudited)
March 31, 2003 and December 31, 2002
(expressed in US dollars)
==============================================================================================================
March 31, December 31,
2003 2002
- --------------------------------------------------------------------------------------------------------------
(Audited)
Assets
Current assets:
Cash $ 3,597,893 $ 9,615,348
Short-term investments 76,623,873 76,146,586
Accounts receivable, net of allowance for
doubtful accounts of $96,494 ($316,494 at
December 31, 2002) 15,200,131 5,812,656
Income taxes receivable 2,060,707 1,481,977
Tax credits receivable 918,408 728,408
Inventories (note 3) 23,067,337 22,656,666
Future income taxes 103,912 243,470
Prepaid expenses and deposits 973,950 493,499
---------------------------------------------------------------------------------------------------------
122,546,211 117,178,610
Future income taxes 1,970,192 1,549,856
Property and equipment 6,554,236 6,562,344
Goodwill and other intangibles (note 4) 4,449,944 4,399,924
- --------------------------------------------------------------------------------------------------------------
$ 135,520,583 $ 129,690,734
==============================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 7,924,935 $ 7,134,379
Deferred revenue 7,670,878 1,394,455
---------------------------------------------------------------------------------------------------------
15,595,813 8,528,834
Future income taxes 444,648 1,700,870
Shareholders' equity:
Share capital (note 5) 122,102,244 122,102,244
Additional paid-in capital 5,282 5,282
Deficit (1,142,933) (1,162,025)
Cumulative translation adjustment (1,484,471) (1,484,471)
---------------------------------------------------------------------------------------------------------
119,480,122 119,461,030
Contingencies (note 6)
- --------------------------------------------------------------------------------------------------------------
$ 135,520,583 $ 129,690,734
==============================================================================================================
See accompanying notes to unaudited consolidated financial statements.
3
OPTIMAL ROBOTICS CORP.
Consolidated Statements of Operations
(Unaudited)
Three-month periods ended March 31, 2003 and 2002
(expressed in US dollars)
==============================================================================================================
2003 2002
- --------------------------------------------------------------------------------------------------------------
Revenues $ 16,300,225 $ 20,374,389
Cost of sales 10,684,082 12,918,677
- --------------------------------------------------------------------------------------------------------------
Gross margin 5,616,143 7,455,712
Expenses (income):
Selling, general and administrative 6,143,544 6,519,073
Research and development (note 7) 229,284 400,734
Amortization 632,234 614,947
Restructuring (note 8) 247,500 --
Operating lease 416,155 395,192
Investment income (268,422) (705,006)
Foreign exchange 153,756 9,106
---------------------------------------------------------------------------------------------------------
7,554,051 7,234,046
- --------------------------------------------------------------------------------------------------------------
(Loss) earnings before income taxes (1,937,908) 221,666
(Recovery of) provision for income taxes (note 9) (1,957,000) 115,450
- --------------------------------------------------------------------------------------------------------------
Net earnings $ 19,092 $ 106,216
==============================================================================================================
Weighted average number of shares:
Basic 14,936,235 15,384,010
Plus impact of stock options and warrants -- 21,323
- --------------------------------------------------------------------------------------------------------------
Diluted 14,936,235 15,405,333
==============================================================================================================
Earnings per share (note 10):
Basic $ 0.00 $ 0.01
Diluted 0.00 0.01
==============================================================================================================
See accompanying notes to unaudited consolidated financial statements.
4
OPTIMAL ROBOTICS CORP.
Consolidated Statements of Deficit
(Unaudited)
Three-month periods ended March 31, 2003 and 2002
(expressed in US dollars)
==============================================================================================================
2003 2002
- --------------------------------------------------------------------------------------------------------------
(Deficit) retained earnings, beginning of period $ (1,162,025) $ 8,475,146
Net earnings 19,092 106,216
Excess of purchase price over book value of shares (note 5) -- (3,185,471)
- --------------------------------------------------------------------------------------------------------------
(Deficit) retained earnings, end of period $ (1,142,933) $ 5,395,891
==============================================================================================================
See accompanying notes to unaudited consolidated financial statements.
5
OPTIMAL ROBOTICS CORP.
