Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
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, 1999
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from to
Commission file number 0-28572.
----------------
OPTIMAL ROBOTICS CORP.
(Exact name of registrant as specified in its charter)
[Canada] 98-0160833
(I.R.S. Employer Identification Number)
(State or other jurisdictionof
incorporation or organization)
----------------
4700 de la Savane, Suite 101,
Montreal, Quebec, Canada H4P 1T7
(Address of principal executive (Postal code)
offices)
Registrants telephone number, including (514) 738-8885
area code:
Name of each exchange on which
Title of each class: registered
Class "A" shares, no par value Nasdaq National Market
----------------
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].
Aggregate market value of the voting stock of the registrant held by non-
affiliates of the registrant at February 23, 2000 (computed by reference to the
last reported sale price of the common shares on the Nasdaq Stock Market on
such date): $434,231,145.38
Number of common Shares outstanding at February 23, 2000: 11,460,933
DOCUMENTS INCORPORATED BY REFERENCE: NONE
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Item 1. BUSINESS
Company Overview
We are the leading provider of self-checkout systems to retailers in the
United States. Our principal product is the U-Scan Express, an automated self-
checkout system which enables shoppers to scan, bag and pay for their purchases
with little or no assistance from store personnel. We estimate that in 1999 U-
Scan Express systems processed over 45 million customer transactions. The U-
Scan Express can be operated quickly and easily by shoppers and makes the
checkout process more convenient for them. The U-Scan Express also reduces the
cost of checkout transactions to retailers and addresses labor shortage
problems by replacing manned checkout counters with our automated self-checkout
stations.
As of December 31, 1999, we had installed 375 U-Scan Express systems,
consisting of 1,498 checkout stations, in 328 stores of leading retailers
across 29 states. Each U-Scan Express system typically includes four checkout
stations and one manned supervisor terminal.
As of January 31, 2000, we had purchase commitments for a minimum of 457 U-
Scan Express systems. Purchase commitments represent general purchase orders,
blanket purchase commitments or purchase contracts from customers for a
designated number of U-Scan Express systems over a specified period of time.
The following chart provides information regarding the U-Scan Express systems
we have installed during the last five years:
1995 1996 1997 1998 1999
---- ---- ---- ---- -----
U-Scan Express system installations:
Systems installed during year................... 2 6 22 57 288
Systems installed at year-end................... 2 8 30 87 375
U-Scan checkout stations installed at year-end.... 8 32 120 346 1,498
Customer transactions (millions)(1)............... 12 45
- --------
(1) Estimated, based on reports provided by our customers. Prior to 1998, we
did not track this data.
Our Industry
We currently target supermarket and supercenter chains in the United States
with average annual sales per store in excess of $12 million. According to
industry sources, there are over 11,500 of these stores in the United States.
Based on information received from various supermarkets and supercenters, we
believe that approximately half of all transactions at those stores are made by
shoppers who purchase 15 or fewer items and who check out through express
lanes. U-Scan Express, which can be quickly and easily operated, addresses
these shoppers' needs by providing them with more control over the checkout
process.
The potential market for self-checkout solutions includes applications
beyond supermarkets and supercenters. General merchandise stores and other big-
box retailers have begun to install self-checkout systems. Other types of
stores that we have identified where self-checkout systems could be used
include drug stores, warehouse stores, office superstores, toy stores and home
improvement centers. We recently introduced one new product for use in small
retail establishments and small departments in larger stores and a second new
product for use in high volume retail outlets. See "--Our Business Strategy."
Additionally, we believe that a large market for self-checkout systems exists
in Europe.
We believe that the demand for self-checkout systems will continue to grow,
in part because they help alleviate the significant labor shortage confronting
retailers in certain markets. The U.S. Bureau of Labor Statistics has estimated
that, from 1998 to 2008, the U.S. economy will require over 550,000 additional
cashiers. In addition to providing stores with a dependable and economical
alternative to maintaining cashiers in express checkout lanes, we believe that
self-checkout systems allow large retailers to offer shoppers the speed of a
small convenience store while maintaining the greater selection and lower
prices of a supermarket.
1
We also believe that the acceptance of self-checkout systems will increase
over time much like the increase in acceptance of automated teller machines
(ATMs) and pay-at-the-pump credit/debit card machines. Banking industry sources
estimate that the number of ATMs in the United States grew from 18,500 in 1980
to over 200,000 in 1999, and that the number of ATMs in use worldwide was over
700,000 at the end of 1999. According to the National Association of
Convenience Stores' 1999 State of the Industry report, the percentage of
convenience stores with pay-at-the-pump technology increased from less than 5%
in 1990 to 50% in 1998. In the same way that many people have become more
accustomed to using ATMs to conduct their banking and to paying at the pump
when fueling their cars, rather than interacting with a bank teller or store
attendant, we believe that consumers seeking convenience and "control" when
shopping will choose to use a self-checkout system instead of paying at a
traditional manned checkout counter.
Our Customers
Our main customers have been supermarkets and supercenters, including the
following retailers:
. Kroger. Kroger is the largest supermarket retailer in the United States,
and owns and operates approximately 2,200 supermarkets and 794
convenience stores. Kroger is our largest customer and recently ordered
an additional 200 U-Scan Express systems, of which 43 have been
installed. We presently have a total of 235 systems installed in Kroger's
stores.
. Meijer. Meijer is the second largest U.S. supercenter operator with
approximately 130 stores. Its typical store size is over 175,000 square
feet. We presently have 94 U-Scan Express systems installed in Meijer's
stores. In January 2000, Meijer agreed to purchase up to 150 (with a
minimum of 100) additional systems through June 2001, of which 10 have
been installed.
. Ahold. Ahold operates over 3,600 stores of various types in the United
States, Europe, Asia and Latin America under various banners, including
over 1,000 BI-LO, Stop & Shop, Tops, Giant and other stores in the United
States. In December 1999, Ahold agreed to purchase 100 U-Scan Express
systems for installation in its U.S. stores, of which five have been
installed.
. A&P. A&P operates over 700 food stores in North America. In October 1999,
A&P informed us that it intends to purchase and install 100 U-Scan
Express systems, of which 24 have been installed.
. Wal-Mart. Wal-Mart is the world's largest retailer with over 2,850
general merchandise discount stores and supercenters in the United States
alone. We presently have 18 U-Scan Express systems installed in Wal-Mart
supercenters and general merchandise discount stores. Wal-Mart is
continuing to work with us as they evaluate the use of U-Scan Express in
their stores.
These leading retailers figure prominently in the establishment of market
standards, and we believe that our relationships with them and the increasing
presence and use of our systems in their stores contribute to the market's
growing acceptance of U-Scan Express. We also believe that shoppers' increasing
familiarity with our systems at these retailers will facilitate future sales
efforts, particularly with retailers who have not yet installed our systems in
their stores.
We believe that these customers have chosen to install U-Scan Express because
it:
. increases convenience for their shoppers, while accommodating typical
shopping patterns and allowing shoppers to check out as if they were at a
manned checkout counter,
. provides the shopper with more control over the checkout process, similar
to an ATM transaction,
. builds loyalty by making shopping easier and more convenient,
. addresses labor shortages in certain markets by replacing manned checkout
counters with automated self-checkout stations, and
. provides labor cost savings by allowing one employee to supervise four
unmanned stations.
2
Our Competitive Advantages
We believe that the following competitive advantages have helped us become
the leading provider of self-checkout systems to retailers in the United
States:
. the largest installed base of self-checkout systems in the United States
and well-established relationships with leading retailers,
. an established brand name and corporate identity,
. six years' experience and expertise in designing self-checkout solutions
for retailers,
. a focused business strategy targeting the rapidly developing self-
checkout market,
.a senior management team and experienced sales force familiar with the
needs of retailers, and
. superior customer service through a 24-hour, 365-day on-line helpdesk
supported by a dedicated network of service personnel.
Our Business Strategy
Our primary objectives are to install more U-Scan Express systems in
additional supermarkets and supercenters, to begin installing U-Scan Express
and other self-checkout systems in other kinds of stores, and to initiate
sales and installations of our systems in Europe.
Key elements of our business strategy are to:
Increase Installations in Existing and New Supermarket and Supercenter
Accounts. We plan to increase our penetration of existing customer accounts
and increase the size of our direct sales force in order to sell to new
customers in North America. We are continuing to develop opportunities in
Europe.
Extend Retail Applications of Our Products and Services. In addition to our
focus on transactions for supermarkets and supercenters, we have recently
introduced two new products, U-Scan Carousel and U-Scan Solo, that have been
designed to extend the retail applications of our U-Scan self-checkout
technology. Much like the U-Scan Express, each of these new applications
enables customers to scan, bag and pay for their purchases with limited or no
assistance from store personnel.
U-Scan Carousel
To meet the demands of existing and new customers, U-Scan Carousel has been
configured as a six-bag self-checkout system which can accommodate large order
purchases. The U-Scan Carousel utilizes U-Scan technology that has been
specifically adapted to handle large orders in the following high volume
retail outlets:
. warehouse stores,
. general merchandise stores,
. home improvement centers, and
. other big-box retailers.
This larger configuration enables these retailers to address the labor
shortage found in many markets while providing a more convenient shopping
experience.
