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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 June 30, 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 August 12, 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)
June 30, 2003 and December 31, 2002
(expressed in US dollars)
==========================================================================================
June 30, December 31,
2003 2002
- ------------------------------------------------------------------------------------------
(Audited)
Assets
Current assets:
Cash $ 4,359,392 $ 9,615,348
Short-term investments 74,237,770 76,146,586
Accounts receivable, net of allowance for doubtful
accounts of $149,599 ($316,494 at December 31, 2002) 11,814,081 5,812,656
Income taxes receivable 2,749,396 1,481,977
Tax credits receivable 1,058,408 728,408
Inventories (note 3) 22,013,936 22,656,666
Future income taxes 50,384 243,470
Prepaid expenses and deposits 1,082,141 493,499
-------------------------------------------------------------------------------------
117,365,508 117,178,610
Property and equipment 6,149,634 6,562,344
Goodwill and other intangible assets (note 4) 4,815,246 4,399,924
Future income taxes 2,596,276 1,549,856
- ------------------------------------------------------------------------------------------
$130,926,664 $129,690,734
==========================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 6,660,722 $ 7,134,379
Deferred revenue 5,462,939 1,394,455
-------------------------------------------------------------------------------------
12,123,661 8,528,834
Future income taxes 540,204 1,700,870
Shareholders' equity:
Share capital (note 5) 122,102,244 122,102,244
Additional paid-in capital 5,282 5,282
Deficit (2,360,256) (1,162,025)
Cumulative translation adjustment (1,484,471) (1,484,471)
-------------------------------------------------------------------------------------
118,262,799 119,461,030
Contingencies (note 6)
- ------------------------------------------------------------------------------------------
$130,926,664 $129,690,734
==========================================================================================
See accompanying notes to unaudited consolidated financial statements.
-3-
OPTIMAL ROBOTICS CORP.
Consolidated Statements of Operations
(Unaudited)
Periods ended June 30, 2003 and 2002
(expressed in US dollars)
============================================================================================
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------
Revenues $16,579,487 $19,544,455 $32,879,712 $39,918,844
Cost of sales 11,665,403 13,057,378 22,349,485 25,976,055
- --------------------------------------------------------------------------------------------
Gross margin 4,914,084 6,487,077 10,530,227 13,942,789
Expenses (income):
Selling, general and
administrative 6,189,871 7,308,855 12,333,415 13,827,928
Research and development
(note 7) 293,468 361,766 522,752 762,500
Amortization 699,589 650,491 1,331,823 1,265,438
Restructuring (note 8) -- -- 247,500 --
Operating lease 408,779 369,451 824,934 764,643
Investment income (242,676) (475,176) (511,098) (1,180,182)
Foreign exchange 19,376 26,388 173,132 35,494
---------------------------------------------------------------------------------------
7,368,407 8,241,775 14,922,458 15,475,821
- --------------------------------------------------------------------------------------------
Loss before income taxes (2,454,323) (1,754,698) (4,392,231) (1,533,032)
Recovery of income tax (note 9) (1,237,000) (1,687,058) (3,194,000) (1,571,608)
- --------------------------------------------------------------------------------------------
Net (loss) earnings $(1,217,323) $ (67,640) $(1,198,231) $ 38,576
============================================================================================
Weighted average number of
shares:
Basic 14,936,235 14,983,916 14,936,235 15,182,856
Plus impact of stock options 426 147,429 213 84,376
- --------------------------------------------------------------------------------------------
Diluted 14,936,661 15,131,345 14,936,448 15,267,232
============================================================================================
Earnings per share (note 10):
Basic $ (0.08) $ 0.00 $ (0.08) $ 0.00
Diluted (0.08) 0.00 (0.08) 0.00
============================================================================================
See accompanying notes to unaudited consolidated financial statements.
-4-
OPTIMAL ROBOTICS CORP.
