SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 2003
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-28572.
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OPTIMAL ROBOTICS CORP.
(Exact name of registrant as specified in its charter)
Canada 98-0160833
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
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4700 de la Savane, Suite 101, H4P 1T7
Montreal, Quebec, Canada (Postal code)
(Address of principal executive offices)
Registrant telephone number, including area code: (514) 738-8885
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of class:
Class "A" shares, no par value
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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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |X| .
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|
Aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant as of June 30, 2003 (computed by reference to
the last reported sale price of the Class "A" shares on the Nasdaq Stock Market
on such date): $108,660,986. For purposes of this calculation, only executive
officers and directors are deemed to be affiliates of the registrant.
Number of Class "A" shares outstanding at March 3, 2004: 14,936,235
DOCUMENTS INCORPORATED BY REFERENCE: NONE
In this Form 10-K, except where otherwise indicated, references to
"dollars" or "$" are to United States dollars, references to "Cdn.$" are to
Canadian dollars, and references to our "common shares" are to our Class "A"
shares.
Item 1. BUSINESS
Company Overview
Optimal is a leading North American provider of self-checkout systems to
retailers and depot and field services to retail, financial services and other
third-party accounts. Optimal has approximately 1,000 employees, which includes
approximately 800 software and hardware professionals, and facilities in
Montreal, Quebec, Plattsburgh, New York, Santa Ana, California, and Toronto,
Ontario and operations throughout North America.
Through the Optimal Services Group ("OSG"), Optimal offers its customers a
single-source solution for many of their computer maintenance and technology
support requirements, including hardware maintenance services, software support,
end-user/help desk services, network support and other technology support
services. Optimal also provides multi-vendor parts repair and refurbishment and
inventory management services as part of its logistics services portfolio. We
believe that we are a significant independent (i.e., not affiliated with an
original equipment manufacturer, or "OEM") provider of these services across a
broad range of computing environments. We deliver our services through an
extensive service organization located in more than 35 service locations
throughout the United States and Canada.
Optimal has recently entered into a number of agreements and has completed
certain transactions that have been done in connection with Optimal pursuing a
strategy of repositioning its business activities with the goal of enhancing
potential long-term financial results. As a result of these transactions,
Optimal will likely have a more balanced and stable business mix and, combined
with our strong balance sheet, continued opportunities to grow our business on a
more strategic basis. At the same time, we will monitor our business activities
and intend to take advantage of strategic and transactional opportunities that
may arise.
On September 30, 2003, we purchased the service business of RBA Inc, which
is now operated by OSG.Our service business includes field support and on-site
services, remote technical support, and repair centers. Our solid
infrastructure, based upon repair, logistics and call center facilities and
supported by field technicians, serves as the foundation for the quality service
and support provided to our customers on a daily basis.
On January 20, 2004, we announced a strategic business combination with
Terra Payments Inc. We believe that this combination will provide us with a
superior platform for enhanced growth and financial results and, following
completion of the transaction, it is intended for Terra Payments to be renamed
Optimal Payments Inc. The completion of the transaction is subject to certain
conditions, including approval by the shareholders of both companies and
regulatory approvals. The transaction is expected to be completed by mid-April
2004. Terra Payments is a growing presence in the payment processing industry
and provides technology and services that businesses require to accept credit
card, electronic check and direct debit payments. Terra Payments processes
credit card payments primarily for non-face-to-face transactions, including
mail-order/telephone-order, licensed online gaming and other online merchants,
as well as for retail point-of-sale merchants. Terra Payments also processes
checks and direct debits online and by telephone. It is headquartered in
Montreal, Quebec with operations throughout North America and in the United
Kingdom.
On February 15, 2004, Optimal and NCR Corporation ("NCR") entered into an
agreement in principle for NCR to acquire Optimal's self-checkout business for
$30 million. The agreement covers the self-checkout systems and services
marketed by Optimal, under the U-Scan(R) brand. Completion of the transaction is
subject to execution of definitive documentation, approval by Optimal
shareholders, receipt of certain third-party consents and approvals, and other
customary conditions. Optimal has agreed to pay NCR a termination fee under
certain circumstances. The transaction is expected to close by mid-April 2004.
On March 1, 2004, Optimal announced the completion of the acquisition of
the hardware service division of Systech Retail Systems at a net cost of $3
million, subject to certain post-closing adjustments. Optimal
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believes that the combination of the Systech hardware service division with
Optimal's existing service organization will contribute positively to Optimal's
financial results in 2004 and should add over $11 million in annual revenues.
Subject to the completion of our merger with Terra Payments and the sale
of our self-checkout business, we will operate in two segments: the payment
processing business, through Optimal Payments, and the service business, through
OSG.
Our Corporate Information
Our company was formed in 1984 and is incorporated under the federal laws
of Canada. We commenced our self-checkout business in 1991. Our principal office
is located at 4700 de la Savane, Suite 101, Montreal, Quebec, H4P 1T7, and our
telephone number is (514) 738-8885. We have three subsidiaries: Optimal Robotics
Inc., a wholly-owned Delaware corporation; Optimal Services Group Inc. (formerly
Optimal Robotics (Canada) Corp.), a wholly-owned Canadian corporation; and
Optimal Robotics Plc, a majority-owned United Kingdom corporation.
Our Industry Segments
Our U-Scan automated self-checkout systems have traditionally been
targeted towards supermarket and supercenter chains in North America and, more
recently, the United Kingdom. Initial results from our efforts to expand into
new markets fostered our belief that the potential market for self-checkout
solutions includes applications beyond supermarkets and supercenters. See
"Business - Our Customers," below. The U-Scan system, which can be quickly and
easily operated, addresses shoppers' needs in each of these markets, by
providing them with greater customer service and more control over the checkout
process. In addition to providing stores with a dependable and economical
alternative to maintaining cashiers in both express and regular checkout lanes,
we believe that self-checkout systems allow large retailers to offer shoppers
the speed of a smaller, convenience store while maintaining the greater
selection and lower prices that a larger store generally offers.
Our service division, OSG, was established with a specific focus on the
installation and service of our U-Scan self-checkout systems and gradually
expanded to provide multi-vendor hardware maintenance outsourcing services and
repair capabilities. Our service business includes preventive and remedial
maintenance, field service dispatch, support and on-site services, remote
technical monitoring and support, and repair centers.
Our Customers
Our most significant self-checkout customers have been supermarkets and
supercenters, including the following retailers:
o The Kroger Co.
o The Great Atlantic & Pacific Tea Company, Inc. (A&P)
o Loblaw Companies Limited
o Ahold NV (which includes Bi-Lo, Tops, Giant Food and Stop & Shop in
the United States)
A majority of the systems that we sold in 2003 were sold to The Kroger Co.
through its various divisions and affiliates. The loss of this customer would
have a material adverse effect upon our self-checkout business and our company.
Our most significant service customers include financial institutions,
retailers, government agencies, including video lottery repair, small and medium
business enterprises ("SME's"), manufacturers as well as small office/home
clientele.
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Our service clientele benefit from the following services:
o debit/credit card and POS maintenance services as well as kiosk and
peripheral device repair services,
o computer maintenance services for their mission critical computer
systems, other POS equipment and software support services,
o reliance on our staging, integration and depot services,
o outsourcing of our hardware maintenance services to agents that
lease or sell debit/credit card systems and ATMs, and
o software support, warranty management, and bring- in centers.
Our Competitive Advantages
In the self-checkout market, we believe that the following competitive
advantages have helped us become a leading provider of systems to retailers in
North America:
o a large installed base of self-checkout systems in North America and
well-established relationships with leading retailers,
o an established brand name and corporate identity,
o ten years' experience and expertise in designing self-checkout
solutions for retailers,
o a focused business strategy targeting the self-checkout market,
o a senior management team and experienced sales force familiar with
the needs of retailers, and
o superior customer service through a 24 hours per day, 365 days per
year on-line helpdesk supported by a dedicated, North American
network of service personnel.
In the computer services market, competition among providers, both OEM's
and independent service organizations, is intense. We believe that the primary
competitive factors in the computer services industry are the quality of a
company's services, the ability to service a wide range of products supplied by
a variety of vendors, the geographic coverage of a company's services and the
cost to the customer of those services. We believe that customers are
increasingly looking for service providers capable of providing a single-source
solution for their increasingly complex multi-vendor systems.
We believe that the widespread service coverage, state-of-the-art call
management system and complete equipment repair capabilities of our services
group offer all the advantages of a high quality service provider. Our customers
benefit from a dedicated project management team, web-based solutions and
sophisticated tracking tools.
We offer our customers a single-source solution for virtually all of their
computer maintenance and technology support requirements, including hardware
maintenance services, software support, end-user/help desk services, network
support and other technology support services. As well, we can offer services
such as hardware support, software support and network support. We also provide
multi-vendor parts repair and refurbishment and inventory management services as
part of our logistics services portfolio.
Our Business Strategy
Our primary objectives are to sell more U-Scan systems and other
self-checkout systems to existing customers and to new supermarkets and
supercenters, both in North America and the United Kingdom. As we move to
reposition our Company, we intend to continue to grow our service business and,
subject to the
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completion of our proposed combination with Terra Payments, to focus on growing
the payment processing business to become a significiant entity in both markets.
Our intention is to grow organically and, at the same time seek acquisition
opportunities that can enhance our business, both operationally and through
improved financial results.
Our principal business strategy for service is to provide the service
solution that will meet and exceed customer needs. All elements of our business
are designed to minimize client equipment concerns. We will continue to monitor
acquisition opportunities in the services business that will enable us to
leverage our existing assets and enhance growth and financial results.
Subject to the completion of our proposed combination with Terra Payments,
our strategy for the payment processing business is to grow organically and by
acquisition of either small companies in the payment processing industry or of
portfolios of payment processing controlled by independent sales organizations
("ISO's"). We also intend to be opportunistic if acquisition opportunities arise
in related areas of financial services that we believe can be successfully
integrated into our operations.
Systems, Services and Products
U-Scan System
A U-Scan system, in a typical configuration for a supermarket or
supercenter application, consists of four self-checkout stations and one manned
supervisor terminal. Some of our customers have installed systems consisting of
up to six self-checkout stations.
In a typical configuration, the U-Scan system occupies the same floor
space as would three manned checkout lanes. As a result, shoppers are provided
with at least one, and up to three additional checkout stations.
Service
We service customers such as lottery corporations, financial institutions,
government departments, retailers and SME's and we service the following
equipment:
Client/server systems Scanners
Networks Fax machines
Mini-computers and peripheral equipment Communications hardware - modems, hubs
IBM (AS/400 and RS/6000) Multiplexers
Microcomputers Lottery terminals
Laptops Video lottery terminals
Dot-Matrix, laser and ink jet printers Point of sale terminals
Uninterruptible power supplies (UPS) Automated teller machines (ATMs)
Using the latest Palm VII technology, many of our service technicians
maintain remote internet access to our central dispatch center. Many of our
technicians are equipped with wireless handheld devices, which allow them to
access service call information in real time and thereby provide the highest
level of customer service to our clients.
As a result of working with customers in many different capacities, we
have developed expertise in managing high-technology environments as well as
high-security and confidential sectors.
We are equipped to handle all of a business's on-site service needs. With
our widespread North American coverage and well-trained field service
technicians, we are available to respond promptly to minimize any unnecessary
downtime.
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Optimal 6300 POS System
The Optimal 6300 POS(TM) system is an open-architecture, PC-based point-of-sale
cash register system utilizing Windows NT/95 or Novel SFTIII mirrored servers.
We offer only the system software for the Optimal 6300 POS system. The customer
is responsible for purchasing the system hardware. The Optimal 6300 POS system
communicates with a store's information systems and has been designed for use as
a conventional cash register checkout system in high-volume retailers such as
supermarkets, department stores and warehouse stores.
We were engaged by Price Chopper Supermarkets of Schenectady, New York, to
develop and install the Optimal 6300 POS system. We receive a monthly fee for
the continuing development of the system. The Optimal 6300 POS system is
presently installed in all of Price Chopper's supermarkets. The system is also
installed at Atlantic Food Mart in Reading, Massachusetts.
The Optimal 6300 POS assets are intended to be sold with the sale of the
self-checkout business.
Sales and Marketing
We have primarily marketed our U-Scan systems directly to customers
through our own sales personnel.
Sales to a retail chain typically follow a three-step process, in which
the customer takes delivery of a single U-Scan station and a supervisor terminal
in a testing facility, then places a full system in a store for evaluation, and
finally decides whether to commit to a volume order.
Our service offerings are also marketed through our own sales personnel.
Research and Development
Our research and development efforts are focused on improving our existing
products and developing new products. To date, most of the software relating to
our products has been developed internally by our employees.
Our research and development expenses, net of tax credits, were
approximately $795,000 in 2003, $1,290,000 in 2002 and $1,224,000 in 2001.
Self-Checkout System Assembly
We assemble all of our U-Scan systems at our Plattsburgh, New York
facility. See Item 2--"Description of Properties."
Suppliers
The U-Scan system is assembled from components that are readily available
from numerous suppliers. Given the open architecture of our system, we are not
dependent on any single supplier for any particular component. The U-Scan system
casing is specially manufactured for us by any one of two suppliers. Repair and
replacement parts for our service business are purchased from a number of
suppliers without dependance on any one supplier.
Service and Field Support
Self-Checkout Service
We offer and provide both software and hardware service and support for
the U-Scan system.
Software support is provided to all customers via our helpdesk on a 24
hours per day, 365 days per year basis. Our helpdesk and support personnel are
trained to diagnose software and hardware problems that may arise in the field
relating to our U-Scan systems.
Hardware support is generally provided by our service division, OSG,
through our own technicians and, in remote locations, through independent
service companies with whom we have contracted and who are trained
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and certified by us. Alternatively, U-Scan system customers can elect to have
their own facility-engineering group perform hardware maintenance on the system,
in which case we train such personnel.
If there is a problem caused by a hardware malfunction, which cannot be
solved by the customer with the support of our helpdesk, or another matter
requiring personnel to be on-site, a technician is dispatched to assist the
customer.
Service Offerings
OSG, provides helpdesk support 7:00am to 11:00pm 365 days a year along
with the following services:
o Repair center for computers and peripherals, including
printers and POS equipment
o Management of manufacturers' warranties
o Software integration, network support and upgrades
o Training and project management
Government Regulation
We, and certain of the components that are used in our self-checkout
products are subject to regulation by various agencies in the United States and
in other countries in which our products are sold. Laser safety is regulated in
the United States by the Food and Drug Administration's Center for Devices and
Radiological Health and in Canada by the Radiation Protection Bureau of Health
Canada. In addition, the U.S. Occupational Safety and Health Administration and
various states and American cities have promulgated regulations concerning
working condition safety standards in connection with the use of lasers in the
workplace. Radio emissions are the subject of governmental regulation in all
countries in which we sell and expect to sell our products. We also voluntarily
submit our products to Underwriters Laboratories Inc., for certification for
product safety, in the United States by Underwriters Laboratories Inc., and in
Canada by Underwriters' Laboratories of Canada, which is recognized by the
Standards Council of Canada.
Competition
In the self-checkout market, we compete against manufacturers of
traditional cashier-operated terminals and other partially automated
self-scanning devices, including NCR and IBM. Certain of our competitors are
larger and have greater financial, technical, and other resources.
Competition for our service offerings is significant and similar offerings
are available from many other service providers. Certain of our competitors are
larger and have greater financial, technical and other resources.
Intellectual Property
We have registered or have filed applications for the registration of over
one dozen different trademarks in the United States, Canada and the European
Union.
We hold patents issued in the United States, Canada and certain member
states of the European Union and have additional patents pending in the United
States for various components of our self-checkout system. Patents pending in
the United States may also be filed, within prescribed periods, in various
member states to the international Patent Cooperation Treaty.
As a general policy, we file patent applications, in jurisdictions where
we consider it to be appropriate, to protect our technological position and new
product development. Although we believe that our patents provide some
competitive advantage and market protection, we rely for our success primarily
upon our proprietary know-how, innovative skills, technical competence and
marketing abilities. Furthermore, there is no assurance that these patents will
not be challenged, invalidated or circumvented in the future.
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We regard our software as proprietary and attempt to protect it with
copyrights, trade secret measures and nondisclosure agreements. Despite these
restrictions, it may be possible for competitors or users to copy aspects of our
products or to obtain information that we regard as trade secrets. Existing
copyright laws afford only limited practical protection for computer software.
The laws of foreign countries generally do not protect our proprietary rights in
our products to the same extent as the laws of the United States and Canada. In
addition, we may experience more difficulty in enforcing our proprietary rights
in certain foreign jurisdictions.
Employees
As of December 31, 2003, we employed 1,012 full time employees, as
compared to 529 at the end of 2002. The substantial increase was due to the
purchase of the services business of RBA Inc. on September 30, 2003.
Our employees are not represented by any collective bargaining unit and we
have never experienced a work stoppage. We believe that our employee relations
are good.
Financial Information About Segments and Geographic Areas
See note 17 of the notes to our consolidated financial statements, which
are included in Item 8 - "Financial Statements and Supplementary Data."
Where You Can Find Additional Information
We are required to furnish to our shareholders annual reports containing
audited consolidated financial statements certified by our auditors in Canada
and quarterly reports containing unaudited financial data for the first three
quarters of each fiscal year following the end of the respective fiscal quarter.
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.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address or telephone number:
Optimal Robotics Corp.
4700 de la Savane
Suite 101
Montreal, Quebec H4P 1T7
Attention: Secretary
(514) 738-8885
Internet Access
Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") are available free of charge on or through our
website (www.optimal-robotics.com) as soon as reasonably practicable after we
electronically file the material with, or furnish it to, the Securities and
Exchange Commission (the "Commission").
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Item 2. DESCRIPTION OF PROPERTIES
Facilities
Our headquarters are located in approximately 51,000 square feet of leased
space at 4700 de la Savane, Montreal, Quebec, under a lease that expires on
January 31, 2006, subject to our right to renew the lease for an additional
28-month period. Our self-checkout systems are assembled in a facility located
in approximately 43,000 square feet of leased space in Plattsburgh, New York,
under a lease that expires on March 31, 2006. The Plattsburgh lease may be
renewed for an additional three-year period. We repair and distribute our
replacement parts out of a facility located in approximately 66,000 square feet
of leased space in Santa Ana, California, under a lease that expires on
September 30, 2006. OSG is headquartered at 7350 Trans Canada, Montreal, Quebec
in a leased facility of 110,000 square feet, which includes a repair center,
bring in center and administrative offices. Other repair facilities are situated
in Toronto, Ontario and Calgary, Alberta.
We also maintain parts storage facilities in 22 states and ten Canadian
provinces. Additional hub facilities may be opened and existing hub facilities
may be expanded, in the United States and Canada, to the extent required to
support current and future installations and service.
Item 3. LEGAL PROCEEDINGS
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. Kroger and two of its subsidiaries were also sued by IAS in
the action based upon the same issues underlying its suit filed against us in
1999 and they were contractually entitled to be indemnified by us for any
damages for any patent infringement. On January 27, 2004, we entered into a
settlement agreement with IAS, which resolved all potential claims by IAS and
brought this action to an end. The amount that we paid to end the action is not
considered to be material to us.
A second party also sent a demand letter to us in 1999, and again in
February 2001, alleging a different patent infringement. In March 2003, this
second party sent a third demand letter to us alleging infringement of
additional patents. Although, after consultation with counsel, we believe that
this second claimant should not prevail if a lawsuit is brought to assert its
claims and that the assertion of 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 our self-checkout system infringes upon such claimant's rights. A
determination by a court that the system infringes upon such claimant's rights
would have a material adverse effect on our business and results of operations.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Our common shares trade on the Nasdaq National Market under the
symbol "OPMR." The following table sets forth the range of high and
low bid prices for our common shares as reported by the Nasdaq Stock
Market. These quotations reflect inter-dealer prices without retail
mark-up, mark-down or commission and may not necessarily represent
actual transactions.
Nasdaq Stock Market
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$ High $ Low
------ -----
2003
4th Quarter.......................... 9.00 7.00
3rd Quarter.......................... 9.67 6.30
2nd Quarter.......................... 8.35 5.75
1st Quarter.......................... 6.50 5.67
2002
4th Quarter.......................... 7.68 5.57
3rd Quarter.......................... 8.45 6.69
2nd Quarter.......................... 17.50 7.29
1st Quarter.......................... 36.15 13.86
(b) Holders
At March 3, 2004, there were 1,835 stockholders of record of our
common shares.
(c) Dividends
Our policy is to retain all earnings, if any are realized, for the
development and growth of our business. We have never declared or paid cash
dividends on our common shares and we do not anticipate paying cash dividends in
the foreseeable future. Any determination to pay dividends will be at the
discretion of our Board of Directors and will depend upon our financial
condition, results of operations, capital requirements, limitations contained in
loan agreements, if any, and such other factors as our Board of Directors deems
relevant.
Item 6. SELECTED FINANCIAL AND OTHER DATA
The following selected financial data as of December 31, 2003 and 2002 and
for the years ended December 31, 2003, 2002 and 2001 are derived from and are
qualified by reference to our audited consolidated financial statements, which
are included in Item 8--"Financial Statements and Supplementary Data." The
following selected financial data as of December 31, 2001, 2000 and 1999 and for
the years ended December 31, 2000 and 1999 are derived from our audited
financial statements, which are not included herein.
The data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," our consolidated
financial statements, the related notes and the other financial information
included elsewhere in this Form 10-K.
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Our consolidated financial statements are prepared on the basis of
Canadian generally accepted accounting principles ("GAAP"), which is different
in some regards from U.S. GAAP. For a description of the material differences
between Canadian GAAP and U.S. GAAP in regard to our consolidated financial
statements, see note 20 of the notes to our consolidated financial statements,
which are included in Item 8--"Financial Statements and Supplementary Data."