Consolidated Statements of Cash Flows
(Unaudited)
Three-month periods ended March 31, 2003 and 2002
(expressed in US dollars)
==============================================================================================================
2003 2002
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 19,092 $ 106,216
Adjustments for:
Amortization 632,234 614,947
Future income taxes (1,537,000) (88,550)
Changes in operating assets and liabilities:
Accounts receivable (9,387,475) (15,973,518)
Income taxes (578,730) (2,969,031)
Tax credits receivable (190,000) (100,000)
Inventories (410,671) (1,395,948)
Prepaid expenses and deposits (480,451) 291,173
Accounts payable and accrued liabilities 790,556 2,617,925
Deferred revenue 6,276,423 5,166,916
---------------------------------------------------------------------------------------------------------
(4,866,022) (11,729,870)
Cash flows from financing activities:
Repurchase of common shares -- (6,216,724)
Cash flows from investing activities:
Additions to property and equipment and patent costs (674,146) (923,663)
(Increase) decrease in short-term investments (477,287) 11,073,044
---------------------------------------------------------------------------------------------------------
(1,151,433) 10,149,381
- --------------------------------------------------------------------------------------------------------------
Net decrease in cash during the period (6,017,455) (7,797,213)
Cash, beginning of period 9,615,348 9,616,430
- --------------------------------------------------------------------------------------------------------------
Cash, end of period $ 3,597,893 $ 1,819,217
==============================================================================================================
Supplementary disclosure of cash flow information: Cash paid during the period
for:
Interest $ 8,310 $ 4,010
Income taxes 158,730 3,173,030
==============================================================================================================
See accompanying notes to unaudited consolidated financial statements.
6
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements
(Unaudited)
Three-month periods ended March 31, 2003 and 2002
(expressed in US dollars)
1. Interim financial information:
These consolidated financial statements have been prepared by management
in accordance with Canadian generally accepted accounting principles. The
unaudited balance sheet as at March 31, 2003 and the unaudited statements
of operations, deficit and cash flows for the periods ended March 31, 2003
and 2002 reflect all adjustments which, in the opinion of management, are
necessary to a fair statement of the results of the interim periods
presented. The results of operations and cash flows for any quarter are
not necessarily indicative of the results or cash flows for an entire
year. These interim consolidated financial statements follow the same
accounting policies and methods of their application as described in note
2 of the annual consolidated financial statements for the year ended
December 31, 2002. The interim consolidated financial statements do not
include all disclosures required for annual financial statements and
should be read in conjunction with the most recent annual consolidated
financial statements of the Company as at and for the year ended December
31, 2002.
All amounts in the attached notes are unaudited unless specifically
identified.
2. New accounting standards:
(a) Guarantees:
On January 1, 2003, the Company adopted the new recommendations of
the Canadian Institute of Chartered Accountants ("CICA"), Accounting
Guideline 14, Disclosure of Guarantees, which clarifies disclosure
requirements for certain guarantees. The guideline does not provide
guidance on the measurement and recognition of a guarantor's
liability for obligations under guarantees. The guideline defines a
guarantee to be a contract (including an indemnity) that
contingently requires the Company to make payments to a third party
based on (i) changes in an underlying interest rate, foreign
exchange rate, equity or commodity instrument, index or other
variable, that is related to an asset, a liability or an equity
security of the counterparty, (ii) failure of another party to
perform under an obligating agreement or (iii) failure of another
party to pay its indebtedness when due.
As explained in note 6 (a), the Company is contractually bound to
indemnify a customer for damages incurred in connection with a civil
action. A reasonable estimate of the maximum potential amount the
Company could be required to pay to couterparties cannot be made
given the nature of the indemnification.
7
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended March 31, 2003 and 2002
(expressed in US dollars)
2. New accounting standards (continued):
(b) Long-lived assets:
In December 2002, the CICA issued Handbook Section 3063, Impairment
or Disposal of Long-Lived Assets" and revised Section 3475, Disposal
of Long-Lived Assets and Discontinued Operations. Together, these
two Sections supersede the write-down and disposal provisions of
Section 3061, Property, Plant and Equipment as well as Section 3475,
Discontinued Operations. Section 3063 amends existing guidance on
long-lived asset impairment measurement and establishes standards
for the recognition, measurement and disclosure of the impairment of
long-lived assets held for use by the Company. It requires that an
impairment loss be recognized when the carrying amount of an asset
to be held and used exceeds the sum of the undiscounted cash flows
expected from its use and disposal; the impairment recognized is
measured as the amount by which the carrying amount of the asset
exceeds its fair value. Section 3475 provides a single accounting
model for long-lived assets to be disposed of by sale. Section 3475
provides specified criteria for classifying an asset as
held-for-sale and requires assets classified as held-for-sale to be
measured at the lower of their carrying amounts or fair value, less
costs to sell. Section 3475 also broadens the scope of businesses
that qualify for reporting as discontinued operations to include any
disposals of a component of an entity, which comprises operations
and cash flows that can be clearly distinguished from the rest of
the Company, and changes the timing of recognizing losses on such
operations. The new standards contained in Section 3063 on the
impairment of long-lived assets held for use are applicable for
years beginning on or after April 1, 2003; however, early
application is permitted. The revised standards contained in Section
3475 on disposal of long-lived assets and discontinued operations
are applicable to disposal activities initiated by the Company's
commitment to a plan on or after May 1, 2003; however, early
application is permitted. The Company does not expect that the
adoption of these standards will have a material effect on its
financial statements.