Consolidated Statements of Retained Earnings
(Unaudited)
Periods ended June 30, 2003 and 2002
(expressed in US dollars)
===========================================================================================
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------
(Deficit) retained earnings,
beginning of period $(1,142,933) $ 5,395,891 $(1,162,025) $ 8,475,146
Net (loss) earnings (1,217,323) (67,640) (1,198,231) 38,576
Excess of purchase price over
book value of shares (note 5) -- (1,124,470) -- (4,309,941)
- -------------------------------------------------------------------------------------------
(Deficit) retained earnings,
end of period $(2,360,256) $ 4,203,781 $(2,360,256) $ 4,203,781
===========================================================================================
See accompanying notes to unaudited consolidated financial statements.
-5-
OPTIMAL ROBOTICS CORP.
Consolidated Statements of Cash Flows
(Unaudited)
Periods ended June 30, 2003 and 2002
(expressed in US dollars)
================================================================================================
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) earnings $(1,217,323) $ (67,640) $(1,198,231) $ 38,576
Adjustments for:
Amortization 699,589 650,491 1,331,823 1,265,438
Future income taxes (477,000) (1,172,558) (2,014,000) (1,261,108)
Changes in operating assets
and liabilities:
Accounts receivable 3,386,050 5,544,606 (6,001,425) (10,428,912)
Income taxes (688,689) (1,521,728) (1,267,419) (4,490,759)
Tax credits receivable (140,000) 694,649 (330,000) 594,649
Inventories 1,053,401 (1,853,793) 642,730 (3,249,741)
Prepaid expenses and
deposits (108,191) (113,073) (588,642) 178,100
Accounts payable and
accrued liabilities (1,264,213) 728,549 (473,657) 3,346,474
Deferred revenue (2,207,939) (1,528,694) 4,068,484 3,638,222
- ------------------------------------------------------------------------------------------------
(964,315) 1,360,809 (5,830,337) (10,369,061)
Cash flows from financing activities:
Repurchase of common shares -- (2,467,606) -- (8,684,330)
Cash flows from investing activities:
Additions to property
and equipment
and intangible assets (660,289) (1,114,515) (1,334,435) (2,038,178)
Decrease in short-term
investments 2,386,103 7,994,779 1,908,816 19,067,823
- ------------------------------------------------------------------------------------------------
1,725,814 6,880,264 574,381 17,029,645
- ------------------------------------------------------------------------------------------------
Increase (decrease) in cash during
the period 761,499 5,773,467 (5,255,956) (2,023,746)
Cash, beginning of period 3,597,893 1,819,217 9,615,348 9,616,430
- ------------------------------------------------------------------------------------------------
Cash, end of period $ 4,359,392 $ 7,592,684 $ 4,359,392 $ 7,592,684
================================================================================================
Supplemental disclosure to
cash flow statement:
Income taxes paid $ -- $ 207,228 $ 158,730 $ 3,380,258
================================================================================================
See accompanying notes to unaudited consolidated financial statements.
-6-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements
(Unaudited)
Periods ended June 30, 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 June 30, 2003 and the unaudited statements
of operations, deficit and cash flows for the periods ended June 30, 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. Significant accounting policies:
(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 counterparties cannot be made
given the nature of the indemnification.
-7-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2003 and 2002
(expressed in US dollars)
================================================================================
2. Significant accounting policies (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. 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. The Company does not expect that the adoption of these
standards will have a material effect on its financial statements.