Year ended December 31,
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2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(U.S. dollars, in thousands except per share data)
Income Statement Data:
Revenues ..................................................... $ 67,188 $ 75,718 $ 101,421 $ 60,971 $ 29,634
Cost of sales ................................................ 45,422 50,262 63,159 45,558 23,457
--------- --------- --------- --------- ---------
Gross margin ................................................. 21,766 25,456 38,262 15,413 6,177
Selling, general, administrative and other expenses .......... 31,274 33,212 21,280 10,629 6,126
Research and development expenses, net of tax credits ........ 795 1,290 1,224 913 220
Restructuring ................................................ 748 1,039 -- -- --
Write-down of inventory ...................................... -- -- -- -- 604
Investment income ............................................ (980) (1,817) (3,148) (3,896) (893)
--------- --------- --------- --------- ---------
(Loss) earnings before income taxes .......................... (10,071) (8,268) 18,906 7,767 120
(Recovery of) provision for income taxes ..................... (3,903) (2,941) 9,600 2,972 (3,532)
--------- --------- --------- --------- ---------
Net (loss) earnings .......................................... $ (6,168) $ (5,327) $ 9,306 $ 4,795 $ 3,652
========= ========= ========= ========= =========
Weighted average number of common shares outstanding
(thousands) ............................................... 14,936 15,059 14,705 13,104 9,699
Weighted average diluted number of common shares
Outstanding (thousands)(1) ................................ 14,937 15,101 15,573 14,499 10,929
Basic net (loss) earnings per common share ................... $ (0.41) $ (0.35) $ 0.63 $ 0.37 $ 0.38
========= ========= ========= ========= =========
Diluted net (loss) earnings per common share(1) .............. $ (0.41) $ (0.35) $ 0.60 $ 0.33 $ 0.33
========= ========= ========= ========= =========
Balance Sheet Data: December 31,
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2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(U.S. dollars, in thousands)
Cash, cash equivalents and short-term investments ............ $ 78,514 $ 85,762 $ 104,104 $ 76,149 $ 29,136
Working capital .............................................. 92,744 108,650 124,550 100,030 36,032
Total assets ................................................. 135,542 129,691 147,691 111,273 44,206
Shareholders' equity ......................................... 113,293 119,461 133,473 104,746 39,705
U.S. GAAP Financial Data: Year ended December 31,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(U.S. dollars, in thousands except per share data)
Revenues ..................................................... $ 67,188 $ 75,718 $ 101,421 $ 60,971 $ 29,634
Net (loss) earnings .......................................... (6,168) 4,451 (23,294) (14,105) (5,575)
Basic net (loss) earnings per common share ................... (0.41) 0.30 (1.58) (1.08) (0.57)
Diluted net (loss) earnings per common share ................. (0.41) 0.29 (1.58) (1.08) (0.57)
December 31,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(U.S. dollars, in thousands)
Total assets ................................................. $ 135,542 $ 129,691 $ 147,691 $ 111,273 $ 44,206
(1) In 2001, we adopted the new recommendations of the Canadian Institute of
Chartered Accountants with respect to the calculation of diluted earnings
per share, which requires the use of the treasury stock method. The new
recommendations have been applied retroactively and accordingly, all
figures presented for the periods prior to 2001 have been adjusted to
conform to the new recommendations. See note 2(o) of the notes to our
consolidated financial statements, which are included in Item 8 -
"Financial Statements and Supplementary Data."
11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of our company describes our business, our vision and strategy,
seasonality and trends within our business environment, the critical accounting
policies of our company that will help you understand our consolidated financial
statements, the principal factors affecting our results of operations, and
liquidity and capital resources. This discussion should be read in conjunction
with our consolidated financial statements for the years ended December 31,
2003, 2002 and 2001, which are included in Item 8--"Financial Statements and
Supplementary Data", and the factors set forth below under "Forward-Looking
Statements" and all other information contained in our Form 10-K. All dollar
amounts are expressed in United States dollars (unless otherwise stated) and,
other than those expressed in millions of dollars, have been rounded to the
nearest thousand.
We prepare our consolidated financial statements in accordance with
Canadian GAAP, with a reconciliation to U.S. GAAP, as disclosed in note 20 of
the notes to our consolidated financial statements, which are included in Item
8--"Financial Statements and Supplementary Data."
Overview and Strategy
We are a leading North American provider of self-checkout systems to
retailers, and depot and field services to retail, financial services and other
third-party accounts. We have approximately 1,000 employees, which includes
approximately 800 software and hardware professionals, with facilities in
Montreal, Quebec, Plattsburgh, New York, Santa Ana, California, and Toronto,
Ontario and operations throughout North America.
We have recently entered into a number of agreements and have completed
certain transactions (described below) that have been done in connection with
our pursuing a strategy of repositioning our business activities with the goal
of enhancing potential long-term financial results. We believe these
transactions will reposition us as a strong payment processing and services
company. As a result of these transactions, we will likely have a more balanced
and stable business mix and, combined with our strong balance sheet, continued
opportunities to grow our business on a more strategic basis. At the same time,
we will monitor our business activities and intend to take advantage of
strategic and transactional opportunities that may arise. Important to this
strategy is a focused approach to potential acquisitions with an emphasis on
increasing long-term financial results.
Significant developments
On September 30, 2003, we acquired the service business of RBA Inc.
("RBA"), a privately held company based in Montreal, Quebec, and integrated it
into OSG. As a result of the RBA acquisition, we are one of the largest
independent Canadian providers of multi-vendor hardware maintenance outsourcing
services, with over 350,000 sites being serviced. Our maintenance services in
Canada include interac/credit card POS systems, video lottery and bring-in
centers. We deliver our services through an extensive service organization with
a network of over 35 service locations throughout the United States and Canada.
The net cost of the RBA transaction was approximately $6 million. We
arranged for a credit facility with a Canadian chartered bank to fund this
acquisition. We believe that the combination of the RBA business with our
existing service organization will contribute positively to our financial
results in 2004. The RBA transaction presents significant synergies for us. It
continues our strategy of growing our service and support business, as well as
opening new markets, expanding our customer base, and increasing our service
offerings and providing access to additional products.
On January 20, 2004, we announced a strategic business combination with
Terra Payments Inc. We believe that this combination will provide us with a
superior platform for enhanced growth and financial results and, following
completion of the transaction, it is intended for Terra Payments to be renamed
Optimal Payments Inc. The completion of the transaction is subject to certain
conditions, including approval of the shareholders of both companies and
regulatory approvals. The transaction is expected to be completed by mid-April
2004.
12
Terra is a growing presence in the payment processing industry and
provides technology and services that businesses require to accept credit card,
electronic check and direct debit payments. Terra processes credit card payments
primarily for non-face-to-face transactions, including
mail-order/telephone-order, licensed online gaming and other online merchants,
as well as for retail point-of-sale merchants. Terra also processes checks and
direct debits online and by telephone. It is headquartered in Montreal with
operations throughout North America and in the United Kingdom.
The merger agreement, which was unanimously approved by the Boards of
Directors of each company, provides for a stock-for-stock merger in which .4532
of our common shares will be exchanged for each Terra common share and will
result in existing Terra shareholders owning approximately one-third of the
combined company. The transaction is expected to close in mid-April 2004, and is
subject to shareholder approval. See note 22(a) of the notes to our consolidated
financial statements, which are included in Item 8 - "Financial Statements and
Supplementary Data".
On February 15, 2004, we and NCR Corporation ("NCR") entered into an
agreement in principle and on March 4, 2004, we and NCR entered into a
definitive asset purchase agreement, for NCR to acquire our self-checkout
business for $30 million. The agreement covers the systems and services marketed
by us under the U-Scan(R) brand. Completion of the transaction is subject to
approval by our shareholders, receipt of certain third-party consents and
approvals, and other customary conditions. We have agreed to pay NCR a
termination fee under certain circumstances. The transaction is expected to
close by mid-April, 2004. Refer to note 22(b) of the notes to our consolidated
financial statements, which are included in Item 8 - "Financial Statements and
Supplementary Data".
On March 3, 2004, we announced the strategic acquisition of the hardware
service division of Systech Retail Systems ("Systech") at a net cost of $3
million, subject to post-closing adjustments. Optimal believes that the
combination of the Systech hardware service division with Optimal's existing
service organization will contribute positively to Optimal's financial results
in 2004 and should add over $11 million in annual revenues.
Subject to the completion of our merger with Terra and the sale of our
self-checkout business, we will operate in two segments: the payment processing
business, through Optimal Payments, and the service business, through OSG.
The following describes our existing business as at December 31, 2003:
Seasonality
Our U-Scan system revenue and gross margin vary from quarter to quarter as
a result of the level of business volumes and seasonality of demand. Our service
business revenue is relatively balanced from quarter to quarter.
Trends in our revenues and cost of sales
During 2003, we continued to experience a decline in sales of our U-Scan
systems due to a relunctance by supermarket retailers to spend on information
technology and a heightened competitive landscape in the self-checkout
marketplace.. Service revenue accounted for approximately 42% of our total
revenues in 2003, as compared to approximately 25% for 2002. The increase of
service revenue as a percentage of total revenues resulted in a decrease in our
overall gross margins in 2003, since this segment generated a lower overall
gross margin than system sales. Gross margins on service contracts are expected
to increase during 2004 as a result of increasing our service offerings within
our customer base as well as the increased number of service contracts due to
the acquisition of the RBA services business.
Gross margins on the sale of U-Scan systems in 2004 (to the expected
mid-April date of sale of the self-checkout business) are expected to remain
generally consistent with gross margins realized in 2003.
13
Critical accounting policies
The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with Canadian GAAP. On an ongoing basis, we evaluate our
estimates, including those related to bad debts, inventories, investments,
intangible assets, income taxes, and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
A critical accounting policy is one that is important to the understanding
of a company's financial condition and results of operations and requires the
management of the company to exercise judgment or make estimates. We believe the
following are the critical accounting policies used in the preparation of our
consolidated financial statements:
o Revenue Recognition: Approximately 58% of 2003 revenues were
derived from the sale of our U-Scan systems. Revenue from these product
sales is recognized upon shipment, delivery or upon customer acceptance of
the product, based upon the terms as defined in the customer contract. In
general, sales to a retail chain follow a three-step process, in which the
customer takes delivery of a single U-Scan station for testing purposes,
then places a full system in a store for evaluation and finally decides
whether to commit to a volume order. No revenue is recognized for a new
customer until the customization and integration process is complete and
accepted by the customer. Installation revenue, which is billed separately
from product sales, is recognized at the time the installation has been
provided to the customer. Installations can be performed by our
technicians, by the customer's trained and certified employees, or by
certified third party installers. Revenue from maintenance, which is
subject to separate service and support contracts, is deferred and
amortized ratably over the term of the contract.
o Inventories: Raw material inventory is stated at the lower of
landed cost or replacement cost. Finished goods and work in process
inventory are stated at the lower of cost or net realizable value. Cost is
determined on the basis of weighted average costs.
In order to provide maintenance and repair services to our customers, we
are required to maintain significant levels of replacement parts. Parts
are stated at cost, less an allowance for obsolescence and shrinkage. The
costs of refurbishing parts are included in the cost of sales as incurred.
Periodic revisions to allowance estimates are required, based upon the
evaluation of several factors, including changes in estimated product life
cycles, usage levels, and technological changes. Changes in these
estimates are reflected immediately in income. Management bases its
allowance estimates on the expected service life of replacement parts and
its expectation as to parts obsolescence.
Newly adopted accounting policies
Stock-based compensation
In November 2003, the Canadian Institute of Chartered Accountants ("CICA")
revised Handbook Section 3870, Stock-based Compensation and other Stock-based
Payments, with respect to the accounting for stock-based compensation and other
stock-based payments. The revised recommendations permit early adoption and
require that, beginning January 1, 2004, the fair value-based method be used to
account for all transactions whereby goods and services are received in exchange
for stock-based compensation and other stock-based payments. The revised
standard no longer permits the use of the settlement method of accounting for
stock-based employee compensation awards. Under the settlement method, any
consideration paid by employees on the exercise of stock options is credited to
share capital and no compensation expense is recognized. Under the fair
value-based method, compensation cost is measured at fair value at the date of
grant and is expensed over the award's vesting periods.
14
In accordance with one of the transitional options permitted under Section
3870, we have elected to early adopt the new recommendations effective January
1, 2003 and prospectively apply the standard for employee stock awards granted
after January 1, 2003. Previously, we applied the settlement method of
accounting to employee stock options. The adoption of this standard had no
impact on our results of operations in 2003 as no options were granted during
the year. See Note 2(n) of the notes to our consolidated financial statements
for disclosure required for the pro forma effect on net earnings and earnings
per share if the fair value-based method had been used to account for employee
stock options granted between January 1, 2002 and December 31, 2002.
Impairment and disposal of long-lived assets
Effectively January 1, 2003, we adopted the new recommendations of the
CICA Handbook Section 3063, Impairment of Disposal of Long-lived Assets and
revised Section 3475, Disposal of Long-Lived Assets and Discontinued Operations.
These two sections establish standards for the recognition, measurement and
disclosure of the impairment of long-lived assets held for use by us. 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. There
was no impact on our financial statements as a result of the adoption of these
recommendations.
Goodwill and other intangible assets
In 2002, we adopted new recommendations that changed the accounting for
goodwill from an amortization method to an impairment-only approach, with the
effect that goodwill and other intangibles determined to have an indefinite life
are no longer to be amortized but are to be tested for impairment at least
annually. In addition, the standard requires acquired intangible assets to be
separately recognized if the benefit of the intangible assets is obtained
through contractual or other legal right, or if the intangible assets can be
sold, transferred, licensed, rented or exchanged.
On September 30, 2003, we acquired the RBA service business resulting in
goodwill in the amount of $3.8 million. Intangible assets pertaining to customer
contracts and customer relationships of $3.4 million were also recorded and are
being amortized over six years, which is our estimate of their useful lives. As
of December 31, 2003, we had unamortized goodwill in the amount of approximately
$6.8 million, and unamortized identifiable intangible assets in the amount of
approximately $5.3 million. Goodwill was tested for impairment during the last
quarter of fiscal 2003. We consider that there was no impairment in the carrying
value of goodwill, or in the carrying values of the customer contracts and
relationships and the other intangible assets as at that date.
Financial Condition
Our cash, cash equivalents and short-term investments portfolio amounted
to $78,514,000 as at December 31, 2003, compared to $85,762,000 as at December
31, 2002. The decrease relates primarily to cash used in operations of
$6,489,000 and the purchase of property, equipment and intangible assets of
$2,349,000. Our portfolio of liquid and investment grade investments consists of
U.S.- and Canadian-dollar denominated discounted notes and bonds. We expended $3
million of cash to acquire the hardware services business of Systech, subject to
certain post-closing adjustments. As part of the proposed NCR transaction, our
cash position should increase by approximately $30 million, representing the
proceeds from the sale of this business upon closing.
Our inventory position at 2003 year-end was $22,938,000, increased from
$22,657,000 at the end of 2002. We managed to reduce our year-end inventory
levels to $1,183,000 of finished goods, $641,000 of work in process and
$3,203,000 of raw materials, compared to $1,648,000 of finished goods $356,000
of work in process and $4,469,000 of raw materials at the end of 2002.
Replacement parts increased to $17,911,000, for 2003 from $16,185,000, for 2002,
due to the purchase of the RBA services business. We believe, considering our
current installed base, our service product and our anticipated revenue for
2004, that this level of product and service replacement parts is appropriate
for the current servicing and support for our customers. Upon the completion of
the proposed NCR transaction, our total inventory position will decrease by
approximately $18 million.
15
Bank indebtedness at year-end was $10,726,000, which was incurred in
connection with the acquisition of the RBA service business and the repayment of
its existing debt. Due to the current low-interest rate environment coupled with
the rapid decline of the U.S. dollar in relation to the value of the Canadian
dollar, we made a determination that it would be advantageous to us to utilize a
portion of our bank operating credit facility to finance the acquisition of RBA.
In doing so, we were able to obtain a favorable interest rate in connection with
that loan.
We have no long-term debt. Shareholders' equity as at December 31, 2003
was $113,293,000 as compared to $119,461,000 as at December 31, 2002.
Quarterly Results
The following table sets forth certain summarized unaudited quarterly
financial data for the periods presented. The financial data has been derived
from unaudited financial statements that, in the opinion of management, reflect
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of such quarterly data. The operating results for any
quarter are not necessarily indicative of the results to be expected for any
future period.
The unaudited financial statements are prepared on the basis of Canadian
GAAP, which is different in some regards from U.S. GAAP. For a description of
the material differences between Canadian GAAP and U.S. GAAP in regard to our
consolidated financial statements, see note 20 of the notes to our consolidated
financial statements, which are included in Item 8--"Financial Statements and
Supplementary Data."
In December 2003, we adopted the fair value-based method of accounting for
stock-based compensation on a prospective basis beginning January 1, 2003. There
is no impact on our reported quarterly results for 2003 as no options were
granted during the year.
For the quarter ended
--------------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2003 2003 2003 2003 2002 2002 2002 2002
---- ---- ---- ---- ---- ---- ---- ----
(U.S. dollars, in thousands except per share data)
(unaudited)
Revenues .......................... $ 18,924 $ 15,385 $ 16,579 $ 16,300 $ 14,410 $ 21,390 $ 19,544 $ 20,374
Cost of sales ..................... 12,566 10,507 11,665 10,684 10,021 14,266 13,057 12,918
-------- -------- -------- -------- -------- -------- -------- --------
Gross margin ...................... 6,358 4,878 4,914 5,616 4,389 7,124 6,487 7,456
-------- -------- -------- -------- -------- -------- -------- --------
(Loss) earnings before income taxes (3,194) (2,485) (2,454) (1,938) (5,950) (785) (1,755) 222
(Recovery of) provision for
income taxes .................... (334) (375) (1,237) (1,957) (1,986) 616 (1,687) 116
-------- -------- -------- -------- -------- -------- -------- --------
Net (loss) earnings ............... $ (2,860) $ (2,110) $ (1,217) $ 19 $ (3,964) $ (1,401) $ (68) $ 106
======== ======== ======== ======== ======== ======== ======== ========
Basic net (loss) earnings per
common share .................... $ (0.19) $ (0.14) $ (0.08) $ 0.00 $ (0.27) $ (0.09) $ 0.00 $ 0.01
Diluted net (loss) earnings
per common share ................ $ (0.19) $ (0.14) $ (0.08) $ 0.00 $ (0.27) $ (0.09) $ 0.00 $ 0.01
16
The following table sets forth, for the periods indicated, income statement data
expressed as a percentage of total revenues:
For the quarter ended
----------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2003 2003 2003 2003 2002 2002 2002 2002
---- ---- ---- ---- ---- ---- ---- ----
(unaudited)
Revenues .......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ..................... 66.4 68.3 70.4 65.5 69.5 66.7 66.8 63.4
----- ----- ----- ----- ----- ----- ----- -----
Gross margin ...................... 33.6 31.7 29.6 34.5 30.5 33.3 33.2 36.6
----- ----- ----- ----- ----- ----- ----- -----
(Loss) earnings before
income taxes .................. (16.9) (16.2) (14.8) (11.9) (41.3) (3.7) (9.0) 1.1
(Recovery of) provision for
income taxes .................. (1.8) (2.4) (7.5) 12.0 (13.8) 2.8 (8.6) 0.6
----- ----- ----- ----- ----- ----- ----- -----
Net (loss) earnings ............... (15.1)% (13.8)% (7.3)% 0.1% (27.5)% (6.5)% (0.4)% 0.5%
===== ===== ===== ===== ===== ===== ===== =====
Results of Operations
On September 30, 2003, we acquired the RBA service business for
approximately $6 million. We accounted for this acquisition using the purchase
method. Accordingly, the results of operations of RBA are consolidated with
those of our company from the date of acquisition.
2003 Compared with 2002
Total revenues decreased by $8,530,000, or 11%, from 2002 to 2003.
Systems, parts and other revenue declined by $17,681,000, or 31%, from 2002 to
2003. The decline in sales was due to a significant decrease in orders from
existing self-checkout customers compounded by the reluctance of supermarket
retailers to spend on information technology and equipment. As well, the
competitive landscape became more difficult as our competitors, some of whom
have greater financial resources than we do, were willing to reduce prices on
their self-checkout offerings. This may have caused us to not receive orders
that we might otherwise have received and, as well, may have impacted the gross
margins on our self-checkout system sales. Service contract revenue increased by
$9,152,000, or 48%, from 2002 to 2003, in part because of the increased number
of customers that entered into service contracts with us after purchasing U-Scan
systems and the inclusion of the RBArevenues in the amount of $6,388,000 for the
last three months of the year. In total, service revenue accounted for
approximately 42% of our total revenues in 2003 as compared to approximately 25%
in 2002.
Cost of sales decreased by $4,840,000, or 10%, from 2002 to 2003. Overall
gross margin decreased as a percentage of sales from 34% in 2002 to 32% in 2003,
primarily due to the increased percentage of service contract revenue in 2003 as
compared to 2002. Service contract revenue typically generates a lower gross
margin compared to the gross margin generated by system sales. Cost of sales for
systems, parts and others increased from 64% in 2002 to 72% in 2003. The
increase in the cost of sales for systems, parts and others in 2003 was
attributable to changes in our U-Scan system sales mix. Cost of sales for
hardware and software maintenance decreased from 72% in 2002 to 62% in 2003. The
decrease in the cost of sales for hardware and software maintenance in 2003 was
attributable to a reduction in shipping costs, improved labor scheduling and
efficiencies, and an overall reduction in direct costs.
Gross research and development expenses decreased by $975,000, or 45%,
from 2002 to 2003. The decrease was directly related to the reduction in
research and development employees during 2003 as well as concentration on fewer
research and development projects. As a percentage of total revenues, gross
research and development expenses decreased from 3% in 2002 to 2% in 2003.
Research and development activities included the continuing development of the
U-Scan Mobile Attendant(TM) device; development of alternative security
verification techniques; the development of attendant functions integrated into
self-checkout units; 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.
17
Selling, general, administrative, amortization, foreign exchange and
operating lease expenses decreased by $1,938,000, or 6%, from 2002 to 2003.
Excluding the impact of the RBA business, which was included for the three
months, October 1, 2003 to December 31, 2003, our selling, general,
administrative, amortization, foreign exchange and operating lease expenses
would have decreased by $4,262,000. The decrease was mainly attributable to the
cost savings resulting from the reduction of our work force in 2003. As a
percentage of total revenues, total selling, general and administrative expenses
increased from 44% to 47%, given the overall reduction in revenues in 2003.
We reduced our workforce by 96 people, or approximately 18% of our
workforce during the course of the year. This was done in an effort to increase
operating efficiencies, decrease overall general and administrative expenses and
improve financial results. We incurred restructuring charges of approximately
$748,000 for the year, primarily related to severance and accrued vacation.
The recovery of income taxes amounted to $3,903,000 in 2003 as compared to
a recovery of $2,941,000 in 2002. The 2003 amount included the recovery of tax
from losses carried back to prior years, as well as the future benefit of
non-capital losses carried forward, undeducted research and development
expenditures and other temporary differences that may be used to reduce taxable
income for Canadian federal and Quebec provincial income tax purposes in future
years. With respect to the future income tax assets recorded as at December 31,
2003, we determined that it is more likely than not that we will earn sufficient
taxable income during the allowable carry-forward period to fully realize all of
our future income tax assets, except for a tax benefit of approximately
$1,370,000 in losses carry-forward in certain subsidiaries because the criteria
for recognition was not met. Our ability to ultimately realize these future
income tax assets is dependent upon future profitability within the allowable
carry-forward period, thus creating sufficient taxable income to realize the
benefit of these assets.
Our tax provision includes the effect of future taxes on unrealized
foreign exchange gains and losses, which arise on the conversion of short-term
investments and other monetary assets and liabilities into Canadian dollars for
purposes of determining taxable income under Canadian income tax regulations.
Because the U.S. dollar is our measurement currency and our consolidated
financial statements are presented in U.S. dollars, these foreign exchange
gains/losses do not impact earnings before income taxes even though the income
tax provision included a net tax liability for these gains in 2002. In 2003, our
tax provision includes a future tax recovery of $1,403,000 related to the
reversal of unrealized foreign exchange gains from 2002 compared to a recovery
of $178,000 for 2002.