3. Inventories:
=========================================================================================================
March 31, December 31,
2003 2002
- ---------------------------------------------------------------------------------------------------------
(Audited)
Finished goods $ 1,455,334 $ 1,647,505
Work in process 872,245 355,853
Raw materials 5,147,254 4,468,785
Replacement parts 15,592,504 16,184,523
- ---------------------------------------------------------------------------------------------------------
$ 23,067,337 $ 22,656,666
=========================================================================================================
8
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended March 31, 2003 and 2002
(expressed in US dollars)
4. Goodwill and other intangible assets:
=========================================================================================================
March 31,
2003
- ---------------------------------------------------------------------------------------------------------
Gross carrying Accumulated Net book
amount amortization value
- ---------------------------------------------------------------------------------------------------------
Goodwill $ 3,171,903 $ 141,750 $ 3,030,153
Customer list 786,414 222,603 563,811
Patent costs 907,100 51,120 855,980
- ---------------------------------------------------------------------------------------------------------
$ 4,865,417 $ 415,473 $ 4,449,944
=========================================================================================================
=========================================================================================================
December 31,
2002
- ---------------------------------------------------------------------------------------------------------
(Audited)
Gross carrying Accumulated Net book
amount amortization value
- ---------------------------------------------------------------------------------------------------------
Goodwill $ 3,171,903 $ 141,750 $ 3,030,153
Customer list 786,414 183,283 603,131
Patent costs 803,143 36,503 766,640
- ---------------------------------------------------------------------------------------------------------
$ 4,761,460 $ 361,536 $ 4,399,924
=========================================================================================================
9
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended March 31, 2003 and 2002
(expressed in US dollars)
5. Share capital:
Changes in the issued and outstanding share capital were as follows:
=========================================================================================================
March 31, 2003 March 31, 2002
------------------------------- ---------------------------------
Number Dollars Number Dollars
- ---------------------------------------------------------------------------------------------------------
Balance, December 31,
2002 and 2001 14,936,235 $ 122,102,244 15,471,335 $ 126,476,633
Stock repurchase plan (i) -- -- (370,800) (3,031,253)
- ---------------------------------------------------------------------------------------------------------
Balance, March 31, 2003
and 2002 14,936,235 $ 122,102,244 15,100,535 $ 123,445,380
=========================================================================================================
(i) On February 26, 2002, the Board of Directors approved a stock
repurchase plan authorizing the Company to purchase up to 750,000 of
the Company's Class "A" shares in the open market commencing March
5, 2002 and ending March 4, 2003. During the three months ended
March 31, 2003, no shares were repurchased. As at March 31, 2002,
370,800 shares having a book value of $3,031,253 were repurchased
for a total consideration of $6,216,724. The excess of the purchase
price over book value of the shares in the amount of $3,185,471 was
charged to retained earnings.
6. Contingencies:
(a) In 1995 and 1996, the Company received demand letters from the same
claimant alleging patent infringement. In July 1999, the claimant
filed a civil action alleging patent infringement in the United
States District Court for the District of Utah against the Company
and PSC Inc., one of the Company's suppliers. In addition, the
claimant has filed a similar suit in the State of Utah against one
of the Company's customers. The Company is contractually bound to
indemnify the customer for any damages it incurs in connection with
such suit. At the Company's expense, the Company's legal counsel is
defending this suit. The Company also received a lawyer's letter
from another party in 1999, and again in February 2001, alleging
infringement of another patent. In March 2003, this claimant also
sent a third demand letter alleging infringement of additional
patents.
10
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended March 31, 2003 and 2002
(expressed in US dollars)
6. Contingencies (continued):
(a) (continued):
No amounts have been specified in these actions. Consequently, it is
not possible at this time to make an estimate of the amount of
damages, if any, that may result and, accordingly, no provision has
been made in these financial statements with respect to the above
claims. The Company believes the first claimant's action and the
second claimant's 1999 and 2001 claims to be without merit and
intends to vigorously defend its position. The Company is reviewing
the second claimant's March 2003 claim with counsel. Due to the
recentness of this claim, the Company has not yet formed an opinion
as to its merit or materiality to the Company's business.
(b) The Company is party to litigation arising in the normal course of
operations. The Company does not expect the resolution of such
matters to have a materially adverse effect on the financial
position or results of operations of the Company.
7. Research and development:
=========================================================================================================
2003 2002
- ---------------------------------------------------------------------------------------------------------
Gross research and development expenses $ 419,284 $ 500,734
Less tax credits (190,000) (100,000)
- ---------------------------------------------------------------------------------------------------------
$ 229,284 $ 400,734
=========================================================================================================
8. Restructuring:
In February 2003, the Company reduced its workforce by approximately 12%
in an effort to increase operating efficiencies, decrease overall general
and administrative expenses and improve financial results. A total of
$247,500 was expensed in the quarter related mainly to severance payments.