3. Inventories:
--------------------------------------------------------------------------
June 30, December 31,
2003 2002
--------------------------------------------------------------------------
(Audited)
Finished goods $ 1,174,655 $ 1,647,505
Work in process 852,243 355,853
Raw materials 5,045,706 4,468,785
Replacement parts 14,941,332 16,184,523
--------------------------------------------------------------------------
$22,013,936 $22,656,666
==========================================================================
-8-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2003 and 2002
(expressed in US dollars)
================================================================================
4. Goodwill and other intangible assets:
==========================================================================
June 30,
2003
--------------------------------------------------------------------------
Gross carrying Accumulated Net book
amount amortization value
--------------------------------------------------------------------------
Goodwill $ 3,171,903 $ 141,750 $ 3,030,153
Customer list 786,414 261,924 524,490
Patent costs 972,939 66,726 906,213
License 371,266 16,876 354,390
--------------------------------------------------------------------------
$ 5,302,522 $ 487,276 $ 4,815,246
==========================================================================
==========================================================================
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)
Periods ended June 30, 2003 and 2002
(expressed in US dollars)
================================================================================
5. Share capital:
Changes in the issued and outstanding share capital were as follows:
===================================================================================
June 30, 2003 December 31, 2002
------------------------- --------------------------
Number Dollars Number Dollars
-----------------------------------------------------------------------------------
(Audited)
Balance, December 31,
2002 and 2001 14,936,235 $122,102,244 15,471,335 $126,476,633
Stock repurchase plan (i) -- -- (535,100) (4,374,389)
-----------------------------------------------------------------------------------
Balance, June 30, 2003
and December 31, 2002 14,936,235 $122,102,244 14,936,235 $122,102,244
===================================================================================
(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 six months ended June
30, 2003, no shares were repurchased. As at December 31, 2002,
535,100 shares having a book value of $4,374,389 were repurchased
for a total consideration of $8,684,330. The excess of the purchase
price over book value of the shares in the amount of $4,309,941 was
charged to retained earnings.
-10-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2003 and 2002
(expressed in US dollars)
================================================================================
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.
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, and 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:
================================================================================
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2003 2002 2003 2002
--------------------------------------------------------------------------------
Research and development
expenses $ 433,468 $ 561,766 $ 852,752 $1,062,500
Less tax credits (140,000) (200,000) (330,000) (300,000)
--------------------------------------------------------------------------------
$ 293,468 $ 361,766 $ 522,752 $ 762,500
================================================================================
-11-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2003 and 2002
(expressed in US dollars)
================================================================================
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 related mainly to severance was expensed in the first quarter and
no balance remained outstanding as at June 30, 2003.
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:
====================================================================================
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
------------------------------------------------------------------------------------
Loss before income taxes $(2,454,323) $(1,754,698) $(4,392,231) $(1,533,032)
====================================================================================
Combined Canadian federal
and Quebec provincial
income taxes $ (813,854) $ (631,692) $(1,456,464) $ (551,892)
Foreign exchange (1) (174,763) (1,377,580) (1,418,982) (1,326,163)
Permanent differences
and other (248,383) 322,214 (318,554) 306,447
------------------------------------------------------------------------------------
Recovery of income tax $(1,237,000) $(1,687,058) $(3,194,000) $(1,571,608)
====================================================================================
(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)
Periods ended June 30, 2003 and 2002
(expressed in US dollars)
================================================================================
9. Income taxes (continued):
The recovery of income taxes is composed of the following:
===============================================================================
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------------------------------------------------------------------------------
Current income taxes $ (760,000) $ (514,500) $(1,180,000) $ (310,500)
Future income taxes (477,000) (1,172,558) (2,014,000) (1,261,108)
-------------------------------------------------------------------------------
$ 1,237,000 $(1,687,058) $(3,194,000) $(1,571,608)
===============================================================================
10. Earnings per share:
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 issued to employees during the three-month and six-month
periods ended June 30, 2003 and 2002, the net earnings and related
earnings per share figures would be as follows:
=============================================================================================
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2003 2002 2003 2002
---------------------------------------------------------------------------------------------
Reported net (loss) earnings $ (1,217,323) $ (67,640) $ (1,198,231) $ 38,576
Deduct:
Total stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of related taxes of nil (270,752) (16,941,450) (732,673) (16,941,450)
---------------------------------------------------------------------------------------------
$ (1,488,075) $(17,009,090) $ (1,930,904) $(16,902,874)
=============================================================================================
-13-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2003 and 2002
(expressed in US dollars)
================================================================================
10. Earnings per share (continued):
Stock-based compensation (continued):
=========================================================================
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2003 2002 2003 2002
-------------------------------------------------------------------------
Earnings (loss) per share:
Basic:
As reported $ (0.08) $ 0.00 $ (0.08) $ 0.00
Pro forma (0.10) (1.14) (0.13) (1.11)
Diluted:
As reported (0.08) 0.00 (0.08) 0.00
Pro forma (0.10) (1.14) (0.13) (1.11)
=========================================================================
No options were granted in the three-month and six-month periods ended
June 30, 2003. The pro forma adjustment relates to the amortization of
compensation cost for options granted after January 1, 2002 over the
vesting periods.