Our effective tax rate for 2003 was 38.7%, as compared to 35.6% for 2002.
The increase is due to the valuation allowance recorded against non-capital
losses in this year.
Our net loss in 2003 was $6,168,000 (or $0.41 per share (basic and
diluted)), compared to net loss of $5,327,000 in 2002 (or $0.35 per share (basic
and diluted)). The increase in the net loss in 2003 compared with 2002 was
mainly attributable to the decline in sales of our U-Scan systems.
2002 Compared with 2001
Total revenues decreased by $25,704,000, or 25%, from 2001 to 2002. Sales
of our U-Scan systems declined by $29,701,000, or 34%, from 2001 to 2002. The
decline in sales was due to a significant decrease in orders from existing
customers compounded by the reluctance of supermarket retailers to spend on
information technology and equipment.. Service contract revenue recognized for
hardware and software maintenance increased by $3,998,000, or 26%, from 2001 to
2002, in part because of the increased number of customers that entered into
service contracts with us after purchasing U-Scan systems. In total, service
revenue accounted for approximately 25% of our total revenues in 2002 as
compared to approximately 15% in 2001.
Cost of sales decreased by $12,897,000, or 20%, from 2001 to 2002. Overall
gross margin decreased as a percentage of sales from 38% in 2001 to 34% in 2002,
primarily due to the increased percentage of service contract revenue in 2002
compared to 2001, which generated a lower gross margin compared to the gross
margin generated by system sales. Cost of sales for systems, parts and others
increased from 63% in 2001 to 64% in 2002. Cost of sales for hardware and
software maintenance increased from 57% in 2001 to 72% in 2002.
18
The increase in our cost of sales for hardware and software maintenance was
mainly attributable to our decision to invest in growing this business segment.
Gross research and development expenses increased by $122,000, or 6%, from
2001 to 2002. As a percentage of total revenues, gross research and development
expenses increased from 2% in 2001 to 3% in 2002. Research and development
expenses during the year 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; and the improvement
of the graphical user interface (GUI).
During the fourth quarter of 2002, we closed our assembly facility in
Phoenix, Arizona and a support hub in Covington, Kentucky, in an effort to
consolidate operations. The costs incurred as a result of these closures, in the
approximate amount of $1,039,000, related mainly to lease costs, severance
costs, and the write down of inventories and leasehold improvements. As at
December 31, 2002, a provision of $288,000 relating to future lease obligations
was included in accounts payable and accrued liabilities in the consolidated
balance sheet.
Selling, general, administrative, operating lease expenses and foreign
exchange increased by $11,932,000, or 56%, from 2001 to 2002. As a percentage of
total revenues, these expenses increased from 21% to 44%. The increase in
selling, general, administrative and other expenses in 2002 was primarily due to
the hiring of additional sales and business development people; expansion of our
service organization as a result of our increased number of system
installations; the cost of hiring and training service technicians as a result
of the termination of third party support providers; the design of our U-Scan1,
U-Scan2 and U-Scan3 next generation of systems, along with the training of our
technicians and customers for these systems; marketing and trade show expenses;
and the establishment of Optimal Robotics Plc, our U.K. subsidiary. Other
expenses incurred include the migration and upgrade of our computer systems as
well as the standardization of software for a major customer in order to
consolidate the number of versions required to run the self-checkout systems.
The recovery of income taxes amounted to $2,941,000 in 2002 as compared to
a tax provision of $9,600,000 in 2001. The 2002 amount included the recovery of
tax from losses carried back to prior years, as well as the future benefit of
the remaining non-capital losses carry forward, undeducted research and
development expenditures and other temporary differences that may be used to
reduce taxable income for Canadian federal and Quebec provincial income tax
purposes in future years. With respect to the future income tax assets recorded
as at December 31, 2002, we determined that it is more likely than not that we
will earn sufficient taxable income during the allowable carry-forward period to
fully realize all of our future income tax assets. Our ability to ultimately
realize these future income tax assets is dependent upon our realizing certain
sales levels within the allowable carry-forward period, thus creating sufficient
taxable income to realize the benefit of these assets. Our ability to realize
these assets is also dependent on effective control over our selling, general
and administrative expenses.
Our effective tax rate for 2002 was 35%, as compared to 51% for 2001. In
2001, we recognized Canadian income taxes on foreign exchange gains in the
amount of approximately $2.2 million. Because our consolidated financial
statements are presented in U.S. dollars, the foreign exchange gains, which for
Canadian income tax purposes arise on the conversion into Canadian dollars of
our net monetary assets denominated in U.S. dollars, create a tax liability even
though foreign exchange gains do not impact our earnings before income taxes.
Excluding the effect of Canadian income taxes on these foreign exchange gains,
the effective tax rate in 2001 would have been 39%, instead of 51%. In 2002, we
recognized a tax recovery of $178,000 on these foreign exchange items.
The net loss in 2002 was $5,327,000 (or $0.35 per share (basic and
diluted)), compared to net earnings of $9,306,000 in 2001 (or $0.60 per share
(diluted)).
Liquidity and Capital Resources
As of December 31, 2003, we had cash, cash equivalents, and investments of
discounted notes of $78,514,000, compared to $85,762,000 as of December 31,
2002. Our working capital was $92,744,000, compared to $108,650,000 as of
December 31, 2002.
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Operating activities used $6,489,000 of cash and cash equivalents in 2003,
as compared to having used $5,929,000 in 2002. The increased use of cash in
operations during 2003 was the result of the higher net loss which was offset by
cash generated from working capital activities, mainly related to tax refunds
received during the year. In December 2002, we sold accounts receivable and
received net cash proceeds of $4,193,000. We did not sell any accounts
receivable in December 2003.
In 2003, we had expenditures relating to property, equipment and
intangible assets of $2,349,000. In addition, proceeds from a bank demand loan
were $10,726,000 of which $6,046,000 was used to finance the acquisition of the
RBA service business and its related working capital requirements, and
$3,746,000 was used to settle long-term debt obligations of RBA, which we had
assumed.
As a result of restructuring that occurred during the year we believe that
our cash, cash equivalents and investments will be adequate to meet our needs
for at least the next 12 months.
We have no financial obligations of significance other than long-term
lease commitments for our premises and vehicles in the United States and Canada.
These are summarized in note 13(a) of the notes to our consolidated financial
statements, which are included in Item 8--"Financial Statements and
Supplementary Data."
The timing of our contractual commitments during the next five years and
thereafter, related to our operating leases, is as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Contractual Cash
Obligations Total 2004 2005 2006 2007 2008 Thereafter
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Leases $8,391,000 $2,617,000 $2,027,000 $1,288,000 $660,000 $649,000 $1,150,000
- -----------------------------------------------------------------------------------------------------------------------------------
Forward-Looking Statements
This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the "1933
Act"), and Section 21E of the Exchange Act, which are intended to be covered by
the safe harbors created thereby. Words such as "expects", "intends",
"anticipates", "plans", "believes", "seeks", "estimates", or variations of such
words and similar expressions are intended to identify such forward-looking
statements. Investors are cautioned that all forward-looking statements involve
risk and uncertainty. Although we believe that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Form 10-K will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation of our company or any other person
that the objectives and plans of our company will be achieved.
The following factors 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 below may
affect us to a greater extent than indicated. These risks factors are discussed
in the context of the business as it existed at the time of preparing the
financial statements for the year ended December 31, 2003. Risk factors related
to the continuation of the self-checkout business will continue to be relevant
to us as long as we continue to operate such business. Risks related to our
service business are presented below under "RISKS RELATED TO SERVICE BUSINESS"
and risks related to the payments business, which we are committed to enter into
by completing our proposed merger with Terra are presented under "RISKS RELATED
TO PAYMENT BUSINESS". 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.
20
RISKS RELATED TO U-SCAN BUSINESS
WE PRINCIPALLY DEPEND ON ONE LINE OF PRODUCTS. Our short-term success
depends principally on the sales volume of one line of products, the U-Scan
self-checkout system. Our longer-term success depends upon the continued
acceptance of and demand for this one product line, as well as new products that
we may bring to market. If the U-Scan systems experience significant problems,
competition from superior technology, or customer resistance, we could be harmed
significantly.
Sales growth will depend on our generating additional orders from existing
U-Scan system customers, as well as finding new customers for the system. We
believe that our customers will only purchase the system if they conclude that
shoppers will use it and that there are financial benefits to their stores from
its installation. We believe that shoppers will use the system only if it is
convenient, easy to use and reliable.
WE RELIED ON ONE CUSTOMER FOR A SUBSTANTIAL AMOUNT OF OUR REVENUES IN
2003. One significant customer, through its various divisions and affiliates,
accounted for approximately 36% of our revenues in 2003, and we rely on this
customer's continued willingness to purchase our U-Scan systems. We may not be
able to generate new customers for our U-Scan systems.
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH. Prior to 2002, we experienced
significant growth in sales. As a result, we had to hire and train additional
skilled personnel. Due to the continued economic weakness throughout North
America, in 2003 we reduced our workforce by approximately 18%. Should sales
increase, we will again have to hire and train more personnel to customize,
install and support our U-Scan systems. There is no assurance that we will be
able to hire the skilled personnel we will need to meet increased demand, should
it develop. If we are unable to hire such personnel, our sales may be adversely
affected.
WE RELY ON THIRD PARTY SUPPLIERS. The U-Scan system is assembled from
components that are readily available from numerous suppliers. Although we may
use a single supplier for particular components, given the open architecture of
our system, we are not dependent on any single supplier for any particular
component. Nevertheless, should any of our suppliers fail to deliver components
to us in a timely manner, it could disrupt our business.
OUR U-SCAN SYSTEMS ARE ASSEMBLED AT A SINGLE FACILITY. We assemble our
systems at our facility in Plattsburgh, New York. A disruption of operations at
this facility for any reason, including labor unrest or natural disaster, would
have a short-term adverse effect upon our business and results of operations.
WE MAY NOT BE ABLE TO KEEP PACE WITH CHANGES IN TECHNOLOGY. The
self-checkout industry is rapidly developing. The technology used by the U-Scan
system is changing rapidly, in part due to the evolving demands of our
customers. To be successful, we will have to anticipate the demands of our
customers and improve our existing product line and develop new products to
satisfy them. If we fail to improve and develop products by the times and at the
prices demanded by our customers, our business and prospects may be adversely
affected. Our competitors may introduce new technology that is better than ours.
If so, we will have to improve our technology in order to remain competitive. If
we are unable to do so, there might be an adverse impact on us.
WE DEPEND UPON KEY PERSONNEL. Our future success depends to a great extent
on the continued services of our senior management and other key personnel,
including sales and business development people. Our success will also depend
upon our ability to hire and retain qualified personnel to assemble, install and
support our systems, to improve our existing products and to develop new ones.
These people will include:
o programmers and other software engineers,
o project managers,
o installers, and
o hardware and software support personnel.
21
The competition for these people may be significant, despite current
economic conditions. Should we have difficulty hiring or retaining qualified
personnel, it could adversely affect our business and prospects.
WE MIGHT NOT BE ABLE TO COMPETE AGAINST CURRENT OR FUTURE COMPETITORS. The
market for self-checkout systems is very competitive. The chief rival for our
U-Scan system is the traditional manned checkout counter. Although the use of
automated self-checkout systems such as the U-Scan system is relatively new, we
expect increasing competition for sales of this product. The barriers to
entering this market may be low. Certain of our competitors are larger and have
greater financial and other resources. Competitors include NCR and IBM. We may
not be able to compete successfully against these and other companies with
greater financial and other resources. 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.
OUR PRODUCTS MAY CONTAIN DEFECTS. Our products, including the U-Scan
system, are complex and, despite extensive testing, may contain undetected flaws
when first installed for a new customer. This is particularly true of the
software in the U-Scan system, which must be adapted to each customer's
information systems. If serious, any such flaws could prevent or delay market
acceptance of our products and cause us to incur substantial re-engineering
expenses.
ORGANIZED LABOR MAY RESIST OUR U-SCAN SYSTEMS. The U-Scan system displaces
cashiers. For this reason, organized labor may seek provisions in collective
bargaining agreements that prevent stores from purchasing the system.
WE MAY BE VULNERABLE TO TECHNOLOGICAL PROBLEMS. We are a
technology-oriented company and depend to a significant degree upon our ability
to communicate on-line or by telephone with the systems that we have sold. If we
are unable to access these systems due to technological problems beyond our
control, it will have a material adverse effect on our ability to assist our
customers. Additionally, if our customers are unable to reach us by telephone or
via the Internet, we will also be unable to respond to questions or address
serious problems faced by these customers. If our ability to communicate with
our systems or our customers is impaired, our business may be adversely
affected. The Internet is subject to security and privacy breaches, which may
impact us or our customers.
ECONOMIC CONDITIONS IN THE UNITED STATES AND CANADA, AFFECTING THE
SELF-CHECKOUT INDUSTRY, ARE BEYOND OUR CONTROL AND MAY RESULT IN CONTINUING
REDUCED DEMAND AND PRICING PRESSURE ON OUR PRODUCTS. There are trends and
factors affecting the self-checkout industry, which are beyond our control and
may affect our operations. Such trends and factors include:
o adverse changes in the public and private equity and debt
markets and the ability of our customers to obtain financing
or to fund capital expenditures;
o visibility to, and the actual size and timing of, capital
expenditures by our customers;
o the effects of war or acts of terrorism.
Reduced capital spending and the generally negative economic conditions in
the United States and Canada have resulted in substantially reduced demand for
our products. Continuing negative economic conditions could result in further
reductions in demand for and/or pricing pressures on our products. Reduced
capital spending and/or negative economic conditions in Europe can be expected
to affect our attempt to initiate sales of our systems in Europe.
THE ADVERSE RESOLUTION OF LITIGATION AGAINST US COULD ADVERSELY IMPACT OUR
BUSINESS. We recently settled an action alleging that the U-Scan system
infringes upon the claimant's patent. A second party has sent demand letters to
us alleging a different patent infringement. See Item 3 - "Legal Proceedings."
We are and may in the future be subject to other litigation arising in the
normal course of our business, including litigation which could arise after our
disposition of the self-checkout business and which
22
relates to our having carried on that business. Litigation may be time
consuming, expensive and distracting from the conduct of our business, and the
outcome of litigation is difficult to predict. The adverse resolution of any
specific lawsuit could have a material adverse effect on our business, results
of operations, and financial condition.
RISKS RELATED TO SERVICE BUSINESS
LOSS OF KEY PERSONNEL IN THE SERVICES BUSINESS. Our ability to complete
the integration of the RBA business and to grow our service business is
particularly dependent upon the services of a few key personnel, the loss of any
of whom could adversely affect our service business and overall results of
operations.
LOSS OF CONTRACT-BASED REVENUE. As is customary in the computer services
industry, we can experience reductions in our contract-based revenue, as
customers may eliminate certain equipment or services from coverage under their
contracts. We believe that the principal reasons for the loss of contract-based
revenue are the replacement of the equipment being serviced with new equipment
covered under a manufacturer's warranty, the discontinuance of the use of
equipment being serviced for a customer due to obsolescence or a customer's
determination (based on cost, quality and scope of services) to utilize a
competitor's services or to move technical support services in house. There can
be no assurance that we will be able to offset the reduction of contract-based
revenue and maintain revenue growth through new contracts in the future. Any
failure to enter into new contracts, add additional services and equipment to
existing contracts or consummate acquisitions could have a material adverse
effect on our results.
DEPENDENCE ON COMPUTER INDUSTRY TRENDS. Our future success is dependent
upon (i) the continuation of a number of trends in the computer industry,
including the migration by information technology end-users to multi-vendor and
multi-system computing environments, the overall increase in the sophistication
and interdependency of computing technology, and a focus by information
technology managers on cost efficient management, and (ii) our ability to
diversify our services to meet the needs of clients with respect to these
trends. We believe that these trends have resulted in a movement by both
end-users and original equipment manufacturers (each, an "OEM") towards
outsourcing and an increased demand for support service providers that have the
ability to provide a broad range of multi-vendor support services. There can be
no assurance that these trends will continue in the future
RAPID TECHNOLOGICAL CHANGE. Rapid technological change and compressed
product life cycles are prevalent in the computer industry, which may lead to
the development of improved or lower cost technologies, higher quality hardware
with significantly reduced failure rates and maintenance needs, or customer
decisions to replace rather than continue to repair and maintain aging hardware,
which could result in a reduced need for our services in the future. Moreover,
such rapid technological changes could adversely affect our ability to predict
equipment failure rates and, therefore, to establish prices that provide
adequate financial results. Similarly, new computer systems could be built based
upon proprietary, as opposed to open, systems that cannot be serviced by us.
VARIABILITY OF PER INCIDENT REVENUES. Per incident revenues, which consist
primarily of revenues from services performed for customers on an as requested
basis (e.g., projects, help desk services, parts repair, installations and
moves, installation and de-installation of computer equipment), are subject to
monthly variation due to the nature of per incident revenue transactions. It is
difficult for us to estimate the impact or amount of future per incident
revenues because per incident revenues are dependent on customer demand, which
fluctuates based upon various factors such as competition and customers' use of
internal employees. We may not be able to generate significant amounts of per
incident revenue in the future.
WE OPERATE IN A HIGHLY COMPETITIVE MARKET AND THERE IS NO ASSURANCE THAT
WE WILL BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT OR FUTURE COMPETITORS.
Competition among computer support service providers, both OEM's and independent
service organizations, is intense. We believe that a significant portion of
industry hardware maintenance services is currently serviced by OEM service
organizations. The remainder of the technology support services market is
serviced by a small number of larger, independent companies, such as ourselves,
offering a broader range of
23
service capabilities, as well as numerous small companies focusing on narrower
areas of expertise or serving limited geographic areas.
In many instances, OEM service organizations have greater resources than
us, and, because of their access to the OEM's engineering data, may be able to
respond more quickly to servicing equipment that incorporates new or emerging
technologies. Moreover, some OEM's do not make available to end-users or
independent service organizations the technical information, repairable parts,
diagnostics, information that relates to engineering changes and other support
items required to service their products, and design and sell their products in
a manner so as to make it virtually impossible for a third party to perform
maintenance services without potentially infringing upon certain proprietary
rights of the OEM. In addition, OEM's are sometimes able to develop proprietary
remote diagnostic or monitoring systems which we may not be able to offer.
Therefore, OEM service organizations sometimes have a cost and timing advantage
over us because we must first develop or acquire from another party the required
support items before we can provide services for that equipment. An OEM's cost
advantage, the unavailability of required support items or various proprietary
rights of the OEM may preclude us from servicing certain products. Furthermore,
OEM's usually provide warranty coverage for new equipment for specified periods,
during which it is not economically feasible for us to compete for the provision
of maintenance services. To the extent that OEM's choose, for marketing reasons
or otherwise, to expand their warranty periods or terms, our business may be
adversely affected.
SINGLE SUPPLIERS FOR INVENTORY. Spare parts purchases are made from OEM's
and other vendors. We, from time to time, will have only a single supplier for a
particular part which, in some cases, may be the OEM for such spare part. Should
a supplier be unwilling or unable to supply any part or component in a timely
manner, our business could be adversely affected.
DIFFICULTIES IN MANAGING INVENTORY. In order to service our customers, we
are required to maintain a high level of spare parts for extended periods of
time. Any decrease in the demand for our maintenance services could result in a
substantial portion of our spare parts becoming excess, obsolete or otherwise
unusable. In addition, rapid changes in technology could render significant
portions of our spare parts obsolete, thereby giving rise to write-offs and a
reduction in financial results. Our inability to manage our spare parts or the
need to write them off in the future could have a material adverse effect on our
business, financial results and results of operations.
FAILURE TO PRICE FIXED FEE CONTRACTS ACCURATELY. Under some of our
contracts, the customer pays a fixed fee for customized bundled services that
are priced by us based on our best estimates of various factors, including
estimated future equipment failure rates, cost of spare parts and labor
expenses. There can be no assurance that we will be able to estimate these
factors with sufficient accuracy in order to price these fixed fee contracts on
terms favorable to us. Our failure to price these fixed fee contracts accurately
could have a material adverse effect on our financial results.
WE MAY BE UNABLE TO FIND SUITABLE ACQUISITION CANDIDATES AND MAY NOT BE
ABLE TO SUCCESSFULLY INTEGRATE BUSINESSES THAT MAY BE ACQUIRED INTO OUR
OPERATIONS. As part of our recent history and future growth strategy, we have
acquired, and intend to continue to acquire, other businesses. In the future, we
may continue to seek acquisition candidates and, from time to time, engage in
exploratory discussions with suitable candidates. There can be no assurance,
however, that we will be able to identify and acquire targeted businesses or
obtain financing for such acquisitions on satisfactory terms. The process of
integrating acquired businesses into our operations may result in unforeseen
difficulties and may require a disproportionate amount of resources and
management attention. In connection with future acquisitions, we may incur
significant charges to earnings. Future acquisitions may be financed through the
issuance of common shares, which may dilute the ownership of our shareholders,
or through the incurrence of indebtedness. Furthermore, there can be no
assurance that competition for acquisition candidates will not escalate, thereby
increasing the costs of making acquisitions or making suitable acquisitions
unattainable.
24
RISKS RELATED TO PAYMENT BUSINESS
Terra is subject to a number of risks, which, should they materialize, can
have a material adverse effect on its business, revenues, operating results and
financial condition, including those set forth below. Subject to completion of
the proposed Terra merger, the following risk factors will be risks to our
consolidated business, revenues, operating results and financial condition:
RISKS OF LOSS DUE TO FRAUD AND DISPUTES. Terra faces risks of loss due to
fraud and disputes between consumers and merchants, including the unauthorized
use of credit card and bank account information and identity theft, merchant
fraud, disputes over the quality of goods and services, breaches of system
security, employee fraud and use of Terra's system for illegal or improper
purposes.
When a consumer pays a merchant for goods or services using a credit card
and the cardholder disputes the charge, the amount of the disputed item gets
charged back to Terra and the credit card associations may levy fees against
Terra. Chargebacks may arise from the unauthorized use of a cardholder's card
number or from a cardholder's claim that a merchant failed to perform. In turn,
Terra attempts to recover from the merchant the amount charged back; however,
Terra may not always be successful in doing so. In addition, if Terra's
chargeback rate becomes excessive, credit card associations can also require
Terra to pay fines and have done so in the past.
Similarly, when a consumer pays a merchant for goods or services using a
check and the check is returned by the financial institution, the amount of the
returned check gets charged to Terra. In turn, Terra attempts to recover such
amount from the merchant; however, Terra may not always be successful in doing
so. Terra has taken measures to detect and reduce the risk of fraud, but cannot
be assured of their total effectiveness.
SECURITY AND PRIVACY BREACHES IN TERRA'S ELECTRONIC TRANSACTIONS. Any
inability on Terra's part to protect the security and privacy of its electronic
transactions could have a material adverse effect on Terra's profitability. A
security or privacy breach could:
o expose Terra to additional liability and to potentially costly
litigation;
o increase expenses relating to resolution of these breaches;
o deter customers from using Terra's product; and
o decrease market acceptance of electronic commerce transactions
generally.