As at March 31, 2003, a provision of approximately $36,000 is included in
accounts payable and accrued liabilities in the consolidated balance
sheets.
11
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended March 31, 2003 and 2002
(expressed in US dollars)
9. Income taxes:
The income tax provision differs from the amount computed by applying the
combined Canadian federal and Quebec tax rates to earnings before income
taxes. The reasons for the difference and the related tax effects are as
follows:
=========================================================================================================
2003 2002
- ---------------------------------------------------------------------------------------------------------
(Loss) earnings before income taxes $ (1,937,908) $ 221,666
=========================================================================================================
Combined Canadian federal and Quebec
provincial income taxes at 33% (2002 - 35%) $ (642,610) $ 79,800
Foreign exchange (1) (1,244,219) 51,417
Permanent differences and other (70,171) (15,767)
- ---------------------------------------------------------------------------------------------------------
Income tax (recovery) provision $ (1,957,000) $ 115,450
=========================================================================================================
(1) For purposes of calculating the income tax provision of the Company, a tax
liability is recognized when foreign exchange gains arise on the
conversion into Canadian dollars of the net monetary assets denominated in
U.S. dollars which is required for tax purposes. Because these financial
statements are presented in U.S. dollars, these foreign exchange gains do
not impact earnings before income taxes even though the income tax
provision would include a tax liability for these gains. Future
fluctuations in the foreign exchange rate between the Canadian and U.S.
dollar will change the amount of the foreign exchange and may impact the
provision for or recovery of income taxes thereon.
12
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended March 31, 2003 and 2002
(expressed in US dollars)
9. Income taxes (continued):
The provision for income taxes is composed of the following:
=========================================================================================================
2003 2002
- ---------------------------------------------------------------------------------------------------------
Current income taxes $ (420,000) $ 204,000
Future income taxes (1,537,000) (88,550)
- ---------------------------------------------------------------------------------------------------------
$ (1,957,000) $ 115,450
=========================================================================================================
10. Earnings per share:
(a) Stock-based compensation:
If the fair value-based accounting method under CICA Handbook
Section 3870 had been used to account for stock-based compensation
costs relating to exempt options and warrants issued to employees
during the three-month periods ended March 31, 2003 and 2002, the
net earnings and related earnings per share figures would be as
follows:
=====================================================================================================
Three months ended March 31,
------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------
Reported net earnings $ 19,092 $ 106,216
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related taxes of nil (461,921) --
- -----------------------------------------------------------------------------------------------------
Pro forma net (loss) earnings $ (442,829) $ 106,216
=====================================================================================================
13
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended March 31, 2003 and 2002
(expressed in US dollars)
10. Earnings per share (continued):
(a) Stock-based compensation (continued):
=====================================================================================================
Three months ended March 31,
------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------
Earnings (loss) per share:
Basic:
As reported $ 0.00 $ 0.01
Pro forma (0.03) 0.01
Diluted:
As reported 0.00 0.01
Pro forma (0.03) 0.01
=====================================================================================================
No options were granted in the three-month periods ended March 31, 2003
and 2002. The pro forma adjustment relates to the amortization of the fair
value of options granted after January 1, 2002 over the vesting periods.
14
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended March 31, 2003 and 2002
(expressed in US dollars)
10. Earnings per share (continued):
(b) Supplementary measure of earnings per share:
Supplementary measures of earnings do not have any standardized
meaning prescribed by generally accepted accounting principles and
are therefore unlikely to be comparable to similar measures
presented by other companies. The purpose of presenting a
supplementary measure of net earnings and earnings per share is to
illustrate the tax impact of the foreign exchange gains and losses
which arise on the conversion of the short-term investments into
Canadian dollars for purposes of determining taxable income under
Canadian income tax regulations as described in note 9.
=====================================================================================================
Three months ended March 31,
----------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------
Net earnings $ 19,092 $ 106,216
Add back effect of future income taxes on foreign
exchange (1,244,219) 51,417
- -----------------------------------------------------------------------------------------------------
Supplementary measure of net (loss) earnings $ (1,225,127) $ 157,633
=====================================================================================================
Supplementary measure of (loss) earnings per share:
Basic $ (0.08) $ 0.01
Diluted (0.08) 0.01
=====================================================================================================
11. Segmented information:
The Company operates in one segment, the development, marketing,
installation, servicing and sale of automated transaction products
designed for use in the retail sector. Substantially all of the Company's
revenue is derived from sales to retailers located in the United States
and is denominated in U.S. dollars.