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.
-14-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2003 and 2002
(expressed in US dollars)
================================================================================
11. Segmented information (continued):
Revenues and cost of sales by products are as follows:
=====================================================================================
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------------------------------------------------------------------------------------
Revenues:
Systems, parts and
others $12,381,330 $15,627,286 $24,476,052 $32,282,439
Hardware and software
maintenance 4,198,157 3,917,169 8,403,660 7,636,405
-------------------------------------------------------------------------------------
$16,579,487 $19,544,455 $32,879,712 $39,918,844
=====================================================================================
Cost of sales:
Systems, parts
and others $ 8,358,818 $ 9,663,538 $16,216,590 $19,337,198
Hardware and
software
maintenance 3,306,585 3,393,840 6,132,895 6,638,857
-------------------------------------------------------------------------------------
$11,665,403 $13,057,378 $22,349,485 $25,976,055
=====================================================================================
Property and equipment, goodwill and other intangible assets by geographic
area are as follows:
=====================================================================================
June 30, December 31,
2003 2002
-------------------------------------------------------------------------------------
(Audited)
Canada $ 6,087,965 $ 5,811,631
United States 4,876,915 5,150,637
-------------------------------------------------------------------------------------
$10,964,880 $10,962,268
=====================================================================================
-15-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 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:
=========================================================================================
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2003 2002 2003 2002
-----------------------------------------------------------------------------------------
Net (loss) earnings in
accordance with
Canadian GAAP $(1,217,323) $ (67,640) $(1,198,231) $ 38,576
Stock-based
compensation (i) -- 32,310 -- 9,778,143
-----------------------------------------------------------------------------------------
Net (loss) earnings in
accordance
with U.S. GAAP $(1,217,323) $ (35,330) $(1,198,231) $ 9,816,719
=========================================================================================
Earnings (loss) per share:
Basic $ (0.08) $ 0.00 $ (0.08) $ 0.65
Diluted (0.08) 0.00 (0.08) 0.64
=========================================================================================
The weighted average number of common shares outstanding for purposes of
determining basic and diluted earnings (loss) per share is the same as
that 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.
-16-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 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):
Under Canadian GAAP, the Company uses the settlement method of
accounting for options and compensation expense is not
recognized.
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 and six-month
periods ended June 30:
================================================================================================
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2003 2002 2003 2002
------------------------------------------------------------------------------------------------
Reported net (loss)
earnings $ (1,217,323) $ (35,330) $ (1,198,231) $ 9,816,719
Add: Stock-based
employee compensation
expense determined
under the intrinsic value
method included in
reported net earnings,
net of related taxes of nil -- (32,310) -- (9,778,143)
Deduct: Total stock-based
employee compensation
expense determined
under fair value method
for all awards, net of
related taxes of nil (4,131,275) (23,536,958) (9,256,295) (30,132,466)
------------------------------------------------------------------------------------------------
Pro forma net loss $ (5,348,598) $(23,604,598) $(10,454,526) $(30,093,890)
================================================================================================
Earnings (loss) per share:
Basic:
As reported $ (0.08) $ 0.00 $ (0.08) $ 0.00
Pro forma (0.36) (1.58) (0.70) (1.98)
Diluted:
As reported (0.08) 0.00 (0.08) 0.00
Pro forma (0.36) (1.58) (0.70) (1.98)
================================================================================================
-17-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 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.
In April 2003, FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities", which are effective for contracts entered into or
modified after June 30, 2003 and hedging relationships
designated after June 30, 2003.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity". The provisions of this statement are effective
for financial instruments entered into or modified after May
31, 2003. The Company does not expect FAS No. 149 and 150 to
have a material impact on its financial statements.
-18-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 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):
(b) Consolidated balance sheets:
==========================================================================================
June 30, 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 (2,360,256) (73,139,784) (1,162,025) (71,941,553)
Cumulative
translation
adjustment (1,484,471) -- (1,484,471) --
Accumulated other
comprehensive
loss -- (3,018,233) -- (3,018,233)
------------------------------------------------------------------------------------------
$118,262,799 $118,262,799 $119,461,030 $119,461,030
==========================================================================================
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 retailers and addresses labour shortage problems by
replacing manned checkout counters with our automated self-checkout stations.