Terra cannot assure that the use of applications designed for data
security and integrity will address changing technologies or the security and
privacy concerns of existing and potential customers.
TERRA'S PAYMENT SYSTEM MIGHT BE USED FOR ILLEGAL OR IMPROPER PURPOSES.
Despite measures that have been taken to detect and prevent identity theft,
unauthorized uses of credit cards and similar misconduct, Terra's payment
systems remain susceptible to potentially illegal or improper uses. These may
include illegal online gaming, fraudulent sales of goods or services, illicit
sales of prescription medications or controlled substances, software and other
intellectual property piracy, money laundering, bank fraud, child pornography
trafficking, prohibited sales of alcoholic beverages and tobacco products and
online securities fraud. Despite measures that Terra has taken to detect and
lessen the risk of this kind of conduct, Terra cannot be assured that these
measures will succeed.
COMPLIANCE WITH AND CHANGES TO ASSOCIATION RULES AND PRACTICES. As a
merchant of record, Terra must comply with the operating rules of the Visa(R)
and MasterCard(R) credit card associations and NACHA for checks. The
associations' members set these rules. The associations could adopt operating
rules with which Terra might find it difficult or even impossible to comply.
Furthermore, in cases of fraud or disputes between consumers and
merchants, Terra faces chargebacks when cardholders dispute items for which they
have been billed. If Terra's chargebacks become excessive, Terra's processing
suppliers could fine Terra or terminate its ability to accept credit cards for
payments. The termination of Terra's relationship with credit card associations
or acquiring banks would limit its ability to provide transaction processing
services.
25
FAILURE TO DEVELOP PRODUCTS AND LACK OF ACCEPTANCE FOR PRODUCTS UNDER
DEVELOPMENT. The development of the Internet for commercial transactions will
also depend on acceptance of certain technologies, including electronic payments
by credit card processors and financial institutions. The success of Terra's
electronic payments operations will similarly depend upon acceptance of Terra's
technology. There can be no assurance that Terra will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of new products and enhancements, or that its new
products and enhancements will be introduced in a timely fashion or will
adequately meet the requirements of the marketplace and achieve market
acceptance.
FAILURE OF TERRA'S SYSTEMS OR THE SYSTEMS OF THIRD PARTIES; RISKS
ASSOCIATED WITH OPERATING ON THE INTERNET. Fires, floods, earthquakes, power
losses, telecommunications failures, break-ins, security breaches and similar
events could damage Terra's systems. Computer viruses, disgruntled or rogue
employees, electronic break-ins or other similar disruptive problems, including
those beyond Terra's control, could also adversely affect Terra's systems. The
business and reputation of Terra could be adversely affected if such systems
were affected by any of these occurrences. Terra's existing or future insurance
policies may not adequately compensate it for any losses that may occur due to
any failures or interruptions in its systems.
In particular, depending on volume growth, Terra may need to expand and
upgrade its technology, transaction-processing systems and network
infrastructure. Terra could experience periodic temporary capacity constraints,
which may cause unanticipated system disruptions, slower response times and
lower levels of customer service. Terra may be unable to accurately project the
rate or timing of increases, if any, in the use of its services or to expand and
upgrade its systems and infrastructure to accommodate these increases in a
timely manner.
Terra's success in its online business will depend, in large part, on
other companies maintaining the Internet infrastructure. In particular, Terra
will rely on the ability of ISPs, telecommunication and other companies to
maintain a reliable network backbone that provides adequate speed, data capacity
and the infrastructure or complementary products and services necessary to
establish and maintain the Internet as a viable commercial medium.
Users of electronic payment services are highly concerned about the
security of transmissions over public networks. Individuals could possibly
circumvent the measures that Terra takes to protect customer transaction data.
To the extent that Terra's activities involve the storage and transmission of
proprietary information, such as credit card or bank account numbers, security
breaches could damage Terra's reputation and expose it to a risk of loss or
litigation and possible liability.
UNCERTAINTY AS TO THE LEGAL STATUS OF INTERNET GAMING. As electronic
commerce in general and most of the products and services that Terra offers are
relatively new, the manner in which existing provincial, federal and foreign
government regulations may be applied is uncertain and difficult to predict. Due
to the relatively recent development of Internet gaming, there are few laws or
regulations that deal directly with the payment processing of this application
and there is uncertainty as to the legal status of Internet gaming. While some
jurisdictions have taken the position that Internet gaming is legal and have
adopted or are in the process of reviewing legislation to regulate Internet
gaming in such jurisdictions, other jurisdictions have taken the opposite view
and enacted legislation to attempt to restrict or prohibit Internet gaming. For
example, in the United States for the past several years there have been
conflicting efforts to clarify the status of Internet gaming. In the summer of
2003, the United States House of Representatives passed legislation that would
prohibit the acceptance of a credit card, electronic funds transfer or any other
bank instrument in connection with unlawful Internet gambling. The bill left the
definition of "unlawful" gambling essentially unchanged, however. A contrasting
bill, currently pending before the House Judiciary Committee, would establish a
commission to recommend regulations to provide for Internet gambling. A
prohibitory bill similar to the legislation that passed the House has been
introduced in the United States Senate and is pending there. Both the Senate
prohibitory bill and the House regulatory bill have received hearings but no
further action yet has been taken. Should such a bill pass and become law, it is
likely that regulations would come into effect anywhere from six to nine months
after such passage which would make the funding of online gaming accounts by
U.S.
26
residents unlawful. This would have a significant negative impact on Terra. As a
result, Terra has taken the initiative and continues to invest in the
diversification of its revenue base towards the continued diminishing of its
reliance on online gaming payments emanating from U.S. residents. Since Terra
derives a substantial portion of its revenue from processing transactions for
licensed online gaming, Terra may be exposed to governmental investigations
and/or lawsuits initiated by the public in jurisdictions where gambling is
restricted or prohibited. Any adverse findings or rulings rendered against Terra
in such jurisdictions could have a material adverse effect on Terra's business,
revenues, operating results and financial condition. This uncertainty could
affect Terra indirectly through the effect experienced by its clients and on
their revenues and directly in the event that Terra is restricted from
conducting its activities, such as if the banks through which Terra settles its
clients' transactions terminate their agreements with Terra or significantly
increase the costs to Terra for their services, or certain credit card issuing
banks continue to reject Internet gaming transactions.
OUTCOME OF LITIGATION. There is a risk that criminal and civil
proceedings, including class actions brought by or on behalf of public entities
or private individuals, could be initiated against Terra, ISPs, credit card
processors and others involved in the Internet gaming industry. Any future legal
proceedings against Terra relating to Internet gaming could involve substantial
litigation expense, penalties, fines, injunctions or other prohibitions being
invoked against Terra or its licensees or others and the diversion of the
attention of key executives. The outcome of any litigation cannot be predicted.
GOVERNMENT REGULATION OF INTERNET COMMERCE. As electronic commerce over
the Internet develops, it may be the subject of increasing government regulation
and there is a risk that well-established financial institutions and credit card
companies will be able to influence the development of regulations in a manner
which prioritizes their interests to the detriment of Terra. In addition, much
of the current legislation relating to commercial transactions pre-dates and may
be incompatible with Internet electronic commerce. There can be no assurance
that regulators will not choose to enact or enforce legislation in a manner that
would restrict the operations of Terra and other aspects of the electronic
commerce market. Moreover, it may take years to determine the extent to which
existing laws relating to issues such as intellectual property ownership and
infringement, libel and personal privacy are applicable to the Internet.
Existing legislation in Canada, the United States and abroad regulate
communications or commerce specifically; however, the application of such laws
in the context of the Internet and electronic commerce is uncertain. Laws and
regulations that address issues such as user privacy, pricing, online content
regulation, taxation and the characteristics and quality of online products and
services are under consideration by federal, provincial, state, local and
foreign governments and agencies.
In Canada, the Personal Information Protection and Electronic Documents
Act was passed into law by the federal government effective January 1, 2001.
Currently, this law regulates the inter-provincial collection, use and
disclosure of personal information. This law is in addition to several
provincial laws covering the same subject matter within a province currently in
force or being considered.
In the United States, several telecommunication companies have petitioned
the Federal Communications Commission to regulate ISPs and online service
providers. The Federal Trade Commission and government agencies in certain
states of the United States have been investigating certain Internet companies
regarding their use of personal information. Terra could incur additional
expenses if any new regulations regarding the use of personal information are
introduced affecting the way in which Terra does business or if these agencies
choose to investigate Terra's privacy practices.
Any new laws or regulations relating to the Internet, or particular
applications or interpretations of existing laws, could decrease the growth in
the use of the Internet, decrease the demand for Terra's electronic commerce
services, or increase the costs associated with providing such services or
transmitting data over the Internet and generally stunt the development of the
Internet and the growth of Terra.
STRATEGIC PLAN AND RESTRUCTURING. In response to changes in industry and
market conditions, Terra has restructured its business in the past and may again
restructure its business in the future to achieve certain cost savings and to
strategically realign its resources. Terra based its plan pertaining to the
restructuring
27
on certain assumptions and estimates regarding the cost structure of its
business and the nature and severity of the current industry adjustment, which
may not prove to be accurate.
EFFECTS OF ACQUISITIONS. Part of Terra's strategy has been and continues
to be to make acquisitions. There can be no assurance that, in the future,
acquisition candidates will be found on terms suitable to Terra or that Terra
will have adequate resources to consummate any acquisition. Acquisitions involve
a number of special risks, including time and expenses associated with
identifying and evaluating acquisitions, the diversion of management's attention
from day-to-day operations, the difficulty in integrating widely dispersed
operations with distinct corporate cultures, the potential loss of key employees
of the acquired company, the difficulty of incorporating acquired technologies
successfully, the potential impairment of relationships with employees, clients
and strategic partners and the inability to maintain uniform standards,
controls, procedures and policies. In addition, customer satisfaction or
performance problems at a single acquired firm could have a material adverse
effect on Terra's reputation. Acquisitions may also result in the potentially
dilutive issuance of equity securities, the incurring of debt, the write-off of
research and development and capitalized costs, integration costs and goodwill
and other intangible assets.
DEPENDENCE ON STRATEGIC RELATIONSHIPS AND SUPPLIERS. Terra has established
and will continue to establish relationships with strategic partners and
suppliers to help supply, promote and distribute Terra's products and services.
Terra is dependent upon maintaining as well as creating these relationships with
strategic partners and suppliers, especially strategic banking relationships.
The credit card companies and financial institutions on whom Terra relies in
order to process its electronic transactions have adopted guidelines for the
processing of transactions, including gaming transactions. Terra believes that
its operations comply in all material respects with these guidelines. However,
credit card companies and financial institutions could nonetheless decide in the
future to refuse to process transactions for Terra or to process online gaming
transactions generally. Any such decision, when made by a particular credit card
company or financial institution, could be implemented with little or no advance
notice to Terra. Should Terra not be able to conclude alternative arrangements
with other credit card companies or financial institutions within the delays
imposed by any such termination, or at all, its ability to carry out payment
transactions would be impaired and Terra may not then be able to continue to
carry on its business.
PROTECTION OF PRODUCTS AND COPYRIGHTS. Terra relies primarily upon a
combination of copyright, trademark and trade secret laws, non-disclosure and
release of interest in intellectual property agreements and license agreements
to establish and protect proprietary rights in its products and technology. The
source codes for Terra's products and technology are protected both as trade
secrets and as unpublished, unregistered copyrighted works; however, Terra
currently has no patents for its products and technology.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use Terra's products or technology without authorization or
to develop similar technology independently. Policing unauthorized use of
Terra's products and services is and will continue to be difficult, particularly
in the global environment in which Terra operates, and the laws of other
jurisdictions may afford Terra little or no effective protection of its
intellectual property. The global nature of the Internet will make it difficult
to control the ultimate destinations of Terra's products or services. Terra
relies in part on "on-screen" licenses, which are not manually signed by
end-users and, therefore, may be unenforceable under some laws. There is no
assurance that any steps taken by Terra will prevent others from
misappropriating Terra's technology. Terra may engage in litigation related to
its intellectual property; however, such litigation, whether successful or
unsuccessful, could result in substantial costs and diversions of resources.
In addition, there is no assurance that Terra's products and services are
not within the scope of intellectual property rights held by others, either now
or in the future. If any claims are asserted, Terra may seek to obtain a license
under a third party's intellectual property rights. There can be no assurance
that such a license would be available on reasonable terms or at all. Terra may
also decide to defend against a claim of infringement; but litigation, even if
successful, is costly and may have a material adverse effect on Terra regardless
of the eventual outcome.
COMPETITIVE MARKET FOR TERRA'S PRODUCTS AND SERVICES. Potential
competitors to Terra's electronic commerce solutions include credit card
companies, banks, payment processors and other
28
entities, any of which may have greater financial resources, an entrenched
position in the market or brand recognition. These potential competitors may be
able to require that their own technology, rather than the technology of others,
including that of Terra, be used in connection with their payment mechanisms.
Furthermore, the barriers to entry into most Internet markets, including the
electronic commerce segments, are relatively low, making them accessible to a
wide number of entities. Therefore, competition is likely to intensify as
Terra's market develops and matures, which could result in price reductions,
reduced margins or loss of market share.
Furthermore, there can be no assurance that Terra will be able to
identify, develop, manufacture, market or support new products or offer new
services successfully, that such new products or services will gain market
acceptance, or that Terra will be able to respond effectively to technological
changes or product announcements by competitors. Any failure by Terra to
anticipate or respond adequately to technological developments and customer
requirements or any significant delays in product developments or introductions
could result in a loss of market share or revenues.
There can be no assurance that Terra's competitors will not develop
technologies and products that are as or more effective and efficient than
Terra's products or that Terra's technologies and products will not be rendered
obsolete by such developments. As well, there can be no assurance that other
companies with greater financial and technological resources will not develop
electronic commerce technologies for the Internet with similar or better
capabilities than Terra's products or that Terra will be able to compete
successfully against existing competitors or future entrants into the market.
Products developed by competitors may achieve greater market acceptance than
Terra's products.
TECHNOLOGICAL DEFECTS AND PRODUCT DEVELOPMENT DELAYS. Products and
services based on sophisticated technology and computing systems often encounter
development delays, and the underlying technology may contain undetected errors
or failures when introduced or when the volume of services provided increases.
Terra may experience delays in the development of its products, or the
technology and computing systems underlying Terra's services, such as its
transaction processing services. In addition, despite testing, it is possible
that Terra's technology may nevertheless contain errors, and this could delay
product launches and innovations and damage customer relations.
RISKS ASSOCIATED WITH ENCRYPTION TECHNOLOGY. A significant barrier to
electronic commerce and communication is the secure transmission of confidential
information over public networks. Terra's electronic commerce software uses
encryption and authentication technology to provide the security and
authentication necessary to effect secure transmission of confidential
information. Despite the fact that Terra strives to make use of proven
applications for premium data security and integrity to process electronic
transactions, there can be no assurance that use of these applications will be
sufficient to address changing market conditions or the security and privacy
concerns of existing and potential clients. A security or privacy breach may
cause Terra's clients to lose confidence in its services, deter clients from
using Terra's services, harm Terra's reputation, expose Terra to liability,
increase Terra's expenses from potential remediation costs, and decrease market
acceptance and growth of Terra's product offerings.
SYSTEM RISKS AND SERVICE DELAY OR INTERRUPTION RISKS. Terra's ability to
process electronic transactions depends on bank processing and credit card
systems. These systems and operations are vulnerable to damage or interruption
from human error, natural disasters, telecommunication failures, break-ins,
sabotage, computer viruses, intentional acts of vandalism and similar events. In
order to prepare for certain types of system problems, Terra has developed and
is testing a formal disaster recovery plan. Any system failure, including
network, software or hardware failure, that causes a delay or interruption in
Terra's electronic payment services could result in reduced use, reduced revenue
and harm to Terra's reputation, brand and relations with merchants and
end-users.
Delayed response times and interruptions in service associated with
Terra's electronic transaction processing, including delays or interruptions
relating to high volumes of traffic or technological problems, may result in a
loss of merchants and end-users using Terra's electronic payment software for
transaction processing.
29
EXCHANGE RATE RISKS. The majority of Terra's revenues are generated in
U.S. dollars and a significant portion of Terra's expenses are incurred in
Canadian dollars. Any fluctuation in the value of the Canadian dollar relative
to the U.S. dollar may result in variations in the revenues and earnings of
Terra. Terra has not implemented a currency hedging program.
RISK OF UNAUTHORIZED DISCLOSURE OF MERCHANT AND CARDHOLDER DATA. Terra
collects and stores sensitive data about merchants and cardholders, including
names, addresses, social security numbers, drivers' licence numbers, chequing
and savings account numbers and payment history records, such as account
closures and returned checks. In addition, Terra maintains a database of
cardholder data relating to specific transactions, including payment card
numbers and cardholder addresses, in order to process the transactions and for
fraud prevention and other internal processes. If a person penetrates Terra's
network security or otherwise misappropriates sensitive merchant or cardholder
data, Terra could be subject to liability or business interruption.
Although Terra requires that its agreements with service providers who
have access to merchant and customer data include confidentiality obligations
that restrict these parties from using or disclosing any customer or merchant
data except as necessary to perform their services under the applicable
agreements, there can be no assurance that these contractual measures will
prevent the unauthorized disclosure of merchant or customer data. In addition,
Terra's agreements with financial institutions require it to take certain
protective measures to ensure the confidentiality of merchant and consumer data.
Any failure to adequately take these protective measures could result in
protracted or costly litigation.
LOSS OF KEY PERSONNEL. The loss of key personnel or damage to their
reputations could adversely affect Terra's relationships with card associations,
bank sponsors and other service providers, which would adversely affect Terra's
business.
RISK OF ADVERSE BUSINESS CONDITIONS. General economic conditions have
caused some of the merchants Terra serves to experience difficulty in supporting
their current operations and implementing their business plans. If these
merchants make fewer sales of their products and services, Terra will have fewer
transactions to process, resulting in lower revenues.
In addition, in a recessionary environment, the merchants Terra serves
could be subject to a higher rate of insolvency which could adversely affect
Terra financially. Terra bears credit risk for chargebacks related to billing
disputes between credit card holders and bankrupt merchants. If a merchant seeks
relief under bankruptcy laws or is otherwise unable or unwilling to pay, Terra
may be liable for the full transaction amount of a chargeback.
30
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about our financial instruments that
are sensitive to changes in interest rates and foreign currency exchange rates.
Interest rate and foreign currency exchange rate sensitivity table
December 31, 2003
--------------------------
Carrying Fair
Value Value(1)
-------- --------
(U.S. dollars)
Discounted notes denominated in U.S. and Canadian dollars, held for
other than trading purposes, with a weighted average effective yield
of 1.39% (2002 - 1.56%), maturing between January 12, 2004 and October
24, 2004 (2002 - matured between January 13, 2003 and April 17, 2003
with a maturity value of $48,191,000) $48,032,000 $48,525,000
Notes denominated in U.S. and Canadian dollars, held for other than
trading purposes, with a weighted average effective yield of 1.97%,
maturing between February 1, 2005 and December 9, 2008 with a maturity
value of $26,076,000 $26,270,000 $25,931,000
----------- -----------
TOTAL: $74,302,000 $74,456,000
=========== ===========
(1) Fair value has been determined based upon quoted market values
as at December 31, 2003.
We are exposed to foreign currency exchange rate fluctuations resulting from
certain expenses paid from Canadian operations in Canadian dollars, while
substantially all of our revenues are earned in U.S. dollars. If the Canadian
dollar strengthens in relation to the U.S. dollar, the effective cost of our
expenses (as reported in U.S. dollars) will increase. We have never tried to
hedge our exchange rate risk, do not plan to do so and may not be successful
should we attempt to do so in the future. We are also exposed to interest rate
fluctuation risk, which we do not systematically manage. We presently invest in
short-term investment grade paper.
31
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements of
OPTIMAL ROBOTICS CORP.
Years ended December 31, 2003 and 2002
(expressed in US dollars)
32
[LETTERHEAD OF KPMG]
KPMG LLP Telephone (514) 840-2100
Chartered Accountants Telefax (514) 840-2187
2000 McGill College Avenue http://www.kpmg.ca
Suite 1900
Montreal (Quebec) H3A 3H8
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Optimal Robotics Corp. as at
December 31, 2003 and 2002 and the consolidated statements of operations,
deficit and cash flows for each of the years in the three-year period ended
December 31, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and generally accepted auditing standards in the United States. Those
standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2003
and 2002 and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2003 in accordance with
Canadian generally accepted accounting principles.
/s/ KPMG LLP
Chartered Accountants
Montreal, Canada
February 20, 2004
OPTIMAL ROBOTICS CORP.
Consolidated Financial Statements
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
Financial Statements
Consolidated Balance Sheets.......................................... 1
Consolidated Statements of Operations................................ 2
Consolidated Statements of Deficit................................... 3
Consolidated Statements of Cash Flows................................ 4
Notes to Consolidated Financial Statements........................... 5
34
OPTIMAL ROBOTICS CORP.
Consolidated Balance Sheet
December 31, 2003 and 2002
(expressed in U.S. dollars)
===========================================================================================
2003 2002
- -------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 4,211,964 $ 9,615,348
Short-term investments (note 4) 74,301,582 76,146,586
Accounts receivable (note 5) 11,082,962 5,812,656
Income taxes receivable 546,130 1,481,977
Tax credits receivable 376,000 728,408
Inventories (note 6) 22,938,125 22,656,666
Future income taxes (note 16) 331,829 243,470
Prepaid expenses and deposits 1,075,691 493,499
-------------------------------------------------------------------------------------
114,864,283 117,178,610
Property and equipment (note 7) 6,290,188 6,562,344
Goodwill and other intangible assets (note 8) 12,109,838 4,399,924
Future income taxes (note 16) 2,278,016 1,549,856
- -------------------------------------------------------------------------------------------
$ 135,542,325 $ 129,690,734
===========================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness (note 9) $ 10,726,076 $ --
Accounts payable and accrued liabilities (note 10) 8,400,100 7,134,379
Deferred revenue 2,860,122 1,394,455
Future income taxes (note 16) 133,806 --
- -------------------------------------------------------------------------------------------
22,120,104 8,528,834
Future income taxes (note 16) 129,583 1,700,870
Shareholders' equity:
Share capital (note 11) 122,102,244 122,102,244
Additional paid-in capital 5,282 5,282
Deficit (7,330,417) (1,162,025)
Cumulative translation adjustment (1,484,471) (1,484,471)
- -------------------------------------------------------------------------------------------
113,292,638 119,461,030
Commitments and contingencies (note 13)
Subsequent events (note 22)
- -------------------------------------------------------------------------------------------
$ 135,542,325 $ 129,690,734
===========================================================================================
See accompanying notes to consolidated financial statements.