3
U-Scan Solo
U-Scan Solo is a one-bag self-checkout station in which our U-Scan
technology has been adapted to meet the needs of small footprint retail
establishments such as drug stores, convenience stores and general merchandise
stores, as well as for satellite areas, such as floral and video departments,
in supermarkets and supercenters.
The U-Scan Carousel and the U-Scan Solo are the direct results of our
research and development efforts. We remain committed to developing other new
products like U-Scan Carousel and U-Scan Solo on a timely and cost-effective
basis and continuing to improve our current products.
Capitalize on e-Commerce Opportunities. We are exploring various e-commerce
opportunities as a means of generating additional revenue from U-Scan
stations. Among these are the following:
. We estimate that with over 45 million customer transactions through U-
Scan Express systems in 1999, U-Scan touchscreens received over two
million hours of "eyeball" time. U-Scan touchscreens can act as portals
for interactive marketing and advertising solutions. Because we are on-
line to all of our systems, we can deliver targeted interactive
advertising and promotions to the customer on U-Scan touchscreens as well
as relational advertising for other products or services.
. Our self-checkout solutions can be integrated with and used to help
enhance a retailer's e-commerce strategy. A U-Scan system can act as an
e-commerce accelerator because it automates the order fulfillment
process. As shoppers transition to "clicks and mortar" shopping
experiences, we believe our systems will enable shoppers to physically
complete their on-line transactions faster and easier.
Assume Assembly of U-Scan Express. Upon the termination of PSC's exclusive
assembly rights on December 31, 2000, we will assume the assembly of the U-
Scan Express in our Plattsburgh, New York facility (in addition to the final
software configuration and the quality assurance tasks we already perform in
Plattsburgh). We believe that assuming the assembly of our systems will result
in a material increase in our gross and operating margins.
Products and Systems
U-Scan Express System
A U-Scan Express system, in a typical configuration for a supermarket or
supercenter application, consists of four self-checkout stations and one
manned supervisor terminal. Each checkout station consists of the following
components linked by a PC platform:
. a bar code scanner with a scale,
. a bagging station equipped with a scale,
. a touchscreen monitor,
. an overhead video camera,
. a credit/debit terminal (with available support for signature capture
devices),
. bill and coin acceptors and dispensers, and
. a receipt printer.
4
[Picture of U-Scan Express(R) checkout station showing Bag & Weight platform,
Bill & Coin Acceptors, Receipt Printer, Bill & Coin Dispensers, Credit/Debit
Card Keypad, Overhead Video Camera, Touchscreen Monitor and Bar Code Scanner &
Scale.]
The supervisor terminal consists of:
. a monitor that allows the supervisor to observe the activity at each
checkout station,
. a hand-held scanner, either wired or wireless, that enables the
supervisor to assist shoppers with large items,
. an easy-to-use touchscreen that makes it simple for the supervisor to
interact with the system, and
. a receipt printer for credit/debit transactions.
In a typical configuration, the U-Scan Express occupies the same floor space
as would three manned checkout lanes. As a result, shoppers are provided with
one additional checkout station. Because one supervisor can oversee four self-
checkout stations, we believe that the store's costs per checkout lane are
lowered. We believe that labor cost savings associated with a U-Scan Express in
a typical supermarket yield a positive return on investment.
[Schematic diagram showing typical configuration and floor space occupied.]
5
Operation
The U-Scan Express system is equipped with a convenient, intuitive
touchscreen interface and provides automated voice instructions that guide the
shopper through the entire checkout process, from scanning the first item to
removing the receipt after payment.
To commence the checkout process, a shopper presses an icon on the
touchscreen of a U-Scan station. An automated voice greets the shopper and
instructs him or her to begin scanning items using the station's easy-to-use,
multi-directional scanner. As each item is scanned by the shopper, the
touchscreen acknowledges the scanned item and displays its price.
Simultaneously, the shopper is instructed by the automated voice to place the
scanned item in the shopping bag located on the station's scale. In this
manner, not only are purchased items bagged, but the station also
simultaneously weighs each item and makes sure that its weight is correct for
the item scanned.
The U-Scan Express easily handles bar-coded items and has been designed to
accommodate non-bar-coded items and items requiring compliance with specific
procedures. The U-Scan Express has the capacity to learn the weight of bar-
coded items that it has not previously encountered. For non-bar-coded items
such as produce or other items sold by weight, the shopper places the item on a
separate scale that is part of the scanner and presses a specific icon on the
touchscreen that alerts the system supervisor. Each U-Scan station is equipped
with an overhead video camera that transmits an image of the item placed on the
scale to the color video monitor located at the supervisor terminal. This
enables the supervisor to identify the item for the system, which, in turn,
computes the correct price for the item. At the request of some customers, the
system is configured to allow shoppers to identify the non-bar-coded items
being purchased, thereby eliminating the need for supervisor attention.
Additionally, alcohol and tobacco product purchases automatically prompt the
system supervisor to verify the purchaser's age. The system supervisor terminal
is equipped with a hand-held scanner that is used to read bar codes on heavy,
oversized items. Both wired and wireless models are available.
The U-Scan Express is able to handle variations on the normal bar-coded
purchase. For example, it can process transactions involving products that are
sold on a "per unit" basis. The system can identify multiple-unit items such as
six-packs of canned beverages and partial purchases of multiple-unit items
(such as five cans of a six-pack). The system also has the capability to adjust
its tolerance level for deviations in an item's weight, such as where the
inclusion of a prize in a cereal box would increase the weight of that box
beyond the preset or previously "learned" tolerance level.
Once a shopper has scanned all the items he or she wishes to purchase, the
shopper notifies the system by pressing the appropriate icon on the
touchscreen. The U-Scan Express then prompts the shopper to select the form of
payment. The U-Scan Express can accept any form of payment, either at the self-
checkout station or at the supervisor's terminal, that is accepted by cashiers,
including cash, checks, credit cards, debit cards, coupons, food stamps and
gift certificates. The U-Scan station can make change and dispense additional
cash should the shopper choose to withdraw additional money using a credit or
debit card. U-Scan Express also identifies and can handle "mix and match"
payments, such as a combination of cash and coupons. Those shoppers who choose
to pay with checks, food stamps or gift certificates are directed to the system
supervisor to complete their transactions.
Once the shopper has made payment and received change from the U-Scan
station's bill and coin dispenser, a receipt is printed at the U-Scan station.
At all times, a system supervisor is located nearby to provide prompt
assistance should it be required by the shopper.
6
Security
The close proximity of the system supervisor to the U-Scan stations helps to
deter theft. Moreover, the U-Scan Express provides an additional level of
protection with a built-in, three-tier security system designed to guard
against loss due to theft or human error. The security system at each U-Scan
station consists of:
. a bagging station equipped with a scale that detects any unscanned or
substituted items,
. an overhead video camera that discourages non-scanning or substitution,
and
. an integrated payment mechanism that substantially reduces the
opportunity for cashier fraud or error.
The U-Scan Express weighs each item scanned. If the weight detected for the
scanned item is different from the item's weight contained in the system's
database, the shopper will be asked to try again and the cashier will be
alerted. Should a shopper fail to scan an item that is placed on the weighing
platform, the system will prompt the shopper to remove the item and scan it.
Should a shopper mistakenly scan an item more than once before placing it on
the weighing platform, the U-Scan station will only charge the shopper once for
such item. The U-Scan Express can also be customized to support a retailer's
electronic anti-theft system.
Customization and Flexible Technology
The U-Scan Express can be customized to meet the individual requirements of
a particular store by changing features such as the user graphics on the
touchscreen and automated voice prompts. It can be programmed to include
frequent shopper and other loyalty and marketing programs and is available with
a multilingual touchscreen. To ensure compliance with governmental regulations,
the U-Scan Express can be programmed to comply with local weights and measures
and federal and local laws regarding proof-of-age verification for purchases of
alcohol and tobacco products.
The U-Scan Express operates on an industry-standard, PC-based platform with
the Windows NT operating system, and uses readily available, off-the-shelf
components. Its open architecture enables it to be integrated with most
existing information systems. It can be upgraded to take advantage of new
features and can generate custom management reports. The U-Scan Express obtains
most of the information it needs to operate from the store's information
systems, just as cashier-operated terminals do. A local area network links the
four checkout stations to the supervisor terminal.
We have developed software that allows the U-Scan Express system to form
part of and communicate with a store's information systems in the same way
conventional cashier-operated terminals do. In doing so, the system uses the
store's network and communications protocol, enabling it to interact easily and
completely with the information systems. Our technology allows information to
be communicated between the U-Scan Express system and a store's information
systems on a real-time basis, including such information as:
. product movement data,
. inventory management data,
. cash balance information, and
. transaction summaries.
The U-Scan Express system's software is customized for the first
installation at each chain so it can communicate with that chain's information
systems and is modified as necessary to address the needs of each retailer.
Optimal 6300 POS System
The Optimal 6300 POS 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.
7
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 96 Price Chopper supermarkets. The system is also
installed at Atlantic Food Mart in Reading, Massachusetts.
Sales and Marketing
We primarily market U-Scan Express directly to customers through our own
sales personnel. We also market the system through IBM under a non-exclusive
cooperative marketing agreement under which IBM receives a commission on sales
of systems to customers that it has registered with us. In addition, PSC has
non-exclusive marketing rights under our agreement with it. Consistent with our
strategy of increasing distribution of the U-Scan Express, we will continue to
actively review and evaluate other marketing relationships.