-20-
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 successfully completed a trial with a leading
independent co-operative society, which is now in the process of installing our
systems in additional stores. Several other U.K. retailers have installed our
U-Scan systems in their stores on a trial basis.
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 period ended June 30, 2003.
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."
Trends in our revenues and cost of sales
Our most important customers, the retail supermarket chains, continue to
deal with difficult economic and competitive conditions. This has caused the
retail supermarket industry to significantly reduce generalized spending. As a
result, capital spending continues to lag and retailer demand for self-checkout
remains fragile. Under these current business conditions, we do not expect
demand for self-checkout to increase in the near future and we believe that our
business will continue to be challenging. In an effort to improve operating
efficiency and productivity in the face of our currently declining revenue base,
on August 12, 2003 we reduced our workforce by approximately 45 people, or
approximately 10% of our workforce, and we intend to reduce compensation for
management and certain of our employees. We anticipate annual savings of
approximately $3.5 million from these initiatives. The costs associated with
this restructuring are anticipated to be approximately $500,000 and will be
recorded in the third quarter of 2003.
Financial Condition
Our cash and short-term investment portfolio amounted to $78,597,000 as at
June 30, 2003, compared to $85,762,000 as at December 31, 2002. The decrease is
mainly attributable to cash used in operations and additions to property and
equipment and intangibles in the first six months of the year. 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.
-21-
Our inventory position at June 2003 was $22,014,000, down from $22,657,000
at the end of 2002. This decrease is mainly attributable to a reduction in
replacement parts as a result of a further obsolescence provisions and the sale
of older parts no longer required for the servicing of our customers. We believe
that, considering our current installed base, the level of replacement parts is
appropriate for the current servicing and support of our customers.
We have no long-term debt. Shareholders' equity as at June 30, 2003 was
$118,263,000 as compared to $119,461,000 as at December 31, 2002. The decrease
is attributable to the net loss for the period.
Results of Operations
First Six Months of 2003 Compared with First Six Months of 2002
Total revenues decreased by $7,039,000, or 18%, in the first six months of
the year compared to the same period last year. Product sales declined by
$7,806,000, or 24%, 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 $767,000,
or 10%, 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 19%
for the same period in 2002.
Total cost of sales decreased by $3,627,000, or 14%, in the six-month
period ended June 30, 2003 compared to the six- month period ended June 30,
2002. The decrease was consistent with the decrease in sales. Overall gross
margin decreased as a percentage of sales from 35% in 2002 to 32% in 2003,
primarily due to increased price competition.
Gross research and development expenses decreased by $210,000, or 20%,
from 2002 to 2003. As a percentage of total revenues, gross research and
development expenses remained constant at 3%. Research and development expenses
for the six months ended June 30, 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, the improvement
of the graphical user interface (GUI) and the development of the U-Scan Max(TM),
a dual takeaway belted station.
Selling, general, administrative and operating lease expenses decreased by
$1,434,000, or 10%, in 2003 compared to 2002. The decrease arose as a result of
the closure of the facilities in Kentucky and Phoenix in December 2002, the 12%
reduction in our workforce in February 2003 as well as an overall planned
decrease in spending.
Our net loss was $1,198,000 in the six-month period compared to net
earnings of $39,000 for the same period in 2002. On a per share basis, we lost
$0.08 (basic and diluted) compared to earnings of $0.00 (basic and diluted) in
2002. For the six-month period ended June 30, 2003, we recorded a tax recovery
of $3,194,000. Included in that amount was a recovery of $1,419,000, 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.
Second Quarter of 2003 Compared with Second Quarter of 2002
Total revenues decreased by $2,965,000 or 15%, in the second quarter of
the year compared to last year. Product sales declined by $3,246,000 or 21%, due
to a decrease in orders from
-22-
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 $281,000, or 7%, 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 25% of our total revenues in the second quarter of
2003 as compared to approximately 20% in the second quarter of 2002.