Approved by the Board of Directors
/s/ HOLDEN L. OSTRIN Director /s/ NEIL S. WECHSLER Director
- ---------------------------- --------------------------
35
OPTIMAL ROBOTICS CORP.
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
==================================================================================================
2003 2002 2001
- --------------------------------------------------------------------------------------------------
Revenues $ 67,187,900 $ 75,717,591 $ 101,421,243
Cost of sales 45,421,729 50,261,337 63,158,749
- --------------------------------------------------------------------------------------------------
Gross margin 21,766,171 25,456,254 38,262,494
Expenses (income):
Selling, general and administrative 25,905,607 29,012,307 18,441,868
Amortization 3,065,411 2,655,820 1,538,366
Operating lease 1,970,834 1,550,962 1,210,201
Research and development (note 14) 795,390 1,289,848 1,223,956
Restructuring (note 15) 747,919 1,038,835 --
Investment income (980,103) (1,816,889) (3,147,698)
Foreign exchange 332,505 (6,436) 90,110
--------------------------------------------------------------------------------------------
31,837,563 33,724,447 19,356,803
- --------------------------------------------------------------------------------------------------
(Loss) earnings before income taxes (10,071,392) (8,268,193) 18,905,691
Income tax (recovery) provision (note 16) (3,903,000) (2,940,963) 9,600,000
- --------------------------------------------------------------------------------------------------
Net (loss) earnings $ (6,168,392) $ (5,327,230) $ 9,305,691
==================================================================================================
Earnings (loss) per share:
Basic $ (0.41) $ (0.35) $ 0.63
Diluted (0.41) (0.35) 0.60
==================================================================================================
Weighted average number of common shares:
Basic 14,936,235 15,058,533 14,704,636
Effect of dilutive options and warrants 576 42,874 867,903
- --------------------------------------------------------------------------------------------------
Diluted 14,936,811 15,101,407 15,572,539
==================================================================================================
See accompanying notes to consolidated financial statements.
36
OPTIMAL ROBOTICS CORP.
Consolidated Statements of Deficit
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
=============================================================================================
2003 2002 2001
- ---------------------------------------------------------------------------------------------
(Deficit) retained earnings, beginning of year $(1,162,025) $ 8,475,146 $ (830,545)
Net (loss) earnings (6,168,392) (5,327,230) 9,305,691
Excess of purchase price over book value
of shares (note 11) -- (4,309,941) --
- ---------------------------------------------------------------------------------------------
(Deficit) retained earnings, end of year $(7,330,417) $(1,162,025) $ 8,475,146
=============================================================================================
See accompanying notes to consolidated financial statements.
37
OPTIMAL ROBOTICS CORP.
Consolidated Statements of Cash Flows
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
======================================================================================================
2003 2002 2001
- ------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) earnings $ (6,168,392) $ (5,327,230) $ 9,305,691
Adjustments for items not affecting cash:
Amortization 3,065,411 2,655,820 1,538,366
Future income taxes (2,254,000) (951,416) 4,741,905
Loss on sale of trade accounts receivable -- 36,263 73,955
Write-off of property and equipment 140,338 175,749 --
Changes in operating assets and liabilities:
Accounts receivable (2,085,179) (1,032,186) (6,544,104)
Proceeds from sale of trade accounts
receivable -- 4,192,712 9,458,760
Income taxes 935,847 (6,276,453) 4,794,476
Tax credits receivable 352,408 155,649 (560,269)
Inventories 1,940,676 (301,399) (4,374,837)
Prepaid expenses and deposits (293,188) 495,608 (519,685)
Accounts payable and accrued liabilities (2,890,752) 460,575 (3,960,049)
Deferred revenue 768,213 (212,657) (276,037)
------------------------------------------------------------------------------------------------
(6,488,618) (5,928,965) 13,678,172
Cash flows from financing activities:
Proceeds from demand loan 10,726,076 -- --
Repayment of long-term debt (3,746,372) -- --
Repurchase of common shares -- (8,684,330) --
Proceeds from issuance of common shares -- -- 19,421,317
------------------------------------------------------------------------------------------------
6,979,704 (8,684,330) 19,421,317
Cash flows from investing activities:
Purchase of property and equipment (1,387,367) (3,083,748) (4,003,625)
Purchase of intangible assets (961,814) (644,779) --
Proceeds from disposal of property
and equipment 655,544 -- --
Business acquisitions (note 3) (6,045,837) -- (1,141,000)
Sale (purchase) of investments 1,845,004 18,340,740 (23,345,416)
------------------------------------------------------------------------------------------------
(5,894,470) 14,612,213 (28,490,041)
- ------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (5,403,384) (1,082) 4,609,448
Cash and cash equivalents, beginning of year 9,615,348 9,616,430 5,006,982
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 4,211,964 $ 9,615,348 $ 9,616,430
======================================================================================================
Supplemental disclosure of cash flow information (note 19)
See accompanying notes to consolidated financial statements.
38
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
1. Nature of operations:
Optimal Robotics Corp. (the "Company") is engaged in the development,
marketing, installation and servicing of automated transaction products
designed for use in the retail sector. The Company's principal product
focus is its U-Scan(R) system, a self-service checkout system for the
retail industry. The Company also provides hardware maintenance and repair
outsourcing services throughout North America.
2. Significant accounting policies:
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada. These principles
conform, in all material respects, with accounting principles generally
accepted in the United States, except as described in note 20. The
principal accounting policies of the Company are summarized as follows:
(a) Principles of consolidation:
These consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated on
consolidation.
(b) Cash and cash equivalents:
Cash and cash equivalents consist of cash on hand and balances with
banks and highly liquid debt instruments with original terms to
maturity of three months or less.
(c) Short-term investments:
Short-term investments include investments with maturities greater
than three months and less than a year as well as investments with
maturities greater than a year that can be promptly liquidated.
Investments are carried at the lower of amortized cost and market
value.
(d) Securitizations:
Securitization transactions are recorded as sales of accounts
receivable when the control of the asset is transferred to the
purchaser. Transactions recorded in this manner result in the
removal of the accounts receivable sold from the Company's balance
sheet. Discount fees on the portfolio of receivables sold are
recorded in selling, general and administrative expenses.
(e) Inventories:
Raw material inventories are stated at the lower of landed cost or
replacement cost. Finished goods and work in process inventories are
stated at the lower of cost or net realizable value. Cost is
determined on the basis of weighted average cost.
39
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
2. Significant accounting policies (continued):
(e) Inventories (continued):
To provide maintenance and repair services to its customers, the
Company maintains significant levels of replacement parts. Parts are
stated at cost. The Company provides an allowance for obsolescence
and shrinkage. The costs of refurbishing parts are included in the
cost of sales as incurred.
Periodic revisions to allowance estimates are required, based upon
the evaluation of several factors, including changes in estimated
product life cycles, usage levels, and technology changes. Changes
in these estimates are reflected immediately in income.
(f) Research and investment tax credits:
Research and investment tax credits are recorded as a reduction of
the related expense or the cost of the assets acquired. Tax credits
are recorded in the accounts when reasonable assurance exists that
they will be realized.
(g) Property and equipment:
Property and equipment are recorded at cost. Amortization is
provided for over the estimated useful lives of the assets using the
straight-line method at the following annual rates:
====================================================================
Test units 33%
Equipment 10%
Computer equipment and software 33%
Leasehold improvements Over lease term
====================================================================
(h) Goodwill and other intangible assets:
Goodwill:
Goodwill is the residual amount that results when the purchase price
of an acquired business exceeds the sum of the amounts allocated to
the assets acquired, less liabilities assumed, based on their fair
values. Goodwill is allocated as of the date of the business
combination to the Company's reporting units that are expected to
benefit from the synergies of the business combination.
40
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
2. Significant accounting policies (continued):
(h) Goodwill and other intangible assets (continued):
Goodwill (continued):
Goodwill is tested for impairment annually, or more frequently if
events or changes in circumstances indicate that the asset may be
impaired. The impairment test is carried out in two steps. In the
first step, the carrying amount of the reporting unit is compared
with its fair value. When the fair value of a reporting unit exceeds
its carrying amount, goodwill of the reporting unit is considered
not to be impaired and the second step of the test is not required.
The second step is performed when the carrying amount of a reporting
unit exceeds its fair value, in which case the implied fair value of
the reporting unit's goodwill is compared with its carrying amount
to measure the impairment loss, if any. When the carrying amount of
the reporting unit's goodwill exceeds the implied fair value of
goodwill, an impairment loss is recognized in an amount equal to the
excess and is presented as a separate line item on the consolidated
statement of operations.
Based on the impairment tests performed as of December 31, 2003 and
2002, the Company concluded that no goodwill impairment charge was
required.
Prior to the adoption of the Canadian Institute of Chartered
Accountants ("CICA") Handbook Section 3062 on January 1, 2002,
goodwill was amortized on a straight-line basis over its expected
useful life. The following information presents the impact of
goodwill amortization in fiscal 2001:
============================================================================================
2003 2002 2001
--------------------------------------------------------------------------------------------
Reported net (loss) earnings $ (6,168,392) $ (5,327,230) $9,305,691
Add back goodwill amortization, net of tax -- -- 86,968
--------------------------------------------------------------------------------------------
Adjusted net (loss) earnings $ (6,168,392) $ (5,327,230) $9,392,659
============================================================================================
Earnings (loss) per share:
Basic $ (0.41) $ (0.35) $ 0.64
Diluted (0.41) (0.35) 0.60
============================================================================================
Other intangible assets:
Intangible assets acquired either individually or with a group of
other assets are initially recognized and measured at cost. The cost
of a group of intangible assets, including those acquired in a
business combination that meet the specified criteria for
recognition apart from goodwill, is allocated to the individual
assets based on their relative fair values.
41
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
2. Significant accounting policies (continued):
(h) Goodwill and other intangible assets (continued):
Other intangible assets (continued):
Intangible assets are amortized using the straight-line method at
the following annual rates:
====================================================================
Customer list 20%
Patent costs over patent life
License over license term of
44 months
====================================================================
Customer contracts and customer relationships are presented at the
fair value assigned in the context of a business acquisition and are
amortized on a straight-line basis over the estimated useful life of
six years.
(i) Impairment and disposal of 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 for long-lived assets, consisting of property and
equipment and intangible assets with definite useful lives, 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.
42
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
2. Significant accounting policies (continued):
(i) Impairment and disposal of long-lived assets (continued):
On January 1, 2003, the Company adopted Section 3063 on the
impairment of long-lived assets held for use and the revised
standards contained in Section 3475 on disposal of long-lived assets
and discontinued operations. There was no impact on the Company's
financial statements as a result of adopting these recommendations.
(j) Income taxes:
The Company provides for income taxes using the asset and liability
method of tax allocation. Under this method, future income tax
assets and liabilities are determined based on deductible or taxable
temporary differences between financial statement values and tax
values of assets and liabilities using substantively enacted income
tax rates expected to be in effect for the year in which the
differences are expected to reverse.
The Company establishes a valuation allowance against future income
tax assets if, based on available information, it is more likely
than not that some or all of the future income tax assets will not
be realized.
(k) Revenue recognition:
Revenue from product sales is recognized upon shipment, delivery or
upon customer acceptance of the product, based upon the terms as
defined in the customer contract. Installation service revenue,
which is billed separately from product sales, is recognized at the
time the service has been provided to the customers. Revenue from
maintenance and repair services, which is subject to separate
contracts, is deferred and amortized ratably over the term of the
contract.
(l) Foreign currency translation:
Monetary assets and liabilities of the Canadian and foreign
operations denominated in currencies other than the U.S. dollar are
translated at the rates of exchange prevailing at the balance sheet
dates. Other assets and liabilities denominated in currencies other
than the U.S. dollar are translated at the exchange rates prevailing
when the assets were acquired or the liabilities incurred. Revenues
and expenses denominated in currencies other than the U.S. dollar
are translated at the approximate rate of exchange in effect on the
date of the transaction. Foreign exchange gains and losses are
included in the determination of net earnings.
(m) Research and development expenses:
Research costs, which include all costs incurred to establish
technological feasibility, are charged to operations in the year in
which they are incurred. Technological feasibility has been defined
as the completion of the product design for the computer software.
43
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
2. Significant accounting policies (continued):
(m) Research and development expenses (continued):
Once technological feasibility has been established, development
costs are evaluated for deferral and subsequent amortization. As at
December 31, 2003 and 2002, the Company had no deferred development
costs.
(n) Stock-based compensation:
In November 2003, the CICA revised Handbook Section 3870,
Stock-based Compensation and other Stock-based Payments, with
respect to the accounting for stock-based compensation and other
stock-based payments. The revised recommendations require that
beginning January 1, 2004, the fair value-based method be used to
account for all transactions whereby goods and services are received
in exchange for stock-based compensation and other stock-based
payments. The revised standard no longer permits the use of the
settlement method for stock-based employee compensation awards.
Under the settlement method, any consideration paid by employees on
the exercise of stock options is credited to share capital and no
compensation expense is recognized. Under the fair value-based
method, compensation cost is measured at fair value at the date of
grant and is expensed over the award's vesting periods.
In accordance with one of the transitional options permitted under
Section 3870, the Company has elected to early adopt the new
recommendations effective January 1, 2003 and prospectively apply
the standard for employee stock awards granted after January 1,
2003. Previously, the Company applied the settlement method of
accounting to employee stock options.
44
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
2. Significant accounting policies (continued):
(n) Stock-based compensation (continued):
As required under the standard, the following disclosure is required
to report the pro forma net earnings and earnings per share as if
the fair value-based method had been used to account for employee
stock options granted between January 1, 2002 and December 31, 2002:
====================================================================================================
2003 2002
----------------------------------------------------------------------------------------------------
Net loss, as reported $ (6,168,392) $ (5,327,230)
Deduct:
Total stock-based employee compensation expense
determined under fair value-based method for all
awards granted in fiscal 2002, net of related taxes of nil (1,423,340) (18,575,322)
----------------------------------------------------------------------------------------------------
Pro forma net loss $ (7,591,732) $(23,902,552)
====================================================================================================
Earnings (loss) per share:
Basic:
As reported $ (0.41) $ (0.35)
Pro forma (0.51) (1.59)
Diluted:
As reported (0.41) (0.35)
Pro forma (0.51) (1.59)
====================================================================================================
The weighted average fair value of the 1,765,000 options granted
during the fiscal 2002, estimated on the date of grant using the
Black-Scholes pricing model with the following weighted average
assumptions, was $11.49 per share:
====================================================================================================
2003 2002
----------------------------------------------------------------------------------------------------
Risk free interest rate N/A 3.32%
Expected volatility N/A 81%
Expected life in years N/A 10
Expected dividend yield N/A nil
====================================================================================================
Dividend yield was excluded from the calculation since it is the
present policy of the Company to retain all earnings to finance
operations.
45
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
2. Significant accounting policies (continued):
(n) Stock-based compensation (continued):
There were no options granted during the year ended December 31,
2003. The pro forma adjustments for fiscal 2003 and fiscal 2002
relate to the amortization of compensation cost for options granted
during fiscal 2002 over the vesting periods.
Details of all outstanding stock options are as follows:
====================================================================
Weighted average
exercise price
Number per share
--------------------------------------------------------------------
Balance, December 31, 2002 4,799,525 $ 22.88
Expired/cancelled (4,794,525) 22.89
--------------------------------------------------------------------
Balance, December 31, 2003 5,000 $ 6.40
====================================================================
(o) Earnings per share:
Basic earnings per share are determined using the weighted average
number of common shares outstanding during the period. Diluted
earnings per share are calculated using the treasury stock method.
Diluted earnings per share are computed in a manner consistent with
basic earnings per share except that the weighted average shares
outstanding are increased to include additional shares from the
assumed exercise of options and warrants, if dilutive. The number of
additional shares is calculated by assuming that outstanding options
and warrants were exercised and that the proceeds from such
exercises are used to repurchase common shares at the average market
price during the reporting period.
(p) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and revenues and expenses
during the reporting periods. Significant areas requiring the use of
management estimates include estimating the useful lives of
long-lived assets, including property and equipment and intangible
assets, estimating the fair value of identifiable intangibles
acquired in a business acquisition, estimating stock-based
compensation costs, as well as assessing the recoverability of
inventories, goodwill, long-lived assets, tax credits receivable and
future tax assets. The reported amounts and note disclosures are
determined to reflect the most probable set of economic conditions
and planned courses of action. Actual results could differ from
those estimates.
46
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
2. Significant accounting policies (continued):
(q) Guarantees:
On January 1, 2003, the Company adopted the new recommendations of
the 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 13 (b), the Company is contractually bound to
indemnify a customer without limitations 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.
3. Business acquisitions:
RBA Inc.
On September 30, 2003, the Company acquired substantially all of the
assets and the ongoing business of RBA Inc. ("RBA"), a company that
provides hardware maintenance outsourcing services, including debit/credit
card system maintenance and computer maintenance services, across Canada.
The net assets acquired for cash are approximately $6.0 million (CA$8.1
million), subject to the determination of certain post closing
adjustments, if any. The acquisition is accounted for by the Company using
the purchase method and the results of RBA are consolidated with those of
the Company from the date of acquisition.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at date of acquisition. The Company is in
the process of finalizing its valuation of the net assets acquired,
including the determination of post-closing adjustments and the allocation
to goodwill and to other intangible assets; thus, the allocation of the
purchase price is subject to final modifications.
47
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
3. Business acquisitions (continued):
RBA Inc. (continued):
==========================================================================
Assets acquired, at assigned values:
Accounts receivable $ 3,185,127
Inventories 2,222,135
Property and equipment 1,766,800
Prepaid expenses and deposits 289,004
Customer contracts and customer relationships 3,399,720
Tax-deductible goodwill 3,783,350
---------------------------------------------------------------------
14,646,136
Liabilities assumed:
Accounts payable and accrued liabilities 4,156,473
Deferred revenue 697,454
Current portion of long-term debt 2,384,182
Long-term debt 1,362,190
---------------------------------------------------------------------
8,600,299
--------------------------------------------------------------------------
Net assets acquired for cash $ 6,045,837
==========================================================================
Alpha Microsystems, LLC
On May 29, 2001, the Company acquired certain assets and the ongoing
business of Alpha Microsystems, LLC, based in Santa Ana, California, for a
total purchase price of approximately $6.8 million, of which $5.7 million
was paid by the assumption of liabilities and $1.1 million was paid in
cash.
48
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
3. Business acquisitions (continued):
Alpha Microsystems, LLC (continued):
Details of the acquisition are as follows:
=====================================================================================
Assets acquired, at assigned values:
Accounts receivable $1,387,105
Inventories 1,254,545
Property and equipment 1,175,000
Other assets 142,383
Tax-deductible goodwill 3,171,903
--------------------------------------------------------------------------------
7,130,936
Liabilities assumed:
Accounts payable and accrued liabilities 2,756,482
Notes payable 1,385,000
Deferred revenue 1,848,454
--------------------------------------------------------------------------------
5,989,936
-------------------------------------------------------------------------------------
Net assets acquired for cash $1,141,000
=====================================================================================
4. Investments:
Investments consist of the following:
=====================================================================================
2003 2002
-------------------------------------------------------------------------------------
Discounted notes denominated in U.S. dollars and in
Canadian dollars, with a weighted average effective
yield of 1.39% (2002 - 1.56%), maturing between
January 12, 2004 and October 24, 2004 (2002 -
matured between January 13, 2003 and April 17, 2003) $48,031,869 $76,146,586
Notes denominated in U.S. dollars, with a weighted
average effective yield of 1.97%, maturing between
February 1, 2005 and December 9, 2008 26,269,713 --
-------------------------------------------------------------------------------------
$74,301,582 $76,146,586
=====================================================================================
49
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
5. Accounts receivable:
=========================================================================
2003 2002
-------------------------------------------------------------------------
Trade accounts receivable $ 10,880,166 $ 5,289,040
Accrued interest 236,929 299,134
Other 250,443 540,976
Less allowance for doubtful accounts (284,576) (316,494)
-------------------------------------------------------------------------
$ 11,082,962 $ 5,812,656
=========================================================================
During fiscal 2002, under an agreement with a subsidiary of a Canadian
chartered bank, the Company sold accounts receivable on a non-recourse
basis with an aggregate carrying value of $4,228,976 for net proceeds
amounting to $4,192,713. The excess of the carrying value over the net
proceeds on sale of these accounts receivable of $36,263 was charged to
selling, general and administrative expense.
6. Inventories:
=========================================================================
2003 2002
-------------------------------------------------------------------------
Finished goods $ 1,182,541 $ 1,647,505
Work in process 641,370 355,853
Raw materials 3,203,305 4,468,785
Product and service replacement parts 17,910,909 16,184,523
-------------------------------------------------------------------------
$ 22,938,125 $ 22,656,666
=========================================================================
50
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
7. Property and equipment:
================================================================================
2003 2002
--------------------------------------------------------------------------------
Cost:
Test units $ 3,912,111 $ 3,363,185
Equipment 2,253,444 1,981,932
Computer equipment and software 4,317,556 3,958,111
Leasehold improvements 3,279,697 2,408,759
---------------------------------------------------------------------------
13,762,808 11,711,987
Accumulated amortization:
Test units 2,631,275 1,709,599
Equipment 622,693 424,166
Computer equipment and software 3,153,302 2,273,216
Leasehold improvements 1,065,350 742,662
---------------------------------------------------------------------------
7,472,620 5,149,643
--------------------------------------------------------------------------------
Net carrying amount $ 6,290,188 $ 6,562,344
================================================================================
8. Goodwill and other intangible assets:
================================================================================
2003 2002
--------------------------------------------------------------------------------
Cost:
Goodwill $ 6,955,253 $ 3,171,903
Customer contracts and customer relationships 3,399,720 --
Patent costs 1,393,693 803,143
Customer list 786,414 786,414
License 371,264 --
---------------------------------------------------------------------------
12,906,344 4,761,460
Accumulated amortization:
Goodwill 141,750 141,750
Customer contracts and customer relationships 141,655 --
Patent costs 105,034 36,503
Customer list 340,564 183,283
License 67,503 --
---------------------------------------------------------------------------
796,506 361,536
--------------------------------------------------------------------------------
Net carrying amount $12,109,838 $ 4,399,924
================================================================================
51
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
9. Bank indebtedness:
The Company has credit facilities in the amount of approximately CA$15
million (U.S.$11.6 million), which can be utilized in the form of loans or
bankers' acceptances in Canadian dollars. At December 31, 2003, the
Company utilized $10,726,076 of the facilities. The borrowings are due on
demand and bear interest either at the bank's prime rate or the market
rate for bankers' acceptances plus an acceptance fee of 0.75% per annum,
depending on the form of the facility utilized. The facilities are secured
by a first ranking moveable hypothec on short-term investments.
10. Accounts payable and accrued liabilities:
==========================================================================
2003 2002
--------------------------------------------------------------------------
Trade accounts payable $5,218,166 $5,725,821
Accrued salaries and benefits 2,078,886 1,217,640
Sales taxes payable 620,170 190,918
Other 482,878 --
--------------------------------------------------------------------------
$8,400,100 $7,134,379
==========================================================================
11. Share capital:
The Company's authorized share capital consists of an unlimited number of
Class "A" shares, and Class "B" and Class "C" preference shares.