We have five employees dedicated to sales and marketing. We plan to hire
additional sales and marketing employees to expand our direct sales force and
to support IBM and PSC. Should PSC choose to promote or market a competing
product it would no longer have any rights to market our system.
To date, we have focused our marketing efforts almost exclusively on
supermarket and supercenter chains in the United States. We intend to begin
marketing our products in Europe in the near term. With the introduction of U-
Scan Carousel and U-Scan Solo, we are marketing our products to drug stores,
convenience stores and general merchandise stores, and for use in satellite
areas, such as floral and video departments, in supermarkets and supercenters.
Sales to a retail chain typically follow a three-step process, in which the
customer takes delivery of a single U-Scan Express 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.
Before installing a U-Scan Express system in the first store of a chain, we
customize the system, which typically takes two months. This process may
include modifying user graphics, voice instructions, functions for specific
pricing, couponing methods and software to meet the store's specifications.
This process also includes integrating the U-Scan Express with the store's
information systems so that data compiled at each U-Scan station is
automatically transmitted to the store's information systems in the same way
data would be compiled and transmitted by a manned cashier station.
Once we have completed the customization and integration process, the U-Scan
Express system is installed. Typically, the store will monitor the performance
of the system for a period of one to two months and request certain software
modifications. Upon the completion of a successful first installation, the U-
Scan Express system generally requires only minor customization to accommodate
additional installations within the chain.
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.
We intend to increase research and development efforts in the following
areas:
. Developing new products and extending our existing products into
additional retail applications.
. Adapting U-Scan self-checkout solutions for use in Europe and other
international markets.
8
. Displaying targeted and relational interactive advertising on a U-Scan
station's touchscreen when it is not in use and printing advertising on
receipts.
. Expanding the use of radio frequency technology so that the U-Scan
Express supervisor can perform more of his or her functions using a
wireless hand-held device, which would allow the supervisor to move
freely from station to station to assist shoppers. Radio frequency
technology would also simplify installation because it would eliminate
the need to install wiring to connect the U-Scan Express to the store's
information systems.
. Improving the receipt-of-payment function by making the U-Scan Express
system more efficient and easier to use. For example, incorporating
technology that enables the system to verify customers' signatures and
confirm bank balances will allow the system to accept checks without the
intervention of a supervisor.
Product Assembly
Upon the termination of PSC's exclusive assembly rights on December 31,
2000, we will assemble all of our systems at our Plattsburgh, New York
facility. We currently perform final software configuration and quality
assurance at the Plattsburgh facility, where all systems assembled by PSC are
checked before delivery to a customer. See Item 2--"Description of Properties."
PSC will continue to act as the exclusive contract assembler of U-Scan
Express through December 2000. PSC currently assembles U-Scan Express to our
designs and specifications in ISO 9001 certified conditions in its Rochester,
New York plant. We believe that PSC will be able to meet the expected demand
for U-Scan Express systems through December 2000.
Suppliers
The U-Scan Express 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
Express casing is specially manufactured for us by two suppliers.
Service and Field Support
It is essential to retailers that providers offer timely and efficient
software and hardware service and support. We provide both software and
hardware service and support for the U-Scan Express for a fee.
Software support is provided to all customers via our helpdesk on a 24 hours
a day, 365 days a year basis. Our helpdesk and support personnel are trained to
diagnose software and hardware problems that may arise in the field. Software
problems are typically solved on-line, as the U-Scan Express can be accessed
on-line from our premises.
U-Scan Express customers can choose between a number of options for hardware
support. Customers may elect to have their own facility engineering group
perform hardware maintenance on the system, in which case we train such
personnel. Customers may also purchase hardware support service from us or an
authorized subcontractor.
We maintain certified technicians at our headquarters, at our central hubs
near Cincinnati, Ohio and in Lansing, Michigan, and at various other strategic
locations. We are generally able to remotely diagnose and solve software-
related problems from our head office in Montreal. If there is a problem caused
by a hardware malfunction or another matter requiring personnel to be on-site,
we dispatch technicians to assist the customer.
To assist with such problems, we have contracted with and certified four
independent service companies that provide hardware support for our system.
Furthermore, we maintain regional facilities for parts storage in
9
Nashville, Memphis and Knoxville, Tennessee; Indianapolis, Indiana; Denver,
Colorado; Atlanta, Georgia; Boise, Idaho; Des Moines, Iowa; Charlotte, North
Carolina; Houston, Texas; Roanoke, Virginia; Grand Rapids, Michigan;
Plattsburgh, New York; and Springfield, Missouri.
Installation Personnel
It is important that we are able to perform large-scale installations of our
systems quickly and reliably with minimal impact on store operations. For a
typical installation, a project manager or one of our other experienced
employees visits the store before the delivery of the system to coordinate all
aspects of the installation. Site requirements are generally limited. Our goal
is to ensure that our systems can be installed and fully operational within six
hours.
Government Regulation
We and certain of the components that are used in our 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 U.S. 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 expect to sell our products. We (and/or PSC) also
voluntarily submit our products for certification for product safety in the
United States and in Canada by the nationally recognized testing laboratories,
the Underwriters Laboratories, Inc. and the Canadian Standards Association,
respectively.
Competition
We compete against manufacturers of traditional cashier-operated terminals
as well as developers of portable hand-held devices and other partially
automated self-scanning devices, including NCR, Symbol Technologies and
Productivity Solutions. Several of our competitors are substantially larger and
have greater financial, technical, and marketing resources. We believe,
however, that the U-Scan Express performs more functions than any other self-
checkout system for retail use currently available on the market. PSC has also
announced its intention to enter the self-checkout market after December 31,
2000.
We believe that the principal criteria for competition within the self-
checkout system market are the following:
. technological capability,
. product features,
. price,
. product support,
. ease of use,
. name recognition,
. distribution channel capability, and
. financial strength of the provider.
10
Intellectual Property
We have registered the following trademarks in the United States:
. Optimal Robotics Corporation(R),
. U-Scan(R),
. a stylized version of Optimal Robotics Corporation(R),
. U-Scan Express(R), and
. a stylized version of U-Scan Express(R).
Additionally, we have filed trademark applications for the following marks:
. Optimal Robotics,
. a second stylized version of Optimal Robotics Corporation, which is used
for different purposes than the registered mark noted above,
. Scan Pay Go,
. U-Scan Solo,
. U-Scan Carousel, and
. It's That Simple.
We have six patents in the United States for various components of our
system. We have two German patents, one United Kingdom patent and one European
patent.
As a general policy, we file domestic and foreign patent applications to
protect our technological position and new product development. We intend to
continue to apply wherever necessary to protect our patents in all countries in
which we operate. 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. We plan to apply for
additional patents on our products, but our applications may not be granted and
any new products developed by us may not be patentable.
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 which 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 January 31, 2000, we employed 187 full-time employees, of whom three
were executive officers, 39 were actively engaged in software customization and
programming, as well as research and development, and the remainder were
engaged in sales, marketing, project management, installation and technical
support, finance and administrative functions.
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.
11
We also maintain parts storage facilities in 14 states. We intend to expand
or to open additional hub facilities in the United States to support current
and future installations.
Enforceability of Civil Liabilities
It may not be possible for shareholders to effect service of process within
the United States upon our directors and officers and the experts named herein,
who are residents of Canada, or upon all or a substantial portion of their
assets and substantially all of our assets, which are located in Canada. It may
also not be possible to enforce against them judgments of U.S. courts under any
U.S. securities laws. There is doubt as to the enforceability in Canada of
civil liabilities predicated upon the U.S. securities laws.
Where You Can Find Additional Information
We file reports and other information with the Securities and Exchange
Commission. You may review these reports and other information without charge
at the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington,
D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC,
which Internet site is located at http://www.sec.gov.
Our statements in this annual report about contracts, agreements and other
documents are not necessarily complete, and you are encouraged to review the
exhibits to this annual report for a more complete description of the matter
involved. Each such statement is qualified in its entirety by reference to the
schedule or exhibit.
We are required to furnish to our shareholders annual reports containing
audited financial statements certified by our chartered accountants 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.
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: O. Bradley McKenna
(514) 738-8885
We are a foreign private issuer under the rules and regulations of the
Commission.
12
Item 2. DESCRIPTION OF PROPERTIES
Facilities
Our headquarters are located in approximately 32,000 square feet of leased
space at 4700 de la Savane, Montreal, Quebec, under a lease that expires on
October 1, 2001, subject to our right to renew the lease for an additional
five-year period. We also operate technical support hubs in approximately 5,000
square feet of leased space in the Cincinnati, Ohio metropolitan area,
approximately 2,700 square feet of leased space in Lansing, Michigan and
approximately 10,500 square feet of leased space in Plattsburgh, New York. We
currently perform final software configuration and quality assurance at, and
ship our systems from our Plattsburgh facility. We intend to lease
approximately 30,000 additional square feet at our Plattsburgh facility this
year in preparation for the termination of PSC's exclusive assembly rights in
December 2000. As of January 1, 2001, we will assemble our systems at the
Plattsburgh facility.
