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, 2002
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-28572.
-------------------
OPTIMAL ROBOTICS CORP.
(Exact name of registrant as specified in its charter)
Canada 98-0160833
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
-------------------
4700 de la Savane, Suite 101, H4P 1T7
Montreal, Quebec, Canada (Postal code)
(Address of principal executive offices)
Registrant telephone number, including area code: (514) 738-8885
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of class:
Class "A" shares, no par value
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |X|.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No | |
Aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant as of June 28, 2002 (computed by reference to
the last reported sale price of the Class "A" shares on the Nasdaq Stock Market
on such date): $108,660,986. For purposes of this calculation, only executive
officers and directors are deemed to be affiliates