- The Class "A" shares are designated as common shares.
- The Class "B" preference shares are voting, non-participating and
redeemable at the option of the Company for the amount paid up
thereon. In the event of the liquidation, dissolution or wind-up of
the Company, the Class "B" preference shares rank in priority to all
other classes.
- The Class "C" preference shares are issuable in series with rights,
privileges, restrictions and conditions designated by the directors.
In the event of the liquidation, dissolution or wind-up of the
Company, the Class "C" preference shares rank in priority to the
common shares.
52
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
11. Share capital (continued):
Changes in the issued and outstanding share capital are as follows:
========================================================================================
Number of
common
shares Dollars
----------------------------------------------------------------------------------------
Balance, December 31, 2000 13,708,690 $ 107,050,914
Issued for cash pursuant to exercise of stock options 1,409,225 17,433,431
Issued pursuant to exercise of warrants: 353,420 --
Ascribed value from other capital -- 4,402
Cash -- 1,987,886
----------------------------------------------------------------------------------------
Balance, December 31, 2001 15,471,335 126,476,633
Stock repurchase program (535,100) (4,374,389)
----------------------------------------------------------------------------------------
Balance, December 31, 2002 and 2003 14,936,235 $ 122,102,244
========================================================================================
On February 26, 2002, the Board of Directors approved a stock repurchase
program authorizing the Company to purchase up to 750,000 common shares in
the open market commencing March 5, 2002 and ending March 4, 2003. During
2002, 535,100 shares having a book value of $4,374,389 had been
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. No shares were repurchased during the
period from January 1, 2003 to March 4, 2003.
During 2001, the Company issued 1,409,225 common shares pursuant to the
exercise of stock options with exercise prices ranging between $3.00 and
$47.00 per share and 353,420 common shares pursuant to the exercise of
warrants with exercise prices ranging between Cdn$5.00 and $6.60 per
share. Total proceeds from the issuance of these shares amounted to
$19,421,317.
12. Stock option plan/warrants:
(a) Stock option plan:
The Company has a stock option plan that provides for the granting
of options to employees and directors for the purchase of the
Company's common shares. Options may be granted by the Board of
Directors for terms of up to ten years. The Board of Directors
establishes the exercise period, vesting terms and other conditions
for each grant at the grant date. Options may be granted with
exercise prices at the then current market price. Options
outstanding under the plan expire between five and ten years after
the date of grant and vest either immediately or over a period of up
to two years.
53
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
12. Stock option plan/warrants (continued):
(a) Stock option plan (continued):
A total of 9,000,000 common shares had been authorized for issuance
pursuant to options granted under the stock option plan. As at
December 31, 2002, 2,543,725 common shares had been issued pursuant
to the stock option plan, an additional 4,794,525 common shares were
reserved for options outstanding, leaving a further 1,661,750 common
shares available to be granted under this plan.
The Company had granted options under the plan pursuant to certain
employment agreements which provide that in the event of termination
by the Company without cause, the exercise price of all options,
warrants or rights would be amended to a nominal value. Included in
the options outstanding as at December 31, 2002, there were options
to purchase 2,790,000 common shares with a weighted average exercise
price of $23.22 which were subject to this provision, of which
2,392,500 options were exercisable.
On July 16, 2003, the Board of Directors approved the cancellation
of all options issued and outstanding under the Company's stock
option plan, subject to the agreement of the option holders. All
such options were cancelled as of July 31, 2003. The 5,000 stock
options that remain outstanding were issued outside of the Company's
stock option plan, to two consultants who are not employees of the
Company.
(b) Details of all outstanding stock options are as follows:
====================================================================
Weighted
average
Number of ex ercise price
options per share
--------------------------------------------------------------------
Balance, December 31, 2000 2,933,000 $ 19.66
Granted 1,846,000 30.62
Expired/cancelled (5,500) 27.43
Exercised (1,409,225) 12.37
--------------------------------------------------------------------
Balance, December 31, 2001 3,364,275 28.73
Granted 1,765,000 13.86
Expired/cancelled (329,750) 34.14
--------------------------------------------------------------------
Balance, December 31, 2002 4,799,525 22.88
Expired/cancelled (4,794,525) 22.89
--------------------------------------------------------------------
Balance, December 31, 2003 5,000 $ 6.40
====================================================================
54
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
12. Stock option plan/warrants (continued):
(b) Details of all outstanding stock options are as follows (continued):
The weighted average remaining contractual life of the options
outstanding at December 31, 2003, all of which are exercisable, is
8.8 years.
13. Commitments and contingencies:
(a) Operating leases:
The Company has entered into operating leases for its premises,
vehicles and certain office equipment. The minimum amounts payable
for each of the next five years, excluding the Company's
proportionate share of common operating costs, are approximately as
follows:
====================================================================
2004 $ 2,617,000
2005 2,027,000
2006 1,288,000
2007 660,000
2008 649,000
Thereafter 1,150,000
--------------------------------------------------------------------
$ 8,391,000
====================================================================
(b) 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 filed claims against one of the Company's customers, which
is contractually entitled to be indemnified by the Company for any
damages incurred by it in connection with any patent infringement.
On January 27, 2004, the Company entered into a settlement agreement
with the claimant, which resolved all potential claims by the
claimant and brought this action to an end. This settlement did not
have a material adverse effect on the financial position or results
of operations of the Company.
The Company also received a legal 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. The Company believes
this second claimant's claims to be without merit and intends to
vigorously defend its position should this second claimant initiate
a civil action. No amounts have been specified in these claims. 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 such claims.
55
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
13. Commitments and contingencies (continued):
(c) The Company is party to litigations 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.
14. Research and development expenses:
=============================================================================================================
2003 2002 2001
-------------------------------------------------------------------------------------------------------------
Gross research and development expenses $ 1,171,390 $ 2,146,058 $ 2,023,956
Less research tax credits (376,000) (856,210) (800,000)
-------------------------------------------------------------------------------------------------------------
$ 795,390 $ 1,289,848 $ 1,223,956
=============================================================================================================
15. Restructuring:
In 2003, the Company reduced its workforce in an effort to increase
operating efficiencies, decrease overall general and administrative
expenses and improve financial results. In total, the Company incurred
charges of $747,919 related primarily to severance and accrued vacations,
all of which were fully paid by December 31, 2003.
In 2002, the Company closed the assembly facility in Phoenix, Arizona, and
the support hub in Covington, Kentucky in an effort to consolidate
operations. The costs incurred as a result of the closures related mainly
to lease costs, severance payments and the write-down of inventories and
leasehold improvements. As at December 31, 2003, a provision of
approximately $133,000 (2002 - $288,000) relating to future obligations
for leased premises is included in accounts payable and accrued
liabilities in the consolidated balance sheets.
56
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
16. Income taxes:
The income tax provision differs from the amount computed by applying the
combined Canadian federal and provincial tax rates to earnings before
income taxes. The reasons for the difference and the related tax effects
are as follows:
================================================================================================================
2003 2002 2001
----------------------------------------------------------------------------------------------------------------
(Loss) earnings before income taxes $ (10,071,392) $ (8,268,193) $ 18,905,691
================================================================================================================
Combined Canadian federal and provincial
income taxes at 33% (2002 - 35% and
2001 - 37%) $ (3,323,559) $ (2,907,097) $ 6,995,106
Foreign exchange (1) (1,403,641) (178,235) 2,173,331
Benefit of losses not recorded 1,370,092 -- --
Difference in tax rates in foreign jurisdictions (367,005) -- --
Permanent differences and other (178,887) 144,369 431,563
----------------------------------------------------------------------------------------------------------------
Income tax (recovery) provision $ (3,903,000) $ (2,940,963) $ 9,600,000
================================================================================================================
(1) For purposes of calculating the income tax provision of the Company,
a tax liability is recognized on the foreign exchange gains which
arise on the conversion into Canadian dollars of the net monetary
assets denominated in U.S. dollars; such conversion is required for
tax purposes. Because these financial statements are presented in
U.S. dollars, this foreign exchange gain does not impact earnings
before income taxes even though the income tax provision includes a
tax liability for this gain. Future fluctuations in the foreign
exchange rate between the Canadian and U.S. dollar will change the
amount of the foreign exchange gains and thus the provision for
income taxes thereon.
The (recovery of) provision for income taxes is composed of the following:
================================================================================================================
2003 2002 2001
----------------------------------------------------------------------------------------------------------------
Current income taxes $ (1,649,000) $ (1,989,547) $ 4,858,095
Future income taxes (2,254,000) (951,416) 4,741,905
----------------------------------------------------------------------------------------------------------------
$ (3,903,000) $ (2,940,963) $ 9,600,000
================================================================================================================
57
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
16. Income taxes (continued):
The future income tax balances are summarized as follows:
===================================================================================
2003 2002
-----------------------------------------------------------------------------------
Future income tax assets (liabilities):
Non-capital losses $ 3,648,108 $ 1,278,016
Share issue costs 331,829 735,596
Less valuation allowance (1,370,092) --
------------------------------------------------------------------------------
2,609,845 2,013,612
Research and development tax credits (133,806) (220,286)
Property and equipment (129,583) (413,415)
Foreign exchange gain -- (1,287,455)
-----------------------------------------------------------------------------------
Net future income tax asset $ 2,346,456 $ 92,456
===================================================================================
Presented as:
Current assets $ 331,829 $ 243,470
Long-term assets 2,278,016 1,549,856
Current liabilities (133,806) --
Long-term liabilities (129,583) (1,700,870)
-----------------------------------------------------------------------------------
$ 2,346,456 $ 92,456
===================================================================================
In assessing the realizability of future tax assets, management considers
whether it is more likely than not that some portion or all of the future
income tax assets will be realized. The ultimate realization of future tax
assets is dependent upon the generation of future taxable income and/or
tax planning strategies.
The Company has approximately $10 million of losses carryforward available
to reduce federal taxable income in the United States. These losses expire
in 2022 and 2023.
17. Segmented information:
Prior to fiscal 2003, the Company reported its operations under one
segment, the development, marketing, installation and sale of automated
transaction products designed for use in the retail sector. As a result of
the acquisitions discussed in note 3, combined with lower product sales
and an increase in service revenue from hardware and software maintenance,
the Company now operates in two segments, namely product sales and
services as described in note 1. The corporate segment is responsible for
the Company's financial and corporate direction, and also includes general
expenses which cannot be directly attributed to a specific segment.
Management measures the results of operations based on segment gross
margin provided by each business segment.
The prior years' figures present revenues and cost of sales by products
only since, until the acquisition referred to above, management reported
its operations as one segment.
58
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
17. Segmented information (continued):
(a) Information on the operating segments is as follows:
===========================================================================================================
Hardware and
Systems, parts software Corporate and
and other maintenance eliminations Consolidated
-----------------------------------------------------------------------------------------------------------
2003:
Revenues from external
customers $ 38,801,548 $ 28,386,352 $ -- $ 67,187,900
Cost of sales 27,861,154 17,560,574 -- 45,421,728
Segment gross margin 10,940,394 10,825,778 -- 21,766,172
Amortization 2,137,473 927,938 -- 3,065,411
Interest income -- -- 980,103 980,103
Income (loss) before taxes (2,292,374) 616,735 (8,395,753) (10,071,392)
Income tax expense (recovery) -- -- (3,903,000) (3,903,000)
Total assets $ 16,663,937 $ 36,063,125 $ 82,815,263 $135,542,325
Total additions to property and
equipment and intangibles $ 1,572,858 $ 7,564,947 $ 394,446 $ 9,532,251
2002:
Revenues from external
customers $ 56,482,854 $ 19,234,737 $ -- $ 75,717,591
Cost of sales 36,409,261 13,852,076 -- 50,261,337
Segment gross margin 20,073,593 5,382,661 -- 25,456,254
2001:
Revenues from external
customers $ 86,184,269 $ 15,236,974 $ -- $101,421,243
Cost of sales 54,440,833 8,717,916 -- 63,158,749
Segment gross margin 31,743,436 6,519,058 -- 38,262,494
===========================================================================================================
(b) Geographic information is as follows:
============================================================================================================
Property and equipment
Revenues and intangibles
------------------------------------------ -------------------------------------------
2003 2002 2001 2003 2002 2001
----------------------------------------------------------------------------------------------------------
Canada $ 13,310,217 $ 3,678,824 $ 572,276 $ 13,804,936 $ 5,811,631 $ 4,436,119
United States 52,570,247 72,038,767 100,848,967 4,581,268 5,150,637 5,629,191
United Kingdom 1,307,436 -- -- 13,822 -- --
----------------------------------------------------------------------------------------------------------
$ 67,187,900 $ 75,717,591 $101,421,243 $ 18,400,026 $ 10,962,268 $ 10,065,310
============================================================================================================
Revenues were derived from customers located in the geographic areas.
59
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
17. Segmented information (continued):
(c) Major customers:
Sales to major customers (customers from which 10% or more of total
revenue is derived during the specified period), predominently from
the systems, parts and other segment, are summarized as follows:
=====================================================================
2003 2002 2001
---------------------------------------------------------------------
Customer 1 $ 24,404,102 $ 33,027,035 $ 65,134,835
Customer 2 N/A N/A 14,109,411
=====================================================================
18. Financial instruments:
(a) Credit risk:
Credit risk results from the possibility that a loss may occur from
the failure of another party to perform according to the terms of
the contract. Financial instruments that potentially subject the
Company to concentrations of credit risk consist primarily of cash,
investments and accounts receivable. Cash is maintained with
high-credit quality financial institutions. Investments consist of
discounted notes issued by high-credit quality corporations. For
accounts receivable, the Company performs periodic credit
evaluations and typically does not require collateral. Allowances
are maintained for potential credit losses consistent with the
credit risk, historical trends, general economic conditions and
other information.
(b) Interest rate risk:
The Company's exposure to interest rate risk is as follows:
====================================================================
Cash and cash equivalents Fixed interest rate
Short-term investments Fixed interest rate
Accounts receivable Non-interest bearing
Tax credits receivable Non-interest bearing
Bank indebtedness Variable interest rate
Accounts payable and accrued liabilities Non-interest bearing
====================================================================
60
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
18. Financial instruments (continued):
(c) Fair value:
Fair value estimates are made as of a specific point in time using
available information about the financial instrument. These
estimates are subjective in nature and often cannot be determined
with precision.
The Company has determined that the carrying values of cash,
accounts receivable, tax credits receivable, accounts payable and
accrued liabilities are reasonable estimates of their fair values
due to the relatively short periods to maturity of these
instruments.
The fair value of investments as at December 31, 2003 amounted to
approximately $74,456,000 (2002 - $76,714,000) which was calculated
by reference to various market data.
19. Supplemental disclosure of cash flow information:
===============================================================================
2003 2002 2001
-------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 174,521 $ 59,579 $ 105,368
Income taxes 158,730 3,260,759 63,621
===============================================================================
Cash and cash equivalents consist of:
Cash balances with banks $4,211,964 $9,615,348 $3,486,203
Short-term investments -- -- 6,130,227
-------------------------------------------------------------------------------
$4,211,964 $9,615,348 $9,616,430
===============================================================================
61
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
20. Canadian/U.S. Reporting Differences:
The consolidated financial statements of the Company are prepared in
accordance with Canadian generally accepted accounting principles
("GAAP"), which conform, in all material respects, with those generally
accepted in the United States except as described below:
(a) Consolidated Statements of Operations:
The reconciliation of net earnings reported in accordance with
Canadian GAAP to U.S. GAAP is as follows:
==============================================================================================
2003 2002 2001
----------------------------------------------------------------------------------------------
Net (loss) earnings in accordance with
Canadian GAAP: $ (6,168,392) $ (5,327,230) $ 9,305,691
Stock-based compensation costs (1) -- 9,778,143 (32,600,037)
----------------------------------------------------------------------------------------------
Net earnings (loss) in accordance with
U.S. GAAP $ (6,168,392) $ 4,450,913 $(23,294,346)
==============================================================================================
Earnings (loss) per share under U.S. GAAP:
Basic $ (0.41) $ 0.30 $ (1.58)
Diluted (0.41) 0.29 (1.58)
==============================================================================================
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.
(1) Stock-based compensation:
Prior to January 1, 2002, the Company accounted for its
stock-based compensation plan under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees and related interpretations, which
requires compensation costs to be recognized for the
difference, if any, between the quoted market price of the
stock as at the grant date and the amount the individual must
pay to acquire the stock. Prior to the cancellation of the
outstanding stock options referred to in note 12 (a), certain
of the Company's stock options were variable because the
exercise price was not known until the options were exercised.
62
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
20. Canadian/U.S. Reporting Differences (continued):
(a) Consolidated Statements of Operations (continued):
(1) Stock-based compensation (continued):
Effective January 1, 2003, the Company adopted the fair value
recognition provisions of FASB Statement 123, Accounting for
Stock-based Compensation, prospectively to all employee awards
granted, modified or settled after January 1, 2003. Awards
under the Company's plan vest either immediately or over a
period of two years. Therefore, the cost related to
stock-based compensation included in the determination of net
earnings for 2003 is less than that which would have been
recognized if the fair value based method had been applied to
all awards since the original effective date of Statement 123.
The following table illustrates the effect on net income and
earnings per share if the fair value based method had been
applied to all outstanding and unvested awards in each period:
==================================================================================================
2003 2002 2001
--------------------------------------------------------------------------------------------------
Reported net (loss) earnings $ (6,168,392) $ 4,450,913 $ (23,294,346)
Add: Stock-based employee
compensation included in reported net
earnings, net of related taxes of nil -- (9,778,143) 32,600,037
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related taxes of nil (10,134,477) (41,975,353) (31,683,852)
--------------------------------------------------------------------------------------------------
Pro forma net loss $ (16,302,869) $ (47,302,583) $ (22,378,161)
Earnings (loss) per share:
Basic:
As reported $ (0.41) $ 0.30 $ (1.58)
Pro forma (1.09) (3.14) (1.52)
Diluted:
As reported (0.41) 0.29 (1.58)
Pro forma (1.09) (3.14) (1.52)
==================================================================================================
63
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
20. Canadian/U.S. Reporting Differences (continued):
(a) Consolidated Statements of Operations (continued):
The weighted averaged fair value of each option granted is estimated
on the date of grant using the Black-Scholes pricing model with the
following weighted average assumptions:
==================================================================================================
2003 2002 2001
--------------------------------------------------------------------------------------------------
Risk-free interest rate N/A 3.32% 4.36%
Expected volatility N/A 81% 76%
Expected life in years N/A 10 8.6
Expected dividend yield N/A nil nil
==================================================================================================
Dividend yield was excluded from the calculation since it is the
present policy of the Company to retain all earnings to finance
operations.
The following table summarizes the weighted average grant-date fair
value per share for options granted:
==================================================================================================
Weighted
average
grant-date
Number of fair value
options per share
--------------------------------------------------------------------------------------------------
2001:
Exercise price per share equal to market price per share 1,846,000 $ 22.22
2002:
Exercise price per share equal to market price per share 1,765,000 11.49
2003:
Exercise price per share equal to market price per share N/A N/A
==================================================================================================
64
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
20. Canadian/U.S. Reporting Differences (continued):
(b) Consolidated Balance Sheets:
Differences between Canadian and U.S. GAAP in the presentation of
share capital, additional paid-in capital and retained earnings are
as follows:
(i) Share capital:
=======================================================================================
2003 2002
---------------------------------------------------------------------------------------
Share capital in accordance with Canadian GAAP $ 122,102,244 $ 122,102,244
Stock-based compensation costs on options exercised:
Current year -- --
Cumulative effect of prior years 39,868,564 39,868,564
Change in reporting currency (2) 2,587,999 2,587,999
---------------------------------------------------------------------------------------
Share capital in accordance with U.S. GAAP $ 164,558,807 $ 164,558,807
=======================================================================================
(ii) Additional paid-in capital:
=======================================================================================
2003 2002
---------------------------------------------------------------------------------------
Additional paid-in capital in accordance with
Canadian GAAP $ 5,282 $ 5,282
Stock-based compensation costs:
Current year -- (9,778,143)
Cumulative effect of prior years 68,756,941 78,535,084
Stock-based compensation costs on options exercised:
Cumulative effect of prior years (39,868,564) (39,868,564)
Change in reporting currency (2) 968,350 968,350
---------------------------------------------------------------------------------------
Additional paid-in capital in accordance
with U.S. GAAP $ 29,862,009 $ 29,862,009
=======================================================================================
65
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
20. Canadian/U.S. Reporting Differences (continued):
(b) Consolidated Balance Sheets (continued):
(iii) Retained earnings (deficit):
======================================================================
2003 2002
----------------------------------------------------------------------
Deficit in accordance
with Canadian GAAP $ (7,330,417) $ (1,162,025)
Stock-based compensation costs:
Current year -- 9,778,143
Cumulative effect of prior years (68,756,941) (78,535,084)
Share issue costs (1) (833,919) (833,919)
Change in reporting currency (2) (1,188,668) (1,188,668)
----------------------------------------------------------------------
Deficit in accordance with U.S. GAAP $(78,109,945) $(71,941,553)
======================================================================
(1) Share issue costs:
Under SFAS No. 123, transactions in which an entity acquires
goods and services from non-employees in exchange for equity
instruments are required to be recorded at fair value. In
1996, a total of 285,600 warrants were granted to
non-employees, the fair value of which was $833,919 and was
charged to deficit as share issue costs.
(2) Change in reporting currency:
In 1998, the Company adopted the U.S. dollar as its reporting
currency. Under Canadian GAAP, at the time of change in
reporting currency, the historical financial statements were
presented using a translation of convenience. Under U.S. GAAP,
the financial statements, including prior years, are
translated according to the current rate method. Accordingly,
the cumulative translation account included as part of
shareholders' equity under Canadian GAAP does not exist for
U.S. GAAP purposes.
(c) Accumulated Other Comprehensive Income (Loss):
Under U.S. GAAP, SFAS No. 130, Reporting Comprehensive Income
establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial
statements. Comprehensive income consists of net earnings (loss) and
all other changes in shareholders' equity that do not result from
transactions with shareholders. These changes include cumulative
foreign currency translation adjustments. The statement requires
only additional disclosures in the consolidated financial
statements; it does not affect the Company's financial position or
results of operations.
66
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
20. Canadian/U.S. Reporting Differences (continued):
(c) Accumulated Other Comprehensive Income (Loss) (continued):
Accumulated other comprehensive income (loss), which resulted solely
from the translation of the financial statements up to June 30,
2000, the date the Company adopted the United States dollar as its
measurement currency, in accordance with the current rate method, is
$(3,018,233) as at December 31, 2003, 2002, and 2001.
(d) Supplementary information:
Under U.S. GAAP separate disclosure is required for the following
statement of operations item. There is no similar requirement under
Canadian GAAP.