The following is a summary of our facilities:
Facility Location
--------------------------------------------------------------------------
Headquarters 4700 de la Savane, Montreal, Quebec
--------------------------------------------------------------------------
Technical Support Hubs Cincinnati, Ohio; Lansing, Michigan;
Plattsburgh, New York (used for final software
configuration, quality assurance and, beginning
2001, system assembly)
--------------------------------------------------------------------------
Regional Facilities/
Parts Storage Hubs Denver, Colorado Atlanta, Georgia
Boise, Idaho Indianapolis, Indiana
Charlotte, North Carolina Des Moines, Iowa
Nashville, Memphis Grand Rapids, Michigan
and Knoxville, Tennessee Springfield, Missouri
Roanoke, Virginia Houston, Texas
13
Item 3. LEGAL PROCEEDINGS
Legal Proceedings
In each of 1995 and 1996, we received a demand letter from the same claimant
alleging that U-Scan Express infringes upon the claimant's patent. In July
1999, this claimant filed a civil action in the United States District Court
for the District of Utah against us and PSC, the current assembler of U-Scan
Express, alleging patent infringement. A second party also sent a demand letter
to us alleging a different patent infringement. Although after consultation
with counsel, we believe that the former claimant should not prevail in its
lawsuit and that the latter claimant should not prevail if a lawsuit is brought
to assert its claim, and that these claims will not have a material adverse
effect on our business or prospects, no assurance can be given that a court
will not find that the system infringes upon one or both of such claimants'
rights.
Kroger has also been sued by the same claimant in the State of Utah based
upon the same issues underlying the suit filed against us in July. At our
expense, our counsel is also defending Kroger in such action. Furthermore, we
are contractually bound to indemnify Kroger for any damages that it may incur
in connection with such suit.
14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
15
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Nasdaq Stock Market Canadian Dealing Network
--------------------- ----------------------------
US$ High US$ Low Cdn.$ High Cdn.$ Low
---------- --------- ------------ ------------
2000
- ----
First Quarter (through
February 22nd)......... 39.50 28.88 35.00 35.00
1999
- ----
1st Quarter............. 12.88 7.00 14.00 11.00
2nd Quarter............. 11.13 7.06 14.00 11.00
3rd Quarter............. 19.88 9.75 20.00 13.00
4th Quarter............. 40.75 17.00 40.00 25.00
1998
- ----
1st Quarter............. 14.75 6.88 19.00 9.00
2nd Quarter............. 16.50 8.75 20.00 12.00
3rd Quarter............. 13.63 6.38 17.00 10.00
4th Quarter............. 14.00 4.50 16.00 7.00
- --------
(b) Holders
At February 21, 2000, there were 2,063 stockholders of record of the
Company's common shares.
(c) Dividends
The Company's policy is to retain all earnings, if any are realized, for
the development and growth of its business. The Company has never
declared or paid cash dividends on its common shares and does not
anticipate paying cash dividends in the foreseeable future. Any
determination to pay dividends will be at the discretion of the
Company's Board of Directors and will depend upon the Company's
financial condition, results of operations, capital requirements,
limitations contained in loan agreements and such other factors as the
Board of Directors deems relevant.
16
Item 6. SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1999 and 1998 and
for the years ended December 31, 1999, 1998 and 1997 are derived from and are
qualified by reference to our audited financial statements that are included in
Item 8--"Financial Statements and Supplementary Data". The following selected
financial data as of December 31, 1997, 1996 and 1995 and for the years ended
December 31, 1996 and 1995 are derived from our audited financial statements,
as restated for a change in reporting currency, that are not included herein.
Effective December 31, 1998, we adopted the U.S. dollar as the reporting
currency for our financial statements. The financial data for all periods prior
to 1999, for Canadian GAAP purposes, are presented in U.S. dollars in
accordance with a translation of convenience method using the representative
exchange rate at December 31, 1998 of US$1.00=Cdn.$1.5333--see note 2 of the
notes to the financial statements, included in Item 8--"Financial Statements
and Supplementary Data."
The data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the financial
statements, related notes and the other financial information included
elsewhere in this annual report.
The selected financial data 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 financial
statements, see note 16 of the notes to the financial statements, included in
Item 8--"Financial Statements and Supplementary Data".
Year ended December 31,
---------------------------------------------
1999 1998 1997 1996 1995
-------- ------- -------- -------- ------
(U.S. dollars, in thousands except per
share data)
Income Statement Data:
Revenues........................ $ 29,634 $ 5,618 $ 3,397 $ 894 $ 498
Cost of sales................... 23,457 5,135 2,709 837 171
-------- ------- -------- -------- ------
Gross margin.................... 6,177 483 688 57 327
Research and development
expenses, net of tax credits... 220 210 294 506 153
Selling, general, administrative
and other expenses............. 6,022 5,265 2,780 1,047 807
Write-down of inventory......... 604 -- --
Other........................... (789) (1,081) (1,005) (429) (15)
-------- ------- -------- -------- ------
Earnings (loss) before income
taxes.......................... 120 (3,911) (1,381) (1,067) (618)
Income tax recovery(1).......... 3,532 -- -- -- --
-------- ------- -------- -------- ------
Net earnings (loss)............. $ 3,652 $(3,911) $ (1,381) $ (1,067) $ (618)
======== ======= ======== ======== ======
Weighted average number of
common shares outstanding
(thousands).................... 9,699 7,464 7,410 4,918 3,624
Weighted average fully diluted
number of common shares
outstanding (thousands)........ 12,709 -- -- -- --
Basic net earnings (loss) per
common share................... $ 0.38 $ (0.52) $ (0.19) $ (0.22) $(0.17)
======== ======= ======== ======== ======
Fully diluted net earnings
(loss) per common share........ $ 0.35 $ (0.52) $ (0.19) $ (0.22) $(0.17)
======== ======= ======== ======== ======
Other data:
U-Scan Express system
installations:
Systems installed during
year......................... 288 57 22 6 2
Systems installed at year-
end.......................... 375 87 30 8 2
U-Scan checkout stations
installed at year-end.......... 1,498 346 120 32 8
Customer transactions
(millions)(2).................. 45 12
December 31,
---------------------------------------------
1999 1998 1997 1996 1995
-------- ------- -------- -------- ------
(U.S. dollars, in thousands)
Balance Sheet Data:
Cash, cash equivalents and
short-term investments......... $ 29,136 $ 6,063 $ 10,354 $ 12,868 $ 612
Working capital................. 36,032 7,319 10,783 12,855 832
Total assets.................... 44,206 9,329 11,848 13,741 1,260
Shareholders' equity............ 39,705 7,596 11,072 12,453 435
17
Year ended December 31,
U.S. GAAP: -------------------------------------------
1999 1998 1997 1996 1995
------- -------- ------- ------- ------
(U.S. dollars, in thousands except per
share data)
Revenues......................... $29,634 $ 5,721 $ 3,749 $ 1,006 $ 561
Net loss......................... $(5,575) $(16,403) $(6,806) $(1,362) $ (715)
Basic and fully diluted net loss
per common share................ $ (0.57) $ (2.20) $ (0.92) $ (0.28) $(0.20)
December 31,
-------------------------------------------
1999 1998 1997 1996 1995
------- -------- ------- ------- ------
(U.S. dollars, in thousands)
Total assets..................... $44,191 $ 9,312 $12,679 $15,348 $1,391
- --------
(1) We received purchase commitments for a large number of systems in the
fourth quarter of 1999, which cover a substantial portion of our fiscal
2000 budgeted sales target. In addition, there has been a positive trend in
our profitability and sales levels in recent quarters. Based on these
factors, we have determined that it is now more likely than not that we
will earn sufficient taxable income during the allowable carry-forward
period to realize all of our future income tax assets. Therefore, during
the fourth quarter of 1999, we recognized the future benefit of all of our
future income tax assets, which relate principally to previously
unrecognized non-capital losses and undeducted research and development
expenses. See Item 7--"Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--1999 Compared
with 1998."
(2) Estimated, based on reports provided by our customers. Prior to 1998, we
did not track this data.
18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are the leading provider of self-checkout systems to retailers in the
United States. Our principal product is the U-Scan Express, an automated self-
checkout system which enables shoppers to scan, bag and pay for their purchases
with little or no assistance from store personnel. As of December 31, 1999, we
had installed 375 U-Scan Express systems, consisting of 1,498 checkout
stations, in 328 stores of leading retailers across 29 states. We estimate that
in 1999 U-Scan Express systems processed over 45 million customer transactions.
The U-Scan Express can be operated quickly and easily by shoppers and makes the
checkout process more convenient for them. The U-Scan Express also reduces the
cost of checkout transactions to retailers and addresses labor shortage
problems by replacing manned checkout counters with our automated self-checkout
stations. We believe that the market for the U-Scan Express extends beyond
supermarkets and supercenters and we now sell to general merchandise stores and
other big-box retailers. The U-Scan Express is currently assembled by PSC under
contract. IBM and PSC also market the U-Scan Express.
Agreement with PSC
In 1995, we entered into a strategic relationship agreement whereby we
granted to Spectra-Physics Scanning Systems, Inc. an exclusive worldwide
license to distribute, sell, assemble and install U-Scan Express systems. PSC
acquired Spectra-Physics in 1996 and assumed this agreement. The agreement
obligated PSC to service and maintain the hardware in the systems after
installation. Our role was to develop the product, provide and service the
software for it and assist in selling it. We shared the gross margin relating
to sales of systems with PSC. As our resources expanded, we negotiated to
reduce PSC's role. Beginning April 1, 1998, we assumed primary responsibility
for the sale and all responsibilities for distributing, installing and
servicing our U-Scan Express systems and became entitled to all the revenue
from their sale. We currently pay PSC to act as the exclusive assembler of the
systems. In October 1999, we notified PSC that we will not renew its exclusive
assembly rights beyond December 31, 2000, the date specified in our agreement.