15
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended March 31, 2003 and 2002
(expressed in US dollars)
11. Segmented information (continued):
Revenues and cost of sales by products are as follows:
=========================================================================================================
Three months ended March 31,
-----------------------------------
2003 2002
- ---------------------------------------------------------------------------------------------------------
Revenues:
Systems, parts and others $ 12,094,722 $ 16,655,153
Hardware and software maintenance 4,205,503 3,719,236
- ---------------------------------------------------------------------------------------------------------
$ 16,300,225 $ 20,374,389
=========================================================================================================
Cost of sales:
Systems, parts and others $ 7,857,772 $ 9,673,660
Hardware and software maintenance 2,826,310 3,245,017
- ---------------------------------------------------------------------------------------------------------
$ 10,684,082 $ 12,918,677
=========================================================================================================
Property and equipment, goodwill and intangibles by geographic area are as
follows:
=========================================================================================================
March 31, December 31,
2003 2002
- ---------------------------------------------------------------------------------------------------------
(Audited)
Canada $ 5,892,670 $ 5,811,631
United States 5,111,510 5,150,637
- ---------------------------------------------------------------------------------------------------------
$ 11,004,180 $ 10,962,268
=========================================================================================================
16
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended March 31, 2003 and 2002
(expressed in US dollars)
12. Additional disclosures required by U.S. GAAP and differences between
Canadian GAAP and U.S. GAAP:
(a) Consolidated statement of operations:
The reconciliation of earnings reported in accordance with Canadian
GAAP with U.S. GAAP is as follows:
=====================================================================================================
March 31, March 31,
2003 2002
- -----------------------------------------------------------------------------------------------------
Net earnings in accordance with Canadian GAAP $ 19,092 $ 106,216
Stock-based compensation costs (i) -- 9,745,833
- -----------------------------------------------------------------------------------------------------
Net earnings in accordance with U.S. GAAP $ 19,092 $ 9,852,049
=====================================================================================================
Earnings per share under U.S. GAAP:
Basic $ 0.00 $ 0.64
Diluted 0.00 0.64
=====================================================================================================
The weighted average number of common shares outstanding for purposes of
determining basic and diluted earnings (loss) per share are the same
amounts disclosed for Canadian GAAP purposes.
(i) Stock-based compensation:
For stock-based compensation plans with employees, as permitted by
Statement of Financial Accounting Standards No. 123 (SFAS 123), the
Company has chosen to use the intrinsic value method, which requires
compensation costs to be recognized on the difference, if any,
between the quoted market price of the stock at the grant date and
the amount the individual must pay to acquire the stock. Certain of
the Company's stock options are variable because the exercise price
is not known until the options are exercised. As a result,
compensation cost is measured on the date the options are exercised.
Under Canadian GAAP, the Company uses the settlement method of
accounting for options and compensation expense is not recognized.
17
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended March 31, 2003 and 2002
(expressed in US dollars)
12. Additional disclosures required by U.S. GAAP and differences between
Canadian GAAP and U.S. GAAP (continued):
(a) Consolidated statement of operations (continued):
(i) Stock-based compensation (continued):
If the fair value-based accounting method under SFAS No. 123
had been used to account for stock-based compensation costs
relating to options and warrants issued to employees, the net
earnings and related earnings per share figures under U.S.
GAAP would be as follows for the three-month periods ended
March 31:
================================================================================================
Three months ended March 31,
----------------------------------
2003 2002
- ------------------------------------------------------------------------------------------------
Reported net earnings $ 19,092 $ 9,852,049
Add: Stock-based employee compensation expense
determined under the intrinsic value method included
in reported net earnings, net of related taxes of nil -- (9,745,833)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related taxes of nil (5,125,020) (6,595,509)
- ------------------------------------------------------------------------------------------------
Pro forma net loss $ (5,105,928) $ (6,489,293)
================================================================================================
Earnings (loss) per share:
Basic:
As reported $ 0.00 $ 0.64
Pro forma (0.34) (0.42)
Diluted:
As reported 0.00 0.64
Pro forma (0.34) (0.42)
================================================================================================
18
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Three-month periods ended March 31, 2003 and 2002
(expressed in US dollars)
12. Additional disclosures required by U.S. GAAP and differences between
Canadian GAAP and U.S. GAAP (continued):
(a) Consolidated statement of operations (continued):
(ii) Recent accounting pronouncements:
In January 2003, the FASB issued Interpretation No. 46
"Consolidation of Variable Interest Entities" (FIN 46). Its
consolidation provisions are applicable for all newly created
entities and are applicable to existing entities as of the
beginning of the first interim or annual reporting period
beginning after June 15, 2003. With respect to entities that
do not qualify to be assessed for consolidation based on
voting interests, FIN 46 generally requires a company that has
a variable interest that will absorb a majority of the
entity's expected losses if they occur, receive a majority of
the entity's expected residual returns if they occur, or both,
to consolidate that variable interest entity. For periods
prior to FIN 46's effective date, certain disclosures will be
required if it is reasonably possible that the company will
have a significant variable interest in or be the primary
beneficiary of a variable interest entity when FIN 46 guidance
is effective. The Company does not expect that the adoption of
this standard will have a material impact on its financial
statements.