====================================================================
2003 2002 2001
--------------------------------------------------------------------
Advertising expense $ 130,549 $ 178,074 $ 124,916
====================================================================
(e) Recent accounting pronouncements:
(i) Variable interest entities:
In December 2003, the Financial Accounting Standards Board
(FASB) issued FIN46R, Consolidation of Variable Interest
Entities. This interpretation provides guidance on the
application of consolidation accounting principles to all
entities. Its principles require an enterprise to determine
whether an entity in which it has an interest is a variable
interest entity ("VIE"), or an entity that is other than a
VIE, to which the basic consolidation principles apply. An
enterprise consolidates a VIE if that enterprise has a
variable interest that will absorb a majority of the VIE's
expected losses if they occur, receive a majority of the VIE's
expected residual returns if they occur, or both.
FIN46R applies to financial statements of public companies
that have an interest in VIEs (other than special-purpose
entities for which the standard is already effective) for
periods ending after March 15, 2004. Similar standards were
issued in Canada, but are only effective for annual or interim
periods beginning after November 1, 2004. The Company does not
expect that the adoption of these standards to have a material
effect on its financial statements.
67
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
20. Canadian/U.S. Reporting Differences (continued):
(e) Recent accounting pronouncements (continued):
(ii) Asset retirement obligations:
These standards were established for the recognition,
measurement and disclosure of liabilities for asset retirement
obligations and the associated retirement cost. The standards
apply to legal obligations associated with the retirements of
a tangible long-lived asset that results from acquisition,
development or normal operations. The standard requires an
entity to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred
and when a reasonable estimate of fair value can be made. An
entity is subsequently required to allocate the asset
retirement cost to expense using a systematic and rational
method over its estimated life. The standards are effective in
Canada and the US for fiscal years beginning on or after
January 1, 2004. The adoption of this standard is not expected
to have a material impact on the Company's financial
statements.
21. Comparative figures:
Certain of the comparative figures have been reclassified in order to
conform with the current year's presentation.
22. Subsequent events:
(a) Terra Payments Inc.:
On January 20, 2004, the Company entered into a Combination
Agreement with Terra Payments Inc. ("Terra"), a Canadian
publicly-traded company that offers proprietary technology and
services to businesses to accept credit card, electronic cheque and
direct debit payments. Terra processes credit card payments
primarily for non-face-to-face transactions, including
mail-order/telephone order, licensed on-line gaming and other
on-line merchants, as well as for retail point-of-sale merchants.
Terra also processes cheques and direct debits online and by
telephone.
The agreement provides for a stock-for-stock merger in which 0.4532
shares of the Company's common shares will be exchanged for each
share of Terra. The total purchase price will be approximately $64.6
million and will be paid through of the issuance of approximately
7.2 million common shares by the Company, the assumption of options
and warrants issued by Terra and estimated transaction costs of the
Company.
68
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
22. Subsequent events (continued):
(a) Terra Payments Inc. (continued):
The estimated fair value of the assets to be acquired and
liabilities to be assumed include tangible assets of approximately
$110 million, goodwill and other intangible assets of $45 million
and liabilities of $91 million. The Company is presently proceeding
to finalize its valuation of the assets to be acquired and
liabilities to be assumed, including the allocation of the purchase
price to identifiable intangible assets and goodwill. Thus, the
allocation of the purchase price will be subject to final
modifications once the acquisition is consummated.
The per share value of the shares issued as consideration for the
business acquisition was $8.48 which was determined using the
Company's average closing share price on NASDAQ over a reasonable
period before and after the date the terms of the business
combination were agreed to and announced.
Each outstanding Terra stock option and warrant, including Terra
options to be issued on closing of this transaction, will become a
0.4532 stock option or warrant to acquire a common share of the
Company. The Company will effectively issue approximately 1.8
million stock options and warrants having a fair value of
approximately $5.6 million, or a weighted average of $3.08 per
share, to acquire the Terra options and warrants. The fair value of
the vested stock options and warrants of approximately $2.5 million
will be recorded as purchase consideration. The fair value of the
unvested stock options of approximately $3.1 million will be
recorded as deferred compensation, which will be amortized over the
vesting period of three years.
The completion of the transaction is subject to certain conditions,
including approval by the shareholders of both companies and
regulatory approvals. The agreement provides for the payment of a
termination fee by either Terra or the Company in certain
circumstances. The transaction is expected to close in April 2004.
The Company will account for the transaction using the purchase
method from the closing date.
(b) Sale of U-Scan(R) business:
On February 16, 2004, the Company entered into an agreement in
principle with NCR Corporation ("NCR") to sell its U-Scan(R)
self-checkout business, including all related tangible assets,
intellectual property rights, and obligations, for $30 million in
cash. The purchase price is subject to adjustments at the date of
closing based on the net assets at that date. Completion of the
transaction is subject to the execution of definitive documentation,
approval by shareholders, receipt of certain third-party consents
and approvals and other conditions. The Company has agreed to pay
NCR a termination fee under certain circumstances. The transaction
is expected to close in April 2004.
69
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
For each of the years in the three-year period ended December 31, 2003
(expressed in U.S. dollars)
================================================================================
22. Subsequent events (continued):
(b) Sale of U-Scan(R) business (continued):
At December 31, 2003, the net assets to be sold were approximately
$26 million, comprised of $20.6 million of working capital, $4.4
million of property and equipment and $1.6 million of intangible
assets. The results of operations of this business for the year
ended December 31, 2003 were as follows:
===================================================================
Systems and hardware service revenue $ 55,459,418
Cost of sales 37,494,209
-------------------------------------------------------------------
17,965,209
Expenses:
Selling, general and administrative 16,941,025
Amortization 2,160,064
Operating lease 1,137,392
Research and development 795,390
Restructuring 415,414
--------------------------------------------------------------
21,449,285
-------------------------------------------------------------------
Loss before income taxes $ (3,484,076)
===================================================================
The results of operations include management assumptions and
adjustments related to cost allocations which are inherently
subjective.
(c) Acquisition of the hardware service division of Systech Retail
Systems:
On February 20, 2004, the Company entered into an agreement to
acquire the hardware service division of Systech Retail Systems for
a cash consideration of $3 million. Completion of the transaction is
subject to the execution of definitive documentation, receipt of
certain third party consents and approvals, and other customary
closing conditions. The Company will account for the transaction
using the purchase method from the closing date, which is expected
by the end of February 2004.
70
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures that is
designed to provide reasonable assurance that information, which is required to
be disclosed by us in the reports that we file or submit under the Exchange Act,
is accumulated and communicated to management in a timely manner. Our Chief
Executive Officer and Chief Financial Officer have evaluated this system of
disclosure controls and procedures as of the end of the period covered by this
annual report and believe that the system is operating effectively to ensure
appropriate disclosure. There have been no changes in our internal control over
financial reporting during the most recent fiscal year that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of our directors and executive officers at
December 31, 2003, are as follows:
Name Age Position
---- --- --------
Neil S. Wechsler...................... 37 Co-Chairman, Chief Executive Officer and Director
Holden L. Ostrin...................... 44 Co-Chairman and Director
Henry M. Karp......................... 49 President, Chief Operating Officer and Director
Gary S. Wechsler, C.A. ............... 45 Treasurer and Chief Financial Officer
Ike Tamigian.......................... 44 Senior Vice-President and Chief Technology Officer
Elliot Brenhouse...................... 50 Senior Vice-President and General Manager
Leon P. Garfinkle..................... 43 Senior Vice-President, General Counsel, Secretary and Director
O. Bradley McKenna, C.A............... 53 Vice President, Administration and Human Resources
Charles Morris........................ 46 Vice-President, Software Development
Frank Alcaraz......................... 55 Vice-President, Operations
Catherine Rotiroti.................... 45 Vice-President, Project Management
Martin J. Reiss....................... 49 Vice-President, Sales and Special Accounts
James S. Gertler(1)................... 37 Director
Thomas D. Murphy...................... 50 Director
Sydney Sweibel(1)..................... 53 Director
Jonathan J. Ginns(1).................. 39 Director
- -------------
(1) Member of Audit Committee
The number of directors of our company is currently set at eight, divided
into three classes, one class consisting of two directors and two classes
consisting of three directors each. Messrs. Karp, Garfinkle and Ginns, as
members of a single class of directors, have been elected to hold office until
the close of our 2004 annual and special meeting of shareholders; Messrs.
Ostrin, Gertler and Sweibel, as members of a single class of directors, have
been elected to hold office until the close of our 2005 annual meeting of
shareholders; and Messrs. N. Wechsler and Murphy, as members of a single class
of directors, have been elected to hold office until the close of our 2006
annual meeting of shareholders.
Executive officers of our company are appointed annually by our Board of
Directors and serve until their successors are duly appointed and qualified.
There are no family relationships between any of our directors or
executive officers, except for Neil S. Wechsler and Gary S. Wechsler who are
brothers.
71
Neil S. Wechsler has been a director of our company since June 1995. Mr.
Wechsler has been our Chief Executive Officer since October 1994 and was our
Chairman from June 1996 through June 1999, at which time Mr. Wechsler and Mr.
Holden L. Ostrin each became Co-Chairman. Mr. Wechsler earned a Bachelor of Arts
degree from McGill University in 1988 and a Bachelor of Civil Law degree and a
Bachelor of Common Law degree from McGill University in 1992.
Holden L. Ostrin has been a director of our company since June 1996. Mr.
Ostrin was our Vice Chairman from June 1996 through June 1999, at which time Mr.
Ostrin and Mr. N. Wechsler each became Co-Chairman. Mr. Ostrin earned a Bachelor
of Arts degree from Boston University in 1982 and a Juris Doctor degree from
Boston University School of Law in 1985.
Henry M. Karp has been a director and the Chief Operating Officer of our
company since June 1996. Since June 1999, Mr. Karp has been our President. From
June 1996 through June 1999, Mr. Karp was our Executive Vice President, and from
December 1994 to May 1996, Mr. Karp was our Vice President, Business
Development. Mr. Karp earned a Bachelor of Arts degree in Economics from McGill
University in 1976 and a Master of Business Administration degree from McGill
University in 1978.
Gary S. Wechsler, C.A. has been the Treasurer and Chief Financial Officer
of our company since May 1994. For over five years until May 1999, Mr. Wechsler
was a partner of Victor & Gold, a Montreal-based accounting firm. Mr. Wechsler
earned a Bachelor of Commerce degree from McGill University in 1980. Mr.
Wechsler obtained his Chartered Accountant designation in 1983.
Ike Tamigian has been the Senior Vice-President and Chief Technology
Officer of our company since June 2000. From June 1998 to June 2000, Mr.
Tamigian was our Vice-President, Software Development. From June 1995 to June
1998, Mr. Tamigian was our Director of Software Development. Mr. Tamigian earned
a Bachelor of Electrical Engineering degree from McGill University in 1987.
Elliot Brenhouse has been Senior Vice-President and General Manager of our
company since June 2000. From June 1998 to June 2000, Mr. Brenhouse was our
Vice-President, Product Management. Mr. Brenhouse earned a Bachelor of
Electrical Engineering degree from McGill University in 1976.
Leon P. Garfinkle has been a director of our company since June 1996 and
has been our Senior Vice-President, General Counsel and Secretary since July
2000. Prior to July 2000, Mr. Garfinkle was a partner with the law firm of
Goodman Phillips & Vineberg, in Montreal, Quebec. Mr. Garfinkle earned a
Bachelor of Commerce degree from McGill University in 1982, a Bachelor of Laws
degree from the University of Toronto in 1985 and a Bachelor of Laws degree from
the University of Montreal in 1986.
O. Bradley McKenna, C.A. has been the Vice-President, Administration and
Human Resources of our company since June 1999. From March 1994 until June 1999,
Mr. McKenna was our Controller. Mr. McKenna earned a Bachelor of Commerce degree
from Loyola College in 1973 and a Master of Business Administration degree from
McGill University in 1975. Mr. McKenna obtained his Chartered Accountant
designation in 1978.
Charles Morris has been Vice-President, Software Development of our
company since June 2000. From June 1998 to June 2000, Mr. Morris was our
Director of Software Development. Prior to June 1998, Mr. Morris was our Manager
of Software Development. Mr. Morris earned a Bachelor of Science degree in
Mathematics and Computer Science from McGill University in 1979, a Bachelor of
Theology degree from McGill University in 1984 and a Master of Divinity from the
Montreal Diocesan Theological College in 1985.
Frank Alcaraz has been Vice-President, Operations of our company since
June 2000. From November 1998 to June 2000, Mr. Alcaraz was our Director of Cost
and Quality Control. Mr. Alcaraz earned a Bachelor of Mechanical Engineering
degree from Concordia University in 1968 and a Bachelor of Commerce degree from
Concordia University in 1974.
72
Catherine Rotiroti has been Vice-President, Project Management of our
company since September 2000. From June 1997 to September 2000, Ms. Rotiroti was
our Director of Project Management. Ms. Rotiroti earned a Bachelor of Arts
degree in Mathematics and Computer Science from Concordia University in 1980.
Martin J. Reiss has been Vice-President, Sales of our company since July
2000 and was named Vice-President, Sales and Special Accounts in 2002. Prior to
July 2000, Mr. Reiss was a Sales Director of PSC, Inc. Mr. Reiss earned a
Bachelor of Science degree in Economics from University of Georgia in 1977.
James S. Gertler has been a director of our company since November 1997.
He is a principal of the general partner of Signal International, a leading
offshore rig repair, maintenance, upgrade and conversion company in the Gulf of
Mexico and a principal of the general partner in Florimex, the largest
integrated floral distributor in the world. From 1993 to 2001, Mr. Gertler was
Vice President of Corporate Development of the New York Daily News and U.S. News
& World Report. From September 1995 to January 2002, Mr. Gertler was the Vice
President of Corporate Development of Applied Graphics Technologies, Inc. Mr.
Gertler earned a Bachelor of Science degree in Economics from the Wharton School
of the University of Pennsylvania in 1988 and a Masters of Business
Administration degree from Harvard University in 1992.
Thomas D. Murphy has been a director of our company since July 2000. Mr.
Murphy is the President of Peak Tech Consulting, a firm that specializes in
information technology management and related benefit realization. Prior to
January 2000, Mr. Murphy was Vice President, Information Technology of The
Kroger Co. Mr. Murphy earned a Bachelor of Arts degree in Education and Sciences
from Western State College, Colorado in 1976.
Sydney Sweibel has been a director of our company since October 2001.
Since 1994, Mr. Sweibel has been a founding partner of the law firm Sweibel
Novek in Montreal, Quebec, and he has more than 25 years experience in taxation
and business law. Mr. Sweibel earned a bachelors of arts degree from Sir George
Williams University in 1971 and a bachelors degree in civil law from McGill
University in 1974.
Jonathan J. Ginns has been a director of our company since October 2001.
Since 1996, Mr. Ginns has been Managing Partner of ACON Investments, a
Washington, D.C.-based private equity investment firm. Mr. Ginns earned a
Bachelor of Arts degree from Brandeis University in 1986, and a Masters of
Business Administration degree from Harvard University in 1992.
Audit Committee Report
The following Audit Committee Report does not constitute soliciting
material and should not be deemed filed or incorporated by reference into any
other filing of ours under the 1933 Act or the Exchange Act, except to the
extent we specifically incorporate this Report by reference therein.
In accordance with its written charter, the Audit Committee oversees our
financial reporting process on behalf of the Board of Directors. Management has
the primary responsibility for our consolidated financial statements and the
overall reporting process, including our system of financial controls. In
fulfilling its oversight responsibilities during fiscal 2003, the Audit
Committee:
o discussed the quarterly and year-to-date financial information
contained in each quarterly earnings announcement with senior
members of our financial management and KPMG LLP (KPMG), independent
auditors, prior to public release;
o reviewed our audited consolidated financial statements as of and for
the year ended December 31, 2003, as well as the quarterly unaudited
consolidated financial statements and earnings release with senior
members of our financial management and KPMG;
o reviewed with our financial management and KPMG their judgments as
to the quality, not just the acceptability, of our accounting
principles;
o discussed with KPMG the overall scope and plan for their audit;
73
o reviewed our financial controls and financial reporting process;
o reviewed our litigation matters;
o reviewed significant financial reporting issues and practices,
including judgmental items, change in accounting principles and
disclosure practice; pre-approved all services performed by KPMG;
met with KPMG, without management present, to discuss the results of
their examinations, their evaluations of our internal controls and
the overall quality of our financial reporting; and met with our
financial management, without KPMG present, to discuss the quality
of services provided by KPMG.
In addition, the Audit Committee has discussed with KPMG their
independence from management and our company, including the matters in the
written disclosures required by the Independence Standards Board Standard No.1
Independence Discussions with Audit Committee and any matters required to be
discussed by Statement on Auditing Standards No. 61 Communications with Audit
Committees, as amended, and considered whether the provision of all other
non-audit services provided to us by KPMG during fiscal 2003 was compatible with
the auditors' independence.
In reliance on the reviews and discussions referred to above and
representations by management that the consolidated financial statements were
prepared in accordance with Canadian generally accepted auditing standards and
generally accepted auditing standards in the United States, the Audit Committee
recommended to the Board of Directors that the audited consolidated financial
statements be included in the Annual Report on Form 10-K for the fiscal year
ended December 31, 2003 for filing with the Commission. The Audit Committee
selected KPMG as our independent auditors for the fiscal year ending December
31, 2004.
THE AUDIT COMMITTEE
James S. Gertler, Chairman
Jonathan J. Ginns
Sydney Sweibel
For more specific information concerning the role, independence and
responsibilities of our Audit Committee, please refer to our Audit Committee
Charter included as Exhibit 99.1 to this Form 10-K.
Audit Committee Financial Expert
Our Board of Directors has determined that each of James S. Gertler,
Chairman of the Audit Committee, and Audit Committee member Jonathan J. Ginns is
an audit committee financial expert as defined by Item 401(h) of Regulation S-K
of the Exchange Act, is financially sophisticated for the purpose of Nasdaq Rule
4350(d)(2) and is independent within the meaning of Item 7(d)(3)(iv) of Schedule
14A of the Exchange Act.
COMPLAINT PROCEDURES FOR ACCOUNTING AND AUDITING MATTERS
Under Section 301 of the Sarbanes-Oxley Act of 2002 and Rule 10A-3 under
the Exchange Act, the Nasdaq Stock Market must adopt rules prohibiting the
listing of any company whose audit committee does not, among other things
establish procedures for (a) the receipt, retention, and treatment of complaints
received by the company regarding accounting, internal accounting controls, or
auditing matters, and (b) the submission by employees of the company on a
confidential and anonymous basis, of concerns regarding questionable accounting
or auditing matters. Accordingly, our Audit Committee has adopted complaint
procedures that are in compliance with the Commission mandate.
74
Code of Ethics
We have adopted a code of business conduct and ethics for directors and
employees (including officers). The code complies with regulations issued by the
Commission under section 406 of the Sarbanes - Oxley Act of 2002. The code has
been designed to deter wrongdoing and promote: honest and ethical conduct,
including the ethical handling of actual or apparent conflicts of interest
between personal and professional relationships; full, fair, accurate, timely,
and understandable disclosure in reports and documents that we file with, or
submit to, the Commission and in other public communications made by us;
compliance with applicable governmental laws, rules and regulations; the prompt
internal reporting of violations of the code to an appropriate person or
persons; and accountability for adherence to the code. The application of the
code to the persons it applies to may only be waived by our Board of Directors
in accordance with Commission regulations and the Sarbanes - Oxley Act of 2002.
A copy of the code is available to the general public at our website at
http://www.optimal-robotics.com. In addition, we will disclose on our website
any amendment to the code and any waiver of the code that applies to our
principal executive officer, principal financial officer, principal accounting
officer or controller, or any person performing similar functions.
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.
75
Item 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth compensation paid to the Co-Chairman and
Chief Executive Officer and the four other most highly compensated executive
officers of the Corporation (collectively, the "Named Executives") for each of
the three most recently completed fiscal years.
The Named Executive Officers are paid in Canadian dollars. On October 3,
2003, each of the officers of Optimal Robotics Corp. voluntarily agreed to a 10%
reduction in his or her salary, which with respect to the Named Executive
Officers applied only to the portion of their salaries paid in bi-weekly
installments (see note (2) to the Summary Compensation Table below). On January
23, 2004, each of Messrs. N. Wechsler, Ostrin and Karp voluntarily agreed to
reduce his salary, by an aggregate of approximately 35%, through a further
reduction in the portion of his 2004 salary payable in bi-weekly installments
and the complete waiver of his entitlement to receive the portion of his 2004
salary that would otherwise be payable to him in a single installment in 2005
(see note (2) to the Summary Compensation Table below).
- -------------------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation ($) Compensation
-------------------------------------------------------------
Common Shares Underlying
Name and Position Year Salary(1)(2) Bonus Other Options
- -------------------------------------------------------------------------------------------------------------------
Neil S. Wechsler 2003 1,047,230 Nil --(3) Nil
Co-Chairman and ---------------------------------------------------------------------------
Chief Executive Officer 2002 793,577 Nil --(3) 325,000
---------------------------------------------------------------------------
2001 625,788 Nil Nil 345,000(4)
- -------------------------------------------------------------------------------------------------------------------
Holden L. Ostrin 2003 1,047,230 Nil --(3) Nil
Co-Chairman ---------------------------------------------------------------------------
2002 793,577 Nil --(3) 325,000
---------------------------------------------------------------------------
2001 625,788 Nil Nil 359,000(5)
- -------------------------------------------------------------------------------------------------------------------
Henry M. Karp 2003 1,047,230 Nil --(3) Nil
President and ---------------------------------------------------------------------------
Chief Operating Officer 2002 793,577 Nil --(3) 325,000
---------------------------------------------------------------------------
2001 625,788 Nil Nil 355,000(6)
- -------------------------------------------------------------------------------------------------------------------
Gary S. Wechsler 2003 510,524 Nil --(3) Nil
Treasurer and ---------------------------------------------------------------------------
Chief Financial Officer 2002 352,578 Nil --(3) 180,000
---------------------------------------------------------------------------
2001 226,040 Nil Nil 170,000(7)
- -------------------------------------------------------------------------------------------------------------------
Leon P. Garfinkle 2003 184,308 Nil --(3) Nil
Senior Vice-President, ---------------------------------------------------------------------------
General Counsel and Secretary 2002 172,934 Nil --(3) 50,000
---------------------------------------------------------------------------
2001 144,343 Nil Nil 50,000(8)
- -------------------------------------------------------------------------------------------------------------------
(1) We pay salary in Canadian dollars. The respective average exchange rates
for 2001, 2002 and 2003 used to convert these salaries into dollars were:
US$1.00=Cdn$1.5484 (2001), US$1.00=Cdn$1.5703 (2002) and
US$1.00=Cdn$1.4015 (2003).