Starting in January 2001, PSC will cease assembling and we will assume assembly
of the U-Scan Express in our Plattsburgh, New York facility. Through December
2000, the purchase price that we pay to PSC for each system is equal to the
cost of the system plus a margin that fluctuates with its ultimate sales price.
PSC continues to market the U-Scan Express, but we are now the primary seller
of our systems. Furthermore, we control PSC's purchasing process for raw
materials and influence its direct labor costs as they relate to U-Scan
Express.
Trends in our costs
We continue to focus on taking advantage of economies of scale and reducing
the costs of installing and servicing our product. In late 1998, we created a
department having a primary responsibility of sourcing new suppliers and
obtaining the best possible prices for our raw materials. As a result of this
cost-cutting initiative, during 1999 we experienced a reduction in some of our
raw material costs. In 1999, the decrease in the overall cost per system was a
direct result of the increase in the number of U-Scan Express systems sold and
the benefits of this cost cutting initiative. Furthermore, we believe that as
the number of firm commitments we have to purchase the U-Scan Express
increases, we will be able to leverage our increased component requirements
into lower prices from suppliers. We continue to make significant investments
in our infrastructure to support the rapid growth of our business.
19
Quarterly Results
The following table sets forth certain summarized unaudited quarterly
financial and other 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 financial data
for all periods prior to 1999, for Canadian GAAP purposes, are presented in
U.S. dollars in accordance with a translation of convenience method using the
representative exchange rate at December 31, 1998 of US$1.00=Cdn.$1.5333--see
note 2 of the notes to the financial statements, included in Item 8--"Financial
Statements and Supplementary Data". The operating results for any quarter are
not necessarily indicative of the results to be expected for any future period.
The summary financial data 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 financial
statements, see note 16 of the notes to the financial statements, included in
Item 8--"Financial Statements and Supplementary Data".
For the quarter ended
------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1999 1999 1999 1999 1998 1998 1998 1998
-------- --------- -------- --------- -------- --------- -------- ---------
(U.S. dollars, in thousands except per share data)
(unaudited)
Revenues................ $ 6,835 $10,686 $7,023 $ 5,090 $ 1,674 $ 2,722 $ 696 $ 525
Cost of sales........... 5,449 8,128 5,536 4,344 1,715 2,464 582 373
------- ------- ------ ------- ------- ------- ------- -------
Gross margin............ 1,386 2,558 1,487 746 (41) 258 114 152
Earnings (loss) before
income taxes........... (1,153) 1,420 428 (575) (1,142) (1,021) (949) (799)
Income tax recovery..... 3,532 -- -- -- -- -- -- --
------- ------- ------ ------- ------- ------- ------- -------
Net earnings (loss)..... $ 2,379 $ 1,420 $ 428 $ (575) $(1,142) $(1,021) $ (949) $ (799)
Basic net earnings
(loss) per common
share.................. $ 0.21 $ 0.13 $ 0.05 $ (0.08) $ (0.15) $ (0.14) $ (0.13) $ (0.11)
Fully diluted net
earnings (loss) per
common share........... $ 0.18 $ 0.12 $ 0.05 $ (0.08) $ (0.15) $ (0.14) $ (0.13) $ (0.11)
Other data:
U-Scan Express systems
installed during
quarter................ 64 105 68 51 17 24 9 7
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,
1999 1999 1999 1999 1998 1998 1998 1998
-------- --------- -------- --------- -------- --------- -------- ---------
(unaudited)
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 79.7 76.1 78.8 85.3 102.4 90.5 83.6 71.0
----- ----- ----- ----- ----- ----- ------ ------
Gross margin............ 20.3 23.9 21.2 14.7 (2.4) 9.5 16.4 29.0
Earnings (loss) before
income taxes........... (16.9) 13.3 6.1 (11.3) (68.2) (37.5) (136.4) (152.2)
Income tax recovery..... 51.7 -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ------ ------
Net earnings (loss)..... 34.8% 13.3% 6.1% (11.3)% (68.2)% (37.5)% (136.4)% (152.2)%
20
Results of Operations
The following discussion and analysis of our results of operations and
liquidity and capital resources should be read in conjunction with the
financial information and our financial statements and their related notes,
included in Item 8--"Financial Statements and Supplementary Data".
1999 Compared with 1998
Total revenues increased by $24,016,233, or 427%, from 1998 to 1999. Sales of
U-Scan Express grew from 57 systems in 1998 to 288 systems in 1999, producing
$23,146,629 of additional systems revenues, an increase of 449%. The growth in
sales was due to a significant increase in orders from existing customers.
Service contract revenue recognized for hardware and software maintenance
increased by $854,707, or 600%, because of the increased number of customers
that entered into service contracts with us after purchasing U-Scan Express.
Total cost of sales increased by $18,322,336, or 357%, from 1998 to 1999.
Overall gross margin increased as a percentage of sales from 9% in 1998 to 21%
in 1999, primarily representing the increase in gross margin on system sales.
This increase resulted primarily from taking advantage of economies of scale
and reducing the costs of installing and servicing our products.
Gross research and development expenses increased by $635,572, or 196%, from
1998 to 1999. As a percentage of total revenues, gross research and development
expenses decreased from 6% in 1998 to 3% in 1999. This percentage decrease
resulted from the substantial increase in the number of systems sold in 1999 as
compared to 1998. Research and development expenses during the year included
the cost of the development of two new product lines.
We may, for Canadian federal income tax purposes, defer and deduct in future
years certain scientific research and experimental development expenditures
incurred to date. As of December 31, 1999, the amount of such deferred
deductions is Cdn.$2,420,000 (approximately $1,669,000) for Canadian federal
income tax purposes and Cdn.$4,010,000 (approximately $2,766,000) for Quebec
provincial income tax purposes. These deductions may be carried forward
indefinitely. In addition, we have non-refundable investment tax credits of
approximately Cdn.$729,000 (approximately $503,000), which can be carried
forward to reduce Canadian federal income taxes payable and which expire in
various years through 2009.
Selling, general, administrative and other expenses (including operating
lease expenses) increased by $618,099, or 12%, in 1999 compared to 1998. As a
percentage of total revenues, these expenses decreased from 90% in 1998 to 19%
in 1999. This percentage decrease resulted from the substantial increase in the
number of systems sold in 1999 compared to 1998. During the last quarter of
1999, we continued to expand sales and marketing efforts and hire additional
personnel, as our backlog continued to increase. In addition, we incurred
increased costs in engineering follow-through during the early phases of
commercial production for U-Scan Solo and U-Scan Carousel. We also incurred
increased costs adapting the capabilities of our existing U-Scan system to new
customers' needs and for the start-up of the Plattsburgh facility.
A write-down of inventory of $604,364 in the fourth quarter of 1999 was
required due to upgrades in some hardware components, to recognize the
declining replacement costs for many components as a result of stronger
purchasing power with our suppliers, and due to parts obsolescence.
Our 1999 net earnings of $3,651,768 reflect an income tax recovery of
$3,531,583, which represents the future benefit of non-capital loss
carryforwards and undeducted scientific research and experimental development
expenditures which may be used to reduce taxable income, for Canadian federal
and Quebec provincial income tax purposes, in future years. We may utilize
these loss carryforwards and undeducted expenditures only to the extent that we
generate taxable income for Canadian federal and Quebec provincial income tax
purposes, in the future.
21
During 1999, we retroactively adopted the revised recommendations of the
Canadian Institute of Chartered Accountants regarding accounting for income
taxes, which are consistent with U.S. GAAP. During the fourth quarter of the
year, we received purchase commitments for a large number of systems which
cover a substantial portion of our fiscal 2000 budgeted sales target. In
addition, there has been a positive trend in our profitability and sales levels
in recent quarters. Based on these factors, we have determined that it is now
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. Therefore, as a result of this determination, we were required to
record, during the fourth quarter of the year, an income tax recovery with
respect to these future income tax assets.
Our ability to ultimately realize these future income tax assets will be
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. We believe that our revenues for fiscal 2000 and 2001 will
grow annually based on our current order backlog and expected additional
purchase commitments from new and existing customers. Our ability to realize
these assets is also dependent on effective control over our selling, general
and administrative expenses. In addition, we expect our gross and operating
margins to materially increase as a result of our assumption of the assembly
responsibility for our systems commencing in January 2001, when PSC ceases to
assemble our systems. Based on our earnings estimates for fiscal 2000,
$3,012,997 of these future income tax assets have been classified as a current
asset.
1998 Compared with 1997
Total revenues increased by $2,221,296, or 65%, from 1997 to 1998. Sales of
U-Scan Express grew from 22 systems in 1997 to 57 systems in 1998, producing
$3,483,994 of additional systems revenue, an increase of 209%. The growth in
sales was due to our greater marketing efforts and the change in our
relationship with PSC. Under the arrangement with PSC before April 1, 1998, we
recorded as revenue only our portion of the gross margin on system sales.