(b) Consolidated balance sheets:
=====================================================================================================
March 31, 2003 December 31, 2002
--------------------- -----------------------------
- -----------------------------------------------------------------------------------------------------
Canadian US Canadian US
GAAP GAAP GAAP GAAP
- -----------------------------------------------------------------------------------------------------
(Audited)
Shareholders' equity:
Share capital $ 122,102,244 $ 164,558,807 $ 122,102,244 $ 164,558,807
Additional paid-in
capital 5,282 29,862,009 5,282 29,862,009
Deficit (1,142,933) (71,922,461) (1,162,025) (71,941,558)
Cumulative translation
adjustment (1,484,471) -- (1,484,471) --
Accumulated other
comprehensive loss -- (3,018,233) -- (3,018,233)
- -----------------------------------------------------------------------------------------------------
$ 119,480,122 $ 119,480,122 $ 119,461,030 $ 119,461,025
=====================================================================================================
13. Comparative figures:
Certain of the comparative figures have been reclassified in order to
conform with the current period's presentation.
19
Item 2. Management's Discussion and Analysis of Financial condition and Results
of Operations
This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. These
statements are based on current expectations and assumptions that are subject to
risks and uncertainties. Actual results could differ materially because of the
various factors discussed in our Annual Report on Form 10-K for the year ended
December 31, 2002, including, without limitation, the following: we principally
depend on one line of products and we could be harmed significantly if the
U-Scan(R) systems experience significant problems, competition from superior
technology or customer resistance; one significant customer, through its various
divisions and affiliates, accounted for approximately 44% of our revenues in
2002 and we rely on this customer's continued willingness to purchase our U-Scan
systems; our U-Scan systems are assembled at a single facility and any
disruption of operations at this facility would have a short-term adverse effect
on our business and results of operations; the barriers to entering the
self-checkout industry may be low and competition could reduce revenue from the
U-Scan system; in the event that general economic conditions continue to result
in reduced demand in our industry, our competitors could develop more aggressive
pricing practices, which, in turn, could result in price reductions, negatively
affecting our operating results, reducing our profit margins and potentially
leading to a loss of market share; and we are currently a defendant in an action
alleging that the U-Scan system infringes upon the claimant's patent, and a
second party has sent demand letters to us alleging different patent
infringements. The adverse resolution of any specific lawsuit could have a
material adverse effect on our business, results of operations, and financial
condition.
The foregoing factors and those discussed in our Annual Report on Form
10-K for the year ended December 31, 2002, are not intended to represent a
complete list of the general or specific factors that may affect us. It should
be recognized that other factors, including general economic factors and
business strategies, may be significant, presently or in the future, and the
factors discussed above and in our 2002 Annual Report may affect us to a greater
extent than indicated. All forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements set forth herein. Except as required by law, we undertake
no obligation to update any forward-looking statement, whether as a result of
new information, future events or otherwise.
The following discussion of the financial condition and results of
operations of our company should be read in conjunction with our audited
consolidated financial statements for the year ended December 31, 2002, and the
foregoing factors. All dollar amounts are expressed in U.S. dollars and, other
than those expressed in millions of dollars, have been rounded to the nearest
thousand.
Overview
We are the leading provider of self-checkout systems to retailers in North
America. Our principal product is the U-Scan automated self-checkout system,
which enables shoppers to scan, bag and pay for their purchases with little or
no assistance from store personnel.
The U-Scan system can be operated quickly and easily by shoppers and makes
the checkout process more convenient. The U-Scan system reduces the cost of
checkout transactions to
20
retailers and addresses labor shortage problems by replacing manned checkout
counters with our automated self-checkout stations.
We have traditionally targeted supermarket and supercenter chains in the
United States, and more recently have targeted such chains in Canada. In 2002,
our Business Development Group was established to support our efforts to expand
our self-checkout business into new markets, which include drug stores,
convenience stores (including gas station mini-marts), big box retailers
(including warehouse stores and home improvement stores), electronics stores,
office superstores, toy stores and general merchandise stores. Through our
United Kingdom subsidiary, we have installed an evaluation system with one of
the U.K.'s largest regional independent co-operative societies.
We prepare our consolidated financial statements in accordance with
accounting principles which are generally accepted in Canada with a
reconciliation to accounting principles generally accepted in the United States,
as disclosed in note 12 of the notes to our interim consolidated financial
statements for the periods ended March 31, 2003 and 2002.
New accounting policy
On January 1, 2003, we adopted the new recommendations of the Canadian
Institute of Chartered Accountants ("CICA"), Accounting Guideline 14, Disclosure
of Guarantees, which clarifies disclosure requirements for certain guarantees.