Total cost of sales decreased by $1,392,000, or 11%, in the second quarter
of 2003 as compared to the same period last year. The decrease was consistent
with the decrease in sales. Overall, gross margins decreased as a percentage of
sales from 33% to 30%. The decrease was mainly attributable to increased price
competition.
Gross research and development expenses decreased by $128,000 or 22%, from
2002 to 2003. As a percentage of total revenues, gross research and development
expenses remained constant at 3%. Research and development expenses for the
three months ended June 30, 2003, included the continuing development costs of
the U-Scan Mobile Attendant 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, the improvement of the
graphical user interface (GUI) and the development of the U-Scan Max, a dual
takeaway belted station.
Selling, general, administrative and operating lease expenses decreased by
$1,080,000 or 14%, in 2003 compared to 2002. The decrease arose as a result of
the closure of the facilities in Kentucky and Phoenix in December 2002, the 12%
reduction in our workforce in February 2003 as well as an overall planned
decrease in spending.
We incurred a net loss of $1,217,000 in the quarter compared to net loss
of $67,640 in 2002. On a per share basis, we lost $0.08 (basic and diluted)
compared to $0.00 (basic and diluted) in 2002. For the quarter ended June 30,
2003, we recorded a tax recovery of $1,237,000. Included in that amount was a
recovery of $175,000, 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.
Liquidity and Capital Resources
As of June 30, 2003, we had cash and short-term investments of $78,597,000
(December 31, 2002 - $85,762,000), and working capital of $105,242,000 (December
31, 2002 - $108,650,000).
Operating activities used $5,830,000 of cash and cash equivalents in the
first six months of 2003, compared to $10,369,000 used during the first six
months of 2002. The reduction in the use of cash and cash equivalents is as a
result of lower earnings in the second quarter of 2003, and lower balances of
operating assets and liabilities.
During the first six months of the year, we did not repurchase any shares
for cancellation, whereas during the first six months of 2002, through our stock
repurchase program, we repurchased for cancellation 535,100 Class "A" shares at
an average price of $16.23, for a total consideration of $8,684,000. The stock
repurchase program expired in March 2003.
In the first six months of 2003, the Company invested $1,334,000 (2001-
$2,038,000), to purchase property and equipment and intangibles, which
principally related to computer equipment, leasehold improvements software,
patents and license agreements.
-23-
We believe that our cash, cash equivalents 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 for the year ended December 31, 2002.
Item 4. Controls and Procedures
As of June 12, 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.
-24-
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.
Kroger and three of its subsidiaries have 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 Kroger and its subsidiaries
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
and 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.
-25-
Item 4.
We held our annual meeting of shareholders on June 19, 2003. The following
resolutions were adopted:
Votes
Resolution Votes For Against Withheld Spoiled Non-Voted
- ---------- --------- ------- -------- ------- ---------
Election of Directors (1) 9,447,091 344,824
Appointment of KPMG LLP 11,394,839 316,613
as Auditors
(1) The following directors were elected to hold office for the following
period:
Neil S. Wechsler and Thomas D. Murphy, to hold office until the close of
the 2006 annual meeting of shareholders.
The following directors did not stand for election and continue in office
for the following respective periods:
Henry M. Karp and Leon P. Garfinkle, each holding office until the close
of the 2004 annual meeting of shareholders;
Holden L. Ostrin, James S. Gertler and Sydney Sweibel, each to hold office
until the close of the 2005 annual meeting of shareholders; and
Jonathan J. Ginns, to hold office until the close of the 2006 annual
meeting of shareholders.
-26-
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
- ------ -------
31.1 Certification Pursuant to Section 302 of the Sarbanes-oxley Act of
2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-oxley Act of
2002
32.1 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.
32.2 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 8K - One report on Form 8K was filed on May 27, 2003
relating to the Company's Annual and Special Meeting of Shareholders held
on June 19, 2003 (Item 5).
-27-
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: August 13, 2003 By: /s/ Holden L. Ostrin
-----------------------------------
Holden L. Ostrin
Co-Chairman
By: /s/ Gary S. Wechsler
-----------------------------------
Gary S. Wechsler
Treasurer and Chief Financial
Officer
-28-