Beginning April 1, 1998, we recorded the entire sales proceeds for the system
sales (as well as the corresponding cost of sales). See "Overview." The average
selling price for U-Scan Express decreased from 1997 to 1998. From time to
time, we retrofit already-installed systems by changing their casings. In 1998,
we completed 12 retrofits, compared to five in 1997. The price of retrofits
remained constant from year to year. Between May and December 1997, we had
hardware sales of $1,472,559 related to our Optimal 6300 POS ("POS") system.
Prior to January 1, 1998, we discontinued these hardware sales. In 1998,
development and customization revenues, which predominantly related to the POS
business, declined by $16,713, or 8%, because the demand of our POS customer
for development of that product was less. In 1999, we entered into a contract
with that customer for a greater sum than we received in 1998. Service contract
revenue recognized for hardware and software maintenance increased by $119,123,
or 508%, from 1997 to 1998, because of the increased number of customers that
entered into contracts with us after purchasing U-Scan Express systems and
because we began receiving hardware maintenance payments in accordance with the
new agreement with PSC.
Total cost of sales increased by $2,426,288, or 90%, from 1997 to 1998.
Gross margin decreased as a percentage of sales from 20% in 1997 to 9% in 1998.
This decrease resulted primarily from the change in our relationship with PSC.
The costs that we assumed from PSC more than offset the additional revenue that
we realized due to the change. As a result, gross margin on sales of systems
decreased from 29% in 1997 to 7% in 1998. In 1997, we realized a gross margin
of $25,202, or 2%, on revenues of $1,472,559 related to sales of hardware,
which were discontinued prior to 1998. In 1998, a negative gross margin of 26%
was realized on hardware and software maintenance revenue because hardware
maintenance costs, which are recognized as incurred, exceeded hardware
maintenance revenues, which are fixed by contract and recognized evenly over
the term thereof. The gross margin on development and customization revenues
decreased from 68% in 1997 to 58% in 1998. This amount represents only a
$13,100 increase in the cost of sales. In 1998, we realized a gross margin of
$26,019, or 22%, on the sale of third-party software licenses in a single, non-
recurring transaction.
Gross research and development expenses in 1998 remained relatively constant
as compared to 1997. As a percentage of sales, they fell from 12% in 1997 to 6%
in 1998. This change reflects our growing focus in 1998 on selling and
installing U-Scan Express systems and expanding our general and administrative
resources.
22
Selling, general and administrative expenses (including operating lease
expense) increased by $2,403,056, or 90%, from 1997 to 1998. As a percentage of
sales, selling, general and administrative expenses increased from 75% in 1997
to 86% in 1998. Both increases resulted in part from our expanding our sales
and marketing efforts and hiring additional personnel, including engineers and
technicians, as our backlog increased and we anticipated future sales. Expenses
for adapting software for potential new customers, quality control and
redesigning software and hardware also increased from 1997 to 1998.
Liquidity and Capital Resources
As of December 31, 1999, we had cash, cash equivalents and short-term
investments of $29,135,690 and working capital of $36,032,273.
Operating activities used $2,918,423 of cash and cash equivalents in 1999 as
compared to $4,379,534 in 1998. In 1999, we issued 3,000,000 common shares
pursuant to a public offering and 961,963 common shares pursuant to the
exercise of options and warrants, which resulted in net cash proceeds of
$24,206,566 and $2,467,094, respectively.
In 1999, we had capital expenditures of $1,012,586, which principally
related to computer equipment and testing units and leasehold improvements
related to the expansion of our head office premises. In 1998, we had capital
expenditures of $234,207, which were principally related to testing units and
computer equipment.
We also maintain an operating line of credit in the amount of Cdn.$500,000
with a Canadian chartered bank, in connection with which we have pledged a U.S.
treasury bill. We do not have any amounts outstanding under this line of
credit. We believe that our cash, cash equivalents and short-term investments,
combined with our operating line and the net proceeds of our planned public
offering of up to 1,325,000 common shares (excluding shares subject to the
underwriters' over-allotment option), will be adequate to meet our needs for at
least the next 12 months.
Year 2000 Issues
To date, none of our customers has informed us of any Year 2000 problems
with their systems and hardware, although some uncertainty remains in the
software industry and other industries concerning the scope and magnitude of
problems associated with the century change. Furthermore, we received no
indications that any material third party providers were not ready for the Year
2000, and we believe that any such unpreparedness discovered after January 2000
will not have a material effect on our business, results of operations or
financial condition.
We took steps during 1999 to ensure that our operations would not be
adversely affected by Year 2000 software problems. We determined that the
consequences of the Year 2000 for our products and the software contained in
our internal systems would not have a material effect on our business, results
of operations or financial condition. Upgrades required to make current
internal systems Year 2000 ready were installed and tested by June 30, 1999, at
a cost that was not material to us. All internal systems installed thereafter
were tested and verified for Year 2000 readiness at the time of installation at
no additional cost. No alteration to the software contained in our products was
necessary. Nevertheless, customers generally integrate our products into a
store's information systems, which the customer might not have been able to
adequately evaluate for Year 2000 readiness. If in the future we are required
to defend our products or services in court proceedings, or to negotiate
resolutions of claims based on Year 2000 issues, the costs of defending and
resolving Year 2000 related disputes, regardless of the merits of such
disputes, and any liability we may have for Year 2000 related damages,
including consequential damages, could materially adversely affect our
business, financial condition and operating results.
23
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate and foreign currency exchange rate sensitivity table
December 31, 1999
-----------------------
Maturity
Date Fair
2000 Value
----------- -----------
(U.S. dollars)
U.S. Treasury bill denominated in U.S. dollars with a
fixed interest rate of 5.10%......................... $ 564,841 $ 564,841
Short-term discount notes denominated in U.S. dollars
with an effective yield of 5.8% ..................... $ 4,354,219 $ 4,354,219
Short-term discount notes denominated in Canadian
dollars with an effective yield of 5.1%.............. $20,282,387 $20,282,387
Contract advance denominated in U.S. dollars, non-
interest bearing..................................... $ 250,000 $ 227,000
The company is exposed to foreign currency exchange rate fluctuations. 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. The company is
exposed to interest rate fluctuation risk. The company presently invests in
short-term investment grade paper.
Fair value
Due to their short-term maturities, the carrying values of cash, the U.S.
Treasury bill and short-term investments are reasonable estimates of their fair
values.
The fair value of the contract advance at December 31, 1999 is approximately
$227,000 based on discounted cash flows.
24
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by item 8 are set
forth on pages 26 through 48.
25
AUDITORS' REPORT
To the Shareholders of
Optimal Robotics Corp.
We have audited the consolidated balance sheets of Optimal Robotics Corp. as
at December 31, 1999 and 1998 and the consolidated statements of operations,
deficit and cash flows for each of the years in the three-year period ended
December 31, 1999. 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. 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,
1999 and 1998 and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1999 in accordance with
Canadian generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Montreal, Quebec, Canada
February 4, 2000
26
OPTIMAL ROBOTICS CORP.
CONSOLIDATED BALANCE SHEETS
As at December 31, 1999 and 1998
(expressed in U.S. dollars)
1999 1998
---------- ----------
$ $
---------- ----------
ASSETS
------
Current assets
Cash................................................... 3,934,243 --
U.S. Treasury bill, at cost............................ 564,841 538,490
Short-term investments (note 15)....................... 24,636,606 5,524,819
Accounts receivable, net of allowance for doubtful
accounts of nil (note 4).............................. 4,641,566 1,219,716
Inventory (note 5)..................................... 3,363,943 1,401,049
Tax credits receivable................................. 252,520 114,494
Future income taxes (note 13).......................... 3,012,997 --
Prepaid expenses....................................... 127,017 2,935
---------- ----------
40,533,733 8,801,503
Loans receivable (note 6).............................. 155,643 161,807
Deferred share issue costs............................. 56,985 --
Future income taxes (note 13).......................... 2,112,028 --
Capital assets (note 7)................................ 1,347,903 365,869
---------- ----------
44,206,292 9,329,179
========== ==========
LIABILITIES
-----------
Current liabilities
Accounts payable and accrued liabilities (note 8)...... 3,659,189 1,233,014
Deferred revenue....................................... 592,271 124,784
Current portion of contract advance (note 9)........... 250,000 125,000
---------- ----------
4,501,460 1,482,798
Contract advance (note 9).............................. -- 250,000
---------- ----------
4,501,460 1,732,798
---------- ----------
Commitments and contingency (note 12)
Shareholders' Equity
Share capital (note 10)................................ 44,657,833 16,850,531
Other capital.......................................... 20,559 23,240
Cumulative translation adjustment...................... 652,062 --
Deficit................................................ (5,625,622) (9,277,390)
---------- ----------
39,704,832 7,596,381
---------- ----------
44,206,292 9,329,179
========== ==========
Approved by the Board of Directors
/s/ Holden L. Ostrin, Director /s/ Leon P. Garfinkle, Director
------------------------------ -------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
27
OPTIMAL ROBOTICS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
For each of the years in the three-year period ended December 31, 1999
(expressed in U.S. dollars)
1999 1998 1997
---------- ---------- ----------
$ $ $
---------- ---------- ----------
(note 2) (note 2)
Revenues
Systems................................. 28,301,590 5,154,961 1,670,967
Hardware................................ -- -- 1,472,559
Development and customization........... 335,387 202,204 218,917
Hardware and software maintenance....... 997,269 142,562 23,439
Other................................... -- 118,286 10,835
---------- ---------- ----------
29,634,246 5,618,013 3,396,717
---------- ---------- ----------
Cost of sales
Systems................................. 22,343,753 4,778,815 1,190,450
Hardware................................ -- -- 1,447,357
Development and customization........... 116,861 84,082 70,982
Hardware and software maintenance....... 996,799 179,913 --
Other................................... -- 92,267 --
---------- ---------- ----------
23,457,413 5,135,077 2,708,789
---------- ---------- ----------
Gross margin.............................. 6,176,833 482,936 687,928
---------- ---------- ----------
Gross research and development expenses... 960,440 324,868 393,501
Research and development tax credits (note
12)...................................... (740,484) (114,494) (99,600)
Selling, general and administrative
expenses................................. 5,444,831 4,847,804 2,542,336
Operating lease expense................... 232,471 211,399 113,811
Write-down of inventory................... 604,364 -- --
Amortization of capital assets............ 344,718 205,684 123,818
Investment income......................... (893,694) (449,244) (584,285)
Foreign exchange loss (gain).............. 104,002 (632,317) (420,516)
---------- ---------- ----------
6,056,648 4,393,700 2,069,065
---------- ---------- ----------
Earnings (loss) before income taxes....... 120,185 (3,910,764) (1,381,137)
Income tax recovery (note 13)............. 3,531,583 -- --
---------- ---------- ----------
Net earnings (loss) for the year.......... 3,651,768 (3,910,764) (1,381,137)
========== ========== ==========
Weighted average number of common shares
outstanding.............................. 9,699,385 7,463,984 7,409,522
========== ========== ==========
Net earnings (loss) per common share
Basic................................... 0.38 (0.52) (0.19)
========== ========== ==========
Fully diluted........................... 0.35 (0.52) (0.19)
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
28
OPTIMAL ROBOTICS CORP.