The guideline does not provide guidance on the measurement and recognition of a
guarantor's liability for obligations under guarantees. The guideline defines a
guarantee to be a contract that contingently requires the Company to make
payments to a third party based on (i) changes in an underlying interest rate,
foreign exchange rate, equity or commodity instrument, index or other variable,
that is related to an asset, a liability or an equity security of the
counterparty, (ii) failure of another party to perform under an obligating
agreement or (iii) failure of another party to pay its indebtedness when due.
See note 2(a) of the notes to our interim consolidated financial statements,
which are included in Part 1, Item 1. "Financial Statements."
Financial Condition
Our cash and short-term investment portfolio amounted to $80,222,000 as at
March 31, 2003, compared to $85,762,000 as at December 31, 2002. The decrease
relates primarily to cash used in operations due mainly to the increase in our
accounts receivable. Our portfolio of short-term investments consists of
short-term discounted notes. Our investments are liquid and of the highest
investment grade. The portfolio is invested in U.S. and Canadian dollar
denominated securities, which are short-term to minimize interest rate risk.
Our inventory position at March 31, 2003 was $23,067,000, up from
$22,657,000 at the end of 2002. This increase is mainly attributable to raw
materials and work in process inventories amounting to $5,147,000 and $872,000,
respectively, at March 31, 2003 compared to $4,469,000 and $356,000
respectively, at December 31, 2002. Our raw materials inventory increased in
order to provide for deliveries in the second quarter of 2003. The replacement
parts inventory decreased in part through operational efficiencies and in part
as a result of increased obsolescence provisions. We believe that, considering
our current installed base and given the steady upgrades to our systems, the
level of replacement parts is appropriate for the current servicing and support
of our customers.
21
We have no long-term debt. Shareholders' equity as at March 31, 2003 was
$119,480,000 as compared to $119,461,000 as at December 31, 2002. The increase
is attributable to net earnings for the period.
Results of Operations
First Three Months of 2003 Compared with First Three Months of 2002
Total revenues decreased by $4,074,000, or 20%, in the first three months
of the year compared to last year. Product sales declined due to a decrease in
orders from customers, which we attribute primarily to the reluctance of major
retailers to spend on capital, as a result of the continued economic weakness
throughout North America. Service revenue recognized for hardware and software
maintenance increased by $487,000, or 13%, from 2002 to 2003, due to the
increased number of customers that entered into service contracts with us. In
total, service revenue accounted for approximately 26% of our total revenues in
2003 as compared to approximately 18% in 2002.
Total cost of sales decreased by $2,235,000, or 17%, in the three-month
period ended March 2003 compared to the first quarter of 2002. The decrease was
consistent with the decrease in sales. Overall gross margin decreased as a
percentage of sales from 37% in 2002 to 34% in 2003, primarily due to the
increased percentage of service contract revenue in 2003 compared to 2002, which
generated a lower gross margin compared to the gross margin generated by system
sales.
Gross research and development expenses decreased by $81,000, or 16%, from
2002 to 2003. As a percentage of total revenues, gross research and development
expenses increased from 2.5% in 2002 to 2.6% in 2003. Research and development
expenses for the three months ended March 31, 2003, included the continuing
development costs of the U-Scan Mobile Attendant(TM) device; the integration of
an electronic signature capture interface and process; the integration of a
biometric access interface and process; a lower profile, smaller footprint
U-Scan system; the integration of the U-Scan systems to new point of sales
systems, and the improvement of the graphical user interface (GUI).
Selling, general, administrative and operating lease expenses decreased by
$355,000, or 5%, in 2003 compared to 2002. The decrease was mainly as a result
of the closure of the facilities in Kentucky and Phoenix in December 2002.
In February 2003, the Company reduced its workforce by approximately 12%
in an effort to increase operating efficiencies, decrease overall general and
administrative expenses and improve financial results. A total of $247,500 was
expensed in the quarter with respect to the workforce reduction, related
primarily to severance payments
Our net earnings were $19,000 in the quarter compared to $106,000 in the
first quarter of 2002. On a per share basis, we earned $0.00 (basic and diluted)
compared to $0.01 (basic and diluted basis) in 2002. For the quarter ended March
31, 2003, we recorded a tax recovery of $1,957,000. Included in that amount was
a recovery of $1,244,000, which resulted from the reversal of foreign exchange
gains that arose, for Canadian tax purposes, on the conversion into Canadian
dollars of our net monetary assets denominated in U.S. dollars.
22
Liquidity and Capital Resources
As of March 31, 2003, we had cash and short-term investments of
$80,222,000 (December 31, 2002 - $85,762,000), and working capital of
$106,950,000 (December 31, 2002 - $108,650,000).