(2) Salary includes a portion paid bi-weekly in accordance with our general
payroll practice and a portion paid in a single installment (the "Forced
Savings Amount"). In the former employment agreements between our company
and each of the Named Executive Officers, respectively, this Forced
Savings Amount was called a "Recognition Bonus". In our annual report on
Form 10-K filed with the Commission for the 2001 fiscal year, this Forced
Savings Amount was listed as "Bonus" under "Annual Compensation" in the
Summary Compensation Table. Given that our obligation to pay this Forced
Savings Amount, and the amount thereof, are fixed by contract, we
determined, for the purpose of the Summary Compensation Table in our
annual report on Form 10-K filed with the Commission for the 2002 fiscal
year, that this Forced Savings Amount is more accurately qualified as
"Salary" than "Bonus". Accordingly, for the purposes of this Summary
Compensation Table in this Form 10-K, the amounts respectively listed as
"Salary" and "Bonus" in our annual report on Form 10-K filed with the
Commission for the 2001 fiscal year have been combined under the heading
"Salary".
(3) The dollar value of all perquisites and other personal benefits did not
exceed the lesser of $50,000 and 10% of the Named Executive Officer's
salary for the year.
(4) Includes 80,000 common shares issued pursuant to the automatic replacement
("reload") feature of an option granted in 1997, which option expired in
2002.
76
(5) Includes 94,000 common shares issued pursuant to the automatic replacement
("reload") feature of an option granted in 1997, which option expired in
2002.
(6) Includes 90,000 common shares issued pursuant to the automatic replacement
("reload") feature of an option granted in 1997, which option expired in
2002.
(7) Includes 20,000 common shares issued pursuant to the automatic replacement
("reload") feature of an option granted in 1997, which option expired in
2002.
(8) Includes 5,000 common shares issued pursuant to the automatic replacement
("reload") feature of an option granted in 1997, which option expired in
2002.
Option Grants in 2003
The following table provides information regarding options granted to the
Named Executive Officers during 2003. These grants are also reflected in the
Summary Compensation Table.
- -------------------------------------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term ($)(1)
--------------------------------------------------------------------------------------
Common
Shares Percent of Total
Underlying Options Granted Exercise
Options to Employees in Price Expiration
Name Granted (#) 2003 ($) Date 5% 10%
- -------------------------------------------------------------------------------------------------------------------
Neil S. Wechsler Nil N/A N/A N/A Nil Nil
- -------------------------------------------------------------------------------------------------------------------
Holden L. Ostrin Nil N/A N/A N/A Nil Nil
- -------------------------------------------------------------------------------------------------------------------
Henry M. Karp Nil N/A N/A N/A Nil Nil
- -------------------------------------------------------------------------------------------------------------------
Gary S. Wechsler Nil N/A N/A N/A Nil Nil
- -------------------------------------------------------------------------------------------------------------------
Leon P. Garfinkle Nil N/A N/A N/A Nil Nil
- -------------------------------------------------------------------------------------------------------------------
(1) The dollar amounts under these columns represent the potential realizable
value of each option granted assuming that the market price of the common
shares appreciates in value from the date of grant to the expiration date
at the 5% and 10% annual rates prescribed by the Commission and are for
illustration purposes only. They are not intended to forecast possible
future appreciation, if any, of the price of the common shares.
Aggregated Option Exercises in 2003 and Year-end Option Values
The following table provides information regarding option exercises by the
Named Executive Officers in 2003 and the amount and value of the Named Executive
Officers' exercisable and unexercisable options as of December 31, 2003
------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Number of Common Shares Underlying In-the-Money Options
Option Exercises Unexercised Options ($)
---------------------------------------------------------------------------------------------
Common
Shares Value
Acquired on Realized
Name Exercise ($) Exercisable Unexercisable Exercisable Unexercisable
------------------------------------------------------------------------------------------------------------------
Neil S. Wechsler Nil Nil Nil Nil Nil Nil
------------------------------------------------------------------------------------------------------------------
Holden L. Ostrin Nil Nil Nil Nil Nil Nil
------------------------------------------------------------------------------------------------------------------
Henry M. Karp Nil Nil Nil Nil Nil Nil
------------------------------------------------------------------------------------------------------------------
Gary S. Wechsler Nil Nil Nil Nil Nil Nil
------------------------------------------------------------------------------------------------------------------
Leon P. Garfinkle Nil Nil Nil Nil Nil Nil
------------------------------------------------------------------------------------------------------------------
77
Executive Employment Agreements
We have entered into employment agreements with each of the Named
Executive Officers.
Neil S. Wechsler, Holden L.Ostrin, Henry M. Karp and Gary S.Wechsler
The agreements with Messrs. N. Wechsler, Ostrin, Karp and G. Wechsler, the
terms of which are identical, were entered into as of March 5, 2004, and replace
their respective agreements, which were entered into in 1997 (1999 for G.
Wechsler), and subsequently amended before being replaced. The current
agreements with these Named Executive Officers were designed to assure us of the
continued employment of each officer in his respective executive positions with
our company.
Under the terms of these agreements, (i) each officer receives a minimum
annual salary and shall be entitled to participate in any bonus plan for senior
executives that might be established by our Board of Directors, and (ii) we will
pay or reimburse the officer for the premiums for a life and disability term
insurance policy with a minimum coverage of $5,000,000 ($3,000,000 for G.
Wechsler), in addition to any other coverage previously paid for or provided for
by the company.
If we terminate the officer's employment other than for cause or death or
disability, or for any reason following the announcement of a change of control,
or if the officer terminates his employment for good reason (as defined in the
agreements) or for any reason following a change of control, (i) we will pay to
the officer an amount equal to two times the sum of the highest salary and
bonus, if any, paid to him during the term of his employment, (ii) all options
held by the officer shall become immediately exercisable and we will compensate
him for the determined value of his options if he is required by our option plan
to exercise his options before their expiry date due to the termination of his
employment, (iii) the term insurance, for which we have been reimbursing
premiums, will be converted to a level deposit premium insurance policy to age
80, for which we will pay the premiums, and (iv) we will acquire medical
insurance coverage for the officer and his family for a period of five years,
equivalent to the coverage already enjoyed by the officer as a senior officer of
our company. The agreements also provide for the forgiveness of indebtedness of
the officer if he leaves the employment of our company for any reason.
The agreements each contain a covenant on the part of the officer not to
compete with our company for a period of 24 months following the date upon which
he ceases to be an employee of our company.
Leon P. Garfinkle
The agreement with Leon P. Garfinkle was entered into as of July 18, 2000.
Under the terms of his agreement, Mr. Garfinkle receives a minimum annual
salary. If Mr. Garfinkle's services are terminated other than for cause or death
or disability, or in the event that he terminates his employment with our
company for good reason (as defined in his agreement) within six months of a
change of control (as defined in his agreement), we will pay to Mr. Garfinkle an
amount equal to three times his then current minimum annual salary.
The agreement also contains a covenant on the part of Mr. Garfinkle not to
compete with our company for a period of 24 months following the date upon which
he ceases to be an employee of our company.
78
Compensation of Directors
The fiscal 2003 compensation package for each of our four non-executive
directors consisted of an annual retainer of $25,000, as well as $1,500 for each
meeting of the Board of Directors and $1,000 for each committee meeting
attended.
Options to Purchase Securities
On February 7, 1997, our Board of Directors adopted a share option plan
known as the 1997 Stock Option Plan (as amended, the "1997 Plan").
Pursuant to the provisions of the 1997 Plan, we may grant options to
purchase common shares to our full-time employees or directors. Options may be
granted for a term of up to 10 years and the term during which such options may
be exercised will be determined by our Board of Directors at the time of each
grant of options. The conditions of vesting and exercise of the options and the
option price will be established by our Board of Directors when such options are
granted and the option price shall not involve a discount greater than that
permitted by law and by the regulations, rules and policies of the securities
regulatory authorities to which we may then be subject.
Options granted under the 1997 Plan cannot be assigned or transferred,
except by will or by the laws of descent and distribution of the domicile of the
deceased optionee. Upon an optionee's employment with our company being
terminated for cause or upon an optionee being removed from office as a director
or becoming disqualified from being a director by law, any option or the
unexercised portion thereof shall terminate forthwith. If an optionee's
employment with our company is terminated otherwise than by reason of death or
termination for cause, or if any optionee ceases to be a director other than by
reason of death, removal or disqualification by law, any option or the
unexercised portion thereof may be exercised by the optionee for that number of
shares only which he was entitled to acquire under the option at the time of
such termination or cessation, provided that such option shall only be
exercisable within 90 days after such termination or cessation or prior to the
expiration of the term of the option, whichever occurs earlier. If an optionee
dies while employed by our company or while serving as a director, any option or
the unexercised portion thereof may be exercised by the person to whom the
option is transferred by will or the laws of descent and distribution for that
number of shares only which the optionee was entitled to acquire under the
option at the time of death, provided that such option shall only be exercisable
within 180 days following the date of death or prior to the expiration of the
term of the option, whichever occurs earlier.
Upon its establishment, 3,000,000 common shares were authorized for
issuance pursuant to options granted under the 1997 Plan. In each of 2000 and
2001, shareholders approved an additional 3,000,000 shares for issuance under
the 1997 Plan. On July 16, 2003, our Board of Directors approved the
cancellation of all options issued and outstanding under the 1997 Plan, subject
to the agreement of the option holders. All such options were cancelled as of
July 31, 2003. As at February 27, 2004, 2,541,996 common shares had been issued
under the 1997 Plan and no options were outstanding under the 1997 Plan, leaving
6,458,004 common shares available for issuance pursuant to future option grants
under the 1997 Plan.
79
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 27, 2004, certain
information regarding the beneficial ownership of our common shares by (i) each
person known to us to be a beneficial owner of more than 5% of the common shares
of our company, (ii) each director and Named Executive Officer of our company
and (iii) all directors and officers of our company as a group.
Number and Nature of
Name of Beneficial Owner Beneficial Ownership Percent
- ------------------------ -------------------- -------
Cramer Rosenthal McGlynn, LLC......................... 1,904,400(1) 12.75%
Reich & Tang Asset Management, LLC.................... 1,454,000(2) 9.73%
Bank One Corporation.................................. 855,700(3) 5.73%
Harris Associates L.P. ............................... 808,500(4) 5.41%
FMR Corp.............................................. 771,300(5) 5.16%
Neil S. Wechsler...................................... 2,750 *
Holden L. Ostrin...................................... Nil Nil
Henry M. Karp......................................... Nil Nil
Leon P. Garfinkle..................................... 3,000 *
James S. Gertler...................................... 300 *
Thomas D. Murphy...................................... Nil Nil
Sydney Sweibel........................................ Nil Nil
Jonathan J. Ginns..................................... Nil Nil
All directors and officers as a group (16 persons).... 30,750 *
* does not exceed one percent (1%)
(1) The address of this beneficial owner is 520 Madison Avenue, New York, NY
10022. According to Amendment No. 2 to the Schedule 13G, dated January 22,
2004, filed with the Commission by this beneficial owner, which is an
investment advisor, it is the beneficial owner of 1,904,400 common shares
with sole voting power and sole dispositive power over 1,669,400 shares
and shared voting power and shared dispositive power over 235,000 shares.
The information in this table is based exclusively on the most recent
Schedule 13G filed by this beneficial owner with the Commission. We make
no representation as to the accuracy or completeness of the information
reported.
(2) The address of this beneficial owner is 600 Fifth Avenue, New York, NY
10020. According to Amendment No. 2 to the Schedule 13G, dated February
11, 2004, filed with the Commission by this beneficial owner, which is an
investment advisor, it is the beneficial owner of 1,454,000 common shares
with shared voting power and shared dispositive power over all 1,454,000
shares. The information in this table is based exclusively on the most
recent Schedule 13G filed by this beneficial owner with the Commission. We
make no representation as to the accuracy or completeness of the
information reported.
(3) The address of this beneficial owner is 1 Bank One Plaza, Chicago, IL
60670. According to the Schedule 13G, dated February 9, 2004, filed with
the Commission by this beneficial owner, which is a parent holding
company, it is the beneficial owner of 855,700 common shares with sole
voting power and sole dispositive power over all 855,700 shares. The
855,700 shares beneficially owned by this beneficial owner are held by One
Group. The information in this table is based exclusively on the most
recent Schedule 13G filed by this beneficial owner with the Commission. We
make no representation as to the accuracy or completeness of the
information reported.
(4) The address of this beneficial owner is Two North LaSalle Street, Suite
500, Chicago, IL 60602-3790. According to Amendment No. 1 to the Schedule
13G, dated February 12, 2004, filed with the Commission by Harris
Associates L.P., an investment advisor and Delaware limited partnership,
and Harris Associates Inc. a Delaware corporation and the general partner
of Harris Associates L.P. (collectively, "Harris"), Harris was the
beneficial owner of 808,500 common shares with shared voting power over
all 808,500 shares, sole dispositive power over 85,000 shares and shared
dispositive power over 723,500 shares. 723,500 shares over which Harris
has shared voting power and shared dispositive power are held by the
Harris Associates Investment Trust. The information in this table is based
exclusively on the most recent Schedule 13G filed by Harris with the
Commission. We make no representation as to the accuracy or completeness
of the information reported.
(5) The address of this beneficial owner is 82 Devonshire Street, Boston, MA
02109. According to Amendment No. 1 to the Schedule 13G, dated February
16, 2004, filed with the Commission by FMR Corp., Edward C. Johnson 3d,
Abigail P. Johnson, Fidelity Management & Research Company and Fidelity
Low Priced Stock Fund, FMR Corp., a parent holding company, certain of its
subsidiaries and affiliates, and members of the family of Edward C.
Johnson 3d, who may be deemed a controlling group with respect to FMR
Corp., each have sole dispositive power over all 771,300 shares and voting
power over none of such shares. The information in this table is based
exclusively on the most recent Schedule 13G filed by FMR, Edward C.
Johnson
80
3d, Abigail P. Johnson, Fidelity Management & Research Company and
Fidelity Low Priced Stock Fund with the Commission. We make no
representation as to the accuracy or completeness of the information
reported.
Equity Compensation Plan Information
The following table sets forth the number of common shares to be issued upon
exercise of outstanding options, rights and warrants issued pursuant to our
equity compensation plans, the weighted average exercise price of such options,
rights and warrants and the number of common shares remaining available for
future issuance under our equity compensation plans, all as at December 31,
2003.
- ------------------------------------------------------------------------------------------------------------------------
Number of securities Weighted-average Number of securities remaining
to be issued upon exercise price of available for future issuance
exercise of outstanding options, under equity compensation plans
outstanding options, warrants and rights (excluding securities reflected
warrants and rights ($/Share) in column (a)) (1)
Plan Category (a) (b) (c)
- ------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved 0 0 6,458,004
by security holders(1)
- ------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not 5,000(2) 6.40 Nil
approved by security holders(2)
- ------------------------------------------------------------------------------------------------------------------------
Total 5,000 6.40 6,458,004
- ------------------------------------------------------------------------------------------------------------------------
(1) The 1997 Plan (referred to under "Executive Compensation - Options
to Purchase Securities," below), is our only equity compensation
plan that has been approved by shareholders.
(2) Our only equity compensation plans that have not been approved by
shareholders, are two identical individual compensation
arrangements, for two consultants to Optimal Robotics Inc., our
wholly owned subsidiary. Each of these individual compensation
arrangements consists of an option to acquire 2,500 common shares at
an exercise price of $6.40 per share. The options may be exercised
as to 50% of the underlying shares after July 30, 2003 and as to the
remaining 50% of the underlying shares after April 30, 2004. Each of
the options expires on the earlier of (i) the first anniversary of
the termination of the optionee's engagement as a consultant, and
(ii) the tenth anniversary of the date of its grant. The options are
non-assignable, except in the case of the death of the optionee.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Indebtedness of Directors and Employees
The aggregate indebtedness to our company of all employees, officers and
directors and former employees, officers and directors is $101,594, which
relates to an unsecured home-loan agreement with our Co-Chairman. This loan is
non-interest bearing and is repayable in annual installments of $13,178
($17,000Cdn) through and including July 1, 2012.
Transactions with Management
The employment agreements that we have with Neil S. Wechsler, Holden L.
Ostrin and Henry M. Karp provide that we will pay or reimburse the officer for
the premiums for a life and disability insurance policy with a minimum coverage
of $5,000,000. The agreements also provide for the forgiveness of indebtedness
of such officer if he leaves the employment of our company for any reason. See
Item 11--"Executive Compensation - Executive Employment Agreements." The
employment agreement that we have with Gary S. Wechsler, our Chief Financial
Officer, provides that we will pay or reimburse him for the premiums for a life
and disability insurance policy with a minimum coverage of $3,000,000.
81
Item 14. PRINCIPAL AUDITOR FEES AND SERVICES
The Audit Committee has appointed KPMG LLP as our independent auditors for
the fiscal year ending December 31, 2004.
Fees Incurred by our Company for KPMG LLP
The following table shows the fees paid or accrued by our company for the
audit and other services provided by KPMG LLP for fiscal 2003 and 2002(1).
2003 2002
---- ----
Audit Fees(2) $171,245 $127,364
Audit-Related Fees(3) 52,943 Nil
Tax Fees(4) 2,711 164,528
All Other Fees(5) 17,838 Nil
-------- --------
Total $244,737 $291,892
======== ========
The Audit Committee has delegated to the Chairman of the Audit Committee
the authority to pre-approve audit-related and non-audit services not prohibited
by law to be performed by our independent auditors and associated fees up to a
maximum for any one non-audit service of $25,000, provided that the Chairman
shall report any decisions to pre-approve such audit-related or non-audit
services and fees to the full Audit Committee at its next regular meeting.
- ---------
(1) We pay fees to KPMG in Canadian dollars. The respective average
exchange rates for 2002 and 2003 used to convert these fees into
dollars were: US$1.00=Cdn$1.5703 (2002) and US$1.00=Cdn$1.4015
(2003).
(2) Audit fees represent fees for professional services provided in
connection with the audit of our consolidated financial statements
and the review of our quarterly financial statements.
(3) Audit-related fees represent primarily fees for general accounting
consultations and other attestation services.
(4) For 2002, tax fees represent primarily fees for assistance in
claiming research and development tax credits and fees for transfer
pricing studies. For 2003, tax fees were for the review of our
Canadian corporate tax returns.
(5) For 2003, all other fees relates solely to financial due diligence
in connection with a business acquisition.
Item 15. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit
- ------- --------------------------------------------------------------------
3.1 Certificate and Articles of Continuance (incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form F-1,
file 333-4950, filed with the Commission on October 24, 1996)
3.2 By-laws (incorporated by reference to Exhibit 3.2 to the Company's
Annual Report on Form 10-K, File No. 0-28572, filed with the
Commission on March 8, 1999)
3.3 Certificate and Articles of Amendment (incorporated by reference to
Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000, filed with the Commission on March 1, 2001)
4 Specimen certificate of the common shares (incorporated by reference
to Exhibit 1.1 to the Company's Registration Statement on Form 8,
File No. 0-28572, filed with the Commission on July 17, 1996)
82
10.1 Employment Agreement with Neil S. Wechsler (incorporated by
reference to Exhibit I to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, filed with the Commission on
March 31, 1998)
10.2 Amendment to Employment Agreement with Neil S. Wechsler
(incorporated by reference to Exhibit 10.4 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999, filed with
the Commission on March 8, 1999)
10.3 Amendment to Employment Agreement with Neil S. Wechsler
(incorporated by reference to Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001, filed with
the Commission on April 1, 2002)
10.4 Employment Agreement with Henry M. Karp (incorporated by reference
to Exhibit II to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, filed with the Commission on March 31,
1998)
10.5 Amendment to Employment Agreement with Henry M. Karp (incorporated
by reference to Exhibit 10.6 to the Company's Annual Report on Form
10-K for the year ended December 31, 1999, filed with the Commission
on March 8, 1999)
10.6 Amendment to Employment Agreement with Henry M. Karp (incorporated
by reference to Exhibit 10.6 to the Company's Annual Report on Form
10-K for the year ended December 31, 2001, filed with the Commission
on April 1, 2002)
10.7 Employment Agreement with Holden L. Ostrin (incorporated by
reference to Exhibit III to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, filed with the Commission on
March 31, 1998)
10.8 Amendment to Employment Agreement with Holden L. Ostrin
(incorporated by reference to Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999, filed with
the Commission on March 8, 1999)
10.9 Amendment to Employment Agreement with Holden L. Ostrin
(incorporated by reference to Exhibit 10.9 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001, filed with
the Commission on April 1, 2002)
10.10 Employment Agreement with Gary S.Wechsler (incorporated by reference
to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2002, filed with the Commission on March 31,
2003)
10.11 Amendment to Employment Agreement with Gary S. Wechsler
(incorporated by reference to Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2002, filed with
the Commission on March 31, 2003)
10.12 Amendment to Employment Agreement with Gary S. Wechsler
(incorporated by reference to Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2002, filed with
the Commission on March 31, 2003)
10.13 Employment Agreement with Leon P. Garfinkle (incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on Form
10-K for the year ended December 31, 2002, filed with the Commission
on March 31, 2003)
10.14 Employment Agreement with Neil S. Wechsler
10.15 Employment Agreement with Henry M. Karp
10.16 Employment Agreement with Holden L. Ostrin
21 List of Subsidiaries
23.1 Consent of KPMG LLP
83
31.1 Certification required under section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Certification required under 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.
99.1 Audit Committee Charter
(b) Reports on Form 8-K
The following reports on Form 8-K were filed for the year ended December
31, 2003:
1. Form 8-K filed with the Commission on May 27, 2003 (Item5 - Other
Events);
2. Form 8-K filed with the Commission on October 6, 2003 (Item 7 -
Exhibits);
3. Form 8-K filed with the Commission on October 15, 2003 (Item 2 -
Acquisition or Disposition of Assets);
4. Form 8-K/A filed with the Commission on October 16, 2003 (Item 2 -
Acquisition or Disposition of Assets);
5. Form 8-K/A filed with the Commission on December 12, 2003 (Item 2 -
Acquisition or Disposition of Assets; Item 7 - Financial Statements,
Pro Forma Financial Information)
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
March 5, 2004 Optimal Robotics Corp.
By: /s/ NEIL S. WECHSLER
-----------------------------------------
Neil S. Wechsler, Co-Chairman
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ GARY S. WECHSLER
-----------------------------------------
Gary S. Wechsler, Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the Exchange Act, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
March 5, 2004 By: /s/ NEIL S. Wechsler
-------------------------------------------
Neil S. Wechsler, Director
March 5, 2004 By: /s/ HOLDEN L. OSTRIN
-------------------------------------------
Holden L. Ostrin, Director
March 5, 2004 By: /s/ HENRY M. KARP
-------------------------------------------
Henry M. Karp, Director
March 5, 2004 By: /s/ JAMES S. GERTLER
-------------------------------------------
James S. Gertler, Director
March 5, 2004 By: /s/ LEON P. GARFINKLE
-------------------------------------------
Leon P. Garfinkle, Director
March 5, 2004 By: /s/ THOMAS D. MURPHY
-------------------------------------------
Thomas D. Murphy, Director
March 5, 2004 By: /s/ SYDNEY SWEIBEL
-------------------------------------------
Sydney Sweibel, Director
March 5, 2004 By: /s/ JONATHAN J. GINNS
-------------------------------------------
Jonathan J. Ginns, Director
85