CONSOLIDATED STATEMENTS OF DEFICIT
For each of the years in the three-year period ended December 31, 1999
(expressed in U.S. dollars)
1999 1998 1997
---------- ---------- ----------
$ $ $
---------- ---------- ----------
(note 2) (note 2)
Deficit--Beginning of year.................. (9,277,390) (5,366,626) (3,985,489)
Net earnings (loss) for the year............ 3,651,768 (3,910,764) (1,381,137)
---------- ---------- ----------
Deficit--End of year........................ (5,625,622) (9,277,390) (5,366,626)
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
29
OPTIMAL ROBOTICS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For each of the years in the three-year period ended December 31, 1999
(expressed in U.S. dollars)
1999 1998 1997
----------- ---------- -----------
$ $ $
----------- ---------- -----------
(note 2) (note 2)
Cash provided by (used for)
Operating activities
Net earnings (loss) for the year........ 3,651,768 (3,910,764) (1,381,137)
Items not affecting cash
Write-down of inventory................ 604,364 -- --
Amortization of capital assets......... 344,718 205,684 123,818
Unrealized foreign exchange loss (gain)
on contract advance................... (14,016) 53,414 --
Non-refundable tax credits............. (490,438) -- --
Future income taxes.................... (3,531,583) -- --
Change in non-cash operating working
capital items
Increase in accounts receivable........ (3,271,239) (380,271) (506,860)
Decrease (increase) in inventory....... (2,441,539) (1,376,724) 112,279
Decrease (increase) in tax credits
receivable............................ (128,289) (14,894) 90,952
Decrease (increase) in prepaid
expenses.............................. (120,936) 16,265 (10,984)
Decrease in unrealized foreign exchange
gain on forward contract.............. -- -- 171,592
Increase (decrease) in accounts payable
and accrued liabilities............... 2,029,510 902,972 (493,927)
Increase (decrease) in deferred
revenue............................... 449,257 124,784 (17,609)
----------- ---------- -----------
(2,918,423) (4,379,534) (1,911,876)
----------- ---------- -----------
Financing activities
Issuance of common shares............... 29,467,094 435,596 --
Share issue costs....................... (2,793,434) -- --
Deferred share issue costs.............. (55,616) -- --
Repayment of loans under Employee Stock
Purchase Arrangement................... 141,348 -- --
Decrease in contract advance............ (125,000) (125,000) --
----------- ---------- -----------
26,634,392 310,596 --
----------- ---------- -----------
Investing activities
Purchase of capital assets.............. (1,012,586) (234,207) (437,732)
Decrease (increase) in short-term
investments............................ (18,460,828) 4,558,988 (10,083,807)
Issuance of loan receivable............. -- -- (166,308)
Repayment of loans receivable........... 15,088 12,854 1,766
----------- ---------- -----------
(19,458,326) 4,337,635 (10,686,081)
----------- ---------- -----------
Increase (decrease) in cash and cash
equivalents during the year............. 4,257,643 268,697 (12,597,957)
Effect of exchange rate changes on cash
and cash equivalents.................... (297,049) -- --
Cash and cash equivalents--Beginning of
year.................................... 538,490 269,793 12,867,750
----------- ---------- -----------
Cash and cash equivalents--End of year... 4,499,084 538,490 269,793
=========== ========== ===========
Cash and cash equivalents is comprised
of:
Cash.................................... 3,934,243 -- 269,793
U.S. Treasury bill...................... 564,841 538,490 --
----------- ---------- -----------
4,499,084 538,490 269,793
=========== ========== ===========
Supplementary information
Cash paid during the year for interest.. 38,786 1,182 1,163
=========== ========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
30
OPTIMAL ROBOTICS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For each of the years in the three-year period ended December 31, 1999
(expressed in U.S. dollars, unless otherwise noted)
1Nature of operations
The Company is engaged in the development, marketing, installation and
servicing of automated transaction software and systems designed for use in the
retail sector. The Company's principal product focus is its U-Scan(R) Express
system, a self-service checkout system for the retail industry. The Company
also develops, markets and services its 6300 POS for the supermarket industry.
The U-Scan(R) Express system allows shoppers to scan, bag and pay for their
purchases with limited or no assistance from store personnel. The 6300 POS is
an open architecture, PC-based point-of-sale system designed to replace
proprietary cash registers at high volume retailers.
The U-Scan(R) Express system is currently assembled under contract by a
third party which is a full-line manufacturer of bar code reading equipment.
The U-Scan(R) Express system is marketed by the Company and sold both directly
by the Company and indirectly by two third parties under contract.
2Summary of significant accounting policies
Basis of presentation
These 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 16. The principal accounting policies of
the Company, which have been consistently applied, are summarized as follows:
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
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Principles of consolidation
These consolidated financial statements include the accounts of the Company
and its wholly owned U.S. subsidiary, Optimal Robotics, Inc., which was
incorporated on October 7, 1999. The subsidiary had no active operations during
1999.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and balances with banks
and all highly liquid debt instruments with original maturities of three months
or less.
Short-term investments
Short-term investments are carried at the lower of cost and market value.
Revenue recognition
Sales of systems are recognized upon completion of installation and customer
acceptance. Post-installation maintenance and service revenue (hardware and
software) is recognized over the term of the related agreements. Hardware sales
are recognized upon shipment of the product. Development fees related to the
Company's 6300 POS system are recognized as the services are rendered.
31
OPTIMAL ROBOTICS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For each of the years in the three-year period ended December 31, 1999
(expressed in U.S. dollars, unless otherwise noted)
Deferred share issue costs
Deferred share issue costs relate to the proposed public offering of common
shares pursuant to a registration statement which the Company expects to file
with the Securities and Exchange Commission in fiscal 2000. These costs will be
recorded as a reduction of the gross proceeds of the offering during the period
in which the common shares are issued.
Capital assets
Capital assets are recorded at cost. Amortization is provided for over the
estimated useful lives of the capital assets on a straight-line basis as
follows:
Test units and computer equipment............................ 33%
Equipment.................................................... 10%
Leasehold improvements....................................... over lease term
Patents...................................................... 5%
Foreign currency translation
Reporting currency
The functional currency of the Company is the Canadian dollar. Accordingly,
the Company's consolidated financial statements for the year ended December 31,
1999 have been translated into the reporting currency as follows: assets and
liabilities have been translated at the exchange rate in effect at the end of
the year and revenues and expenses have been translated at the average exchange
rate for the year. All gains or losses from translation of the consolidated
financial statements into the reporting currency have been included in the
cumulative translation adjustment in shareholders' equity. Changes in the
cumulative translation adjustment during the year result solely from the
application of this translation method.
The financial statements of the Company were presented in Canadian dollars
up to December 31, 1997. Effective December 31, 1998, the U.S. dollar was
adopted as the reporting currency. Comparative financial information for 1998
and 1997 has been presented in U.S. dollars in accordance with a translation of
convenience method using the representative exchange rate at December 31, 1998
of US$1.00 = Cdn$1.5333. The translated amount for non-monetary items as at
December 31, 1998 became the historical basis for those items in subsequent
years.
Foreign subsidiary
The Company's wholly owned subsidiary is considered to be integrated. As a
result, the subsidiary's accounts are translated into Canadian dollars using
the temporal method. Under this method, monetary assets and liabilities are
translated at the exchange rates in effect at the balance sheet date. Non-
monetary assets and liabilities are translated at historical rates. Revenue and
expenses are translated at the average rate for the period. Gains and losses
resulting from translation are reflected in the statement of operations.