Operating activities used $4,866,000 of cash and cash equivalents in the
first three months of 2003, compared to $11,730,000 used during the first three
months of 2002. The reduction in cash used in operating activities is primarily
due to lower balances of operating assets and liabilities, primarily accounts
receivable, at March 31, 2003.
During the first three months of 2003, we did not repurchase any shares
for cancellation, whereas during the first three months of 2002, through our
stock repurchase program, we repurchased for cancellation 370,800 Class "A"
shares at an average price of $16.77, for a total consideration of $6,217,000.
In the first three months of 2003, we invested $674,000 (2002- $924,000),
to purchase capital assets, which principally related to leasehold improvements,
computer equipment and software, testing units and the defense of our patents.
We believe that our cash and short-term investments will be adequate to
meet our needs for at least the next 12 months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to market risk, as discussed in our
Annual Report on Form 10-K annual report for the year ended December 31, 2002.
Item 4. Controls and Procedures
As of March 26, 2003 (the "Evaluation Date"), under the supervision and
with the participation of our management, including our Chief Executive Officer
and our Chief Financial Officer, we evaluated the effectiveness of the design
and operation of our disclosure controls and procedures, as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based upon this evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that, as of the Evaluation Date, our disclosure
controls and procedures were adequate to ensure that information required to be
disclosed by us in the reports filed or submitted by us under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
Additionally, our Chief Executive Officer and Chief Financial Officer have
determined that there have been no significant changes in our internal controls
or in other factors that could significantly affect our internal controls
subsequent to the Evaluation Date.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In each of 1995 and 1996, we received a demand letter from the same
claimant alleging that the U-Scan system infringes upon the claimant's patent.
In July 1999, this claimant, International Automated Systems, Inc. ("IAS"),
filed a civil action in the United States District Court for the District of
Utah against us and PSC, the former assembler of the U-Scan system, alleging
patent infringement. A second party also sent a demand letter to us in 1999, and
again in February 2001, alleging a different patent infringement. Although after
consultation with counsel, we believe that the former claimant should not
prevail in its lawsuit and that the latter claimant should not prevail if a
lawsuit is brought to assert its claim, and that these claims will not have a
material adverse effect on our business or prospects, no assurance can be given
that a court will not find that the system infringes upon one or both of such
claimants' rights. A determination by a court that the system infringes upon
either of the claimant's rights would have a material adverse effect on our
business and results of operations.
A subsidiary of Kroger has also been sued by IAS in the State of Utah
based upon the same issues underlying its suit filed against us in 1999. At our
expense, our counsel is also defending the subsidiary of Kroger in such action.
Furthermore, we are contractually bound to indemnify Kroger for any damages that
it may incur in connection with such suit.
In March 2003, the claimant that sent the demand letters of 1999 and 2001,
sent a third demand letter to us alleging infringement of additional patents. We
are reviewing the claim asserted in the March 2003 demand letter with counsel.
Due to the recentness of this claim, we have not yet formed an opinion as to its
merit or materiality to our business.
We are also party to litigation arising in the normal course of
operations. We do not expect the resolution of such matters to have a materially
adverse effect on our financial position or results of operations.
Item 2. Changes in Securities
The registrant has nothing to report under this item.
Item 3. Defaults Upon Senior Securities
The registrant has nothing to report under this item.
Item 4. Submission of Matters to a Vote of Security Holders
The registrant has nothing to report under this item.
24
Item 5. Other Information
Reporting Status
As disclosed in our Annual Report on Form 10-K for the year ended December
31, 2002, filed with the Commission on March 31, 2003, we were not a foreign
private issuer under the rules and regulations of the Commission as of December
31, 2002. However, we regained our status as a foreign private issuer on March
31, 2003. As in the past, we intend to voluntarily file annual reports on Form
10-K and quarterly reports on Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit
------ -----------------------------------------
99.1 Certification pursuant to Section 1350, Chapter 63 of Title 18,
United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to Section 1350, Chapter 63 of Title 18,
United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
25
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPTIMAL ROBOTICS CORP.
Dated: May 1, 2003 By: /s/ Holden L. Ostrin
-------------------------------------
Holden L. Ostrin
Co-Chairman
By: /s/ Gary S. Wechsler
-------------------------------------
Gary S. Wechsler
Treasurer and Chief Financial
Officer
26
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Neil S. Wechsler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Optimal Robotics
Corp. (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
i) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
ii) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
iii) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
i) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
ii) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 1, 2003
By: /s/ Neil S. Wechsler
----------------------------
Neil S. Wechsler
Co-Chairman and
Chief Executive Officer
27
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gary S. Wechsler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Optimal Robotics
Corp. (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
i) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
ii) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
iii) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
i) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
ii) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 1, 2003
By: /s/ Gary S. Wechsler
------------------------
Gary S. Wechsler
Treasurer and
Chief Financial Officer
28