Foreign currency transactions
Transactions denominated in foreign currencies are translated into the
functional currency using the temporal method.
32
OPTIMAL ROBOTICS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For each of the years in the three-year period ended December 31, 1999
(expressed in U.S. dollars, unless otherwise noted)
Tax credits
The Company is entitled to scientific research and experimental development
("SRED") tax credits granted by the Canadian federal government ("Federal") and
the government of the Province of Quebec ("Provincial"). Federal SRED tax
credits are earned on qualified Canadian SRED expenditures at a rate of 20%
which can only be used to offset Federal income taxes otherwise payable.
Provincial SRED tax credits are earned on qualified SRED salaries in the
Province of Quebec at a rate of 20%. These tax credits are refundable.
SRED tax credits are accounted for as a reduction of the related
expenditures. The refundable portion of SRED tax credits is recorded in the
year in which they are earned. The non-refundable portion of SRED tax credits
is recorded at such time as the Company has reasonable assurance that the
credits will be realized.
Income taxes
The Company provides for income taxes using the 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
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.
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.
Once technological feasibility has been established, development costs are
evaluated for deferral and subsequent amortization. As at December 31, 1999,
the Company has not deferred any development costs.
Inventory
Replacement parts inventory is stated at the lower of landed cost and
replacement cost. U-Scan(R) Express systems inventory is stated at the lower of
cost and net realizable value. Cost is determined on the basis of actual costs.
Stock-based compensation plan
The Company maintains a stock-based compensation plan, which is described in
note 11. Under accounting principles generally accepted in Canada, no
compensation expense is recognized for this plan when stock options or shares
are issued to employees. Any consideration received from plan participants upon
exercise of stock options is credited to capital stock.
33
OPTIMAL ROBOTICS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For each of the years in the three-year period ended December 31, 1999
(expressed in U.S. dollars, unless otherwise noted)
Earnings per share
Basic earnings (loss) per share is determined using the weighted average
number of common shares outstanding during the period.
Fully diluted earnings (loss) per share is determined using the weighted
average number of common shares and dilutive common share equivalents, such as
stock options and warrants, outstanding during the period. Earnings for the
period are increased by the estimated additional earnings, net of applicable
income taxes, on the proceeds from the exercise of dilutive common share
equivalents.
3Change in accounting policy
During 1999, the Company retroactively adopted the revised recommendations
of the Canadian Institute of Chartered Accountants regarding accounting for
income taxes. Under these revised recommendations, income taxes are now
accounted for using the liability method. These new recommendations are
consistent with those of SFAS 109 under accounting principles generally
accepted in the United States.
The adoption of these revised recommendations did not result in any changes
to prior years' earnings, shareholders' equity or cash flows. However, certain
additional disclosures have been provided. The effect of these recommendations
on the current year is the recognition of tax assets of $4,824,824 of which
approximately $3.5 million was recorded as an income tax recovery in the
consolidated statement of operations.
4Accounts receivable
1999 1998
--------- ---------
$ $
--------- ---------
Trade accounts receivable................................ 4,305,188 1,095,819
Accrued interest......................................... 176,019 35,956
Current portion of loan receivable....................... 13,592 12,853
Other.................................................... 146,767 75,088
--------- ---------
4,641,566 1,219,716
========= =========
5Inventory
1999 1998
--------- ---------
$ $
--------- ---------
Replacement parts........................................ 2,763,261 910,234
U-Scan(R) Express systems................................ 600,682 490,815
--------- ---------
3,363,943 1,401,049
========= =========
6Loans receivable
These loans are as follows:
a) To an employee to purchase common shares of the Company in the
amount of Cdn$24,391 (1998 - Cdn$27,099). This loan is non-interest
bearing and is repayable in annual instalments of Cdn$2,708 until
June 30, 2008; and
34
OPTIMAL ROBOTICS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For each of the years in the three-year period ended December 31, 1999
(expressed in U.S. dollars, unless otherwise noted)
b) To an officer/director to purchase a home in the amount of
Cdn$221,000 (1998 - Cdn$238,000). This loan is non-interest bearing
and is repayable in annual instalments of Cdn$17,000 until July 1,
2012. This loan is forgivable if the officer/director leaves the
employment of the Company for any reason.
7Capital assets
1999 1998
--------- ---------
$ $
--------- ---------
Cost
Test units............................................. 443,931 242,317
Equipment.............................................. 331,775 41,105
Leasehold improvements................................. 499,105 265,391
Leasehold improvements under construction.............. 275,862 --
Computer equipment..................................... 516,286 163,828
Patents................................................ 13,686 12,942
--------- ---------
2,080,645 725,583
--------- ---------
Accumulated amortization
Test units............................................. 268,670 143,954
Equipment.............................................. 33,322 18,314
Leasehold improvements................................. 253,756 131,242
Leasehold improvements under construction.............. -- --
Computer equipment..................................... 164,050 54,609
Patents................................................ 12,944 11,595
--------- ---------
732,742 359,714
--------- ---------
Net carrying amount...................................... 1,347,903 365,869
========= =========
8Accounts payable and accrued liabilities
1999 1998
--------- ---------
$ $
--------- ---------
Trade accounts payable................................... 2,923,123 802,653
Accrued salaries, vacation pay and benefits.............. 100,632 121,089
Outstanding cheques...................................... 635,434 309,272
--------- ---------
3,659,189 1,233,014
========= =========
9Contract advance
Pursuant to an exclusive, worldwide assembly and marketing agreement, the
Company received a non-interest-bearing advance of $500,000. On April 1, 1998,
the agreement was replaced with an exclusive assembly agreement which
terminates on December 31, 2000. The remaining balance of the advance of
$250,000 is repayable on December 31, 2000.
35
OPTIMAL ROBOTICS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For each of the years in the three-year period ended December 31, 1999
(expressed in U.S. dollars, unless otherwise noted)
10Share 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
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.
Issued
Common
Shares $
---------- ----------
Balance - December 31, 1996............................ 7,417,022 16,411,360
Cancellation of shares under Employee Stock Purchase
Arrangement.......................................... (9,000) (51,360)
Cancellation of loan receivable under Employee Stock
Purchase Arrangement................................. -- 51,360
---------- ----------
Balance - December 31, 1997............................ 7,408,022 16,411,360
Issued for cash pursuant to exercise of stock
options.............................................. 1,000 2,998
Issued pursuant to exercise of warrants............... 70,256
Ascribed value from other capital.................... 3,575
Cash................................................. 432,598
Cancellation of shares under Employee Stock Purchase
Arrangement.......................................... (4,000) (22,827)
Cancellation of loan receivable under Employee Stock
Purchase Arrangement................................. -- 22,827
---------- ----------
Balance - December 31, 1998............................ 7,475,278 16,850,531
Issued for cash pursuant to exercise of stock
options.............................................. 934,271 2,393,538
Issued pursuant to exercise of warrants............... 27,692 --
Ascribed value from other capital.................... -- 2,681
Cash................................................. -- 73,556
Issued for cash pursuant to public offering........... 3,000,000 27,000,000
Share issue costs, net of related future income
taxes................................................ -- (1,803,821)
Repayment of loans under Employee Stock Purchase
Arrangement.......................................... -- 141,348
---------- ----------
Balance - December 31, 1999............................ 11,437,241 44,657,833
========== ==========
During 1999, the Company filed a registration statement with the Securities
and Exchange Commission qualifying the issuance of 3,000,000 common shares for
gross proceeds of $9.00 per share. The net proceeds from this offering amounted
to $25,196,179, after deducting underwriting commissions and other expenses of
$1,803,821 (net of future income taxes of $989,613).
36
OPTIMAL ROBOTICS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For each of the years in the three-year period ended December 31, 1999
(expressed in U.S. dollars, unless otherwise noted)
On February 26, 1996, regulatory approval was received to issue 42,000
common shares under an Employee Stock Purchase Arrangement pursuant to which
certain employees of the Company were entitled to purchase common shares of the
Company at a price of Cdn$8.75 per share. Under the Arrangement the Company
provided interest-free non-recourse loans payable according to various
occurrences, but no later than the 10th anniversary of the issuance of the
shares, which loans were secured by a pledge of the shares. These loans
receivable have been presented as a deduction from share capital. At December
31, 1999, 24,000 common shares are issued and outstanding under this
Arrangement and all loans under the Arrangement have been repaid.
11Stock option plan/warrants
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 as permitted by securities regulatory authorities. A
maximum of 3,000,000 common shares may be issued pursuant to options granted
under this plan. Options outstanding under the plan generally expire five years
after the date of grant and vest either immediately or over a period of up to
two years.
In addition, the Company has granted options under certain employment
agreements and established certain terms for some options granted under the
1997 Stock Option Plan as follows:
a) In 1997, options to purchase 1,200,000 common shares were granted to
three senior officers. These options have an exercise price of $3.00 per
share and expire in 2002. As at December 31, 1999, options to purchase
900,000 common shares are outstanding, all of which are exercisable
(1998 - 1,200,000 outstanding, 900,000 exercisable). The employment
agreements contained the following provisions:
i) The holder was permitted to exercise the above options without
paying cash by accepting the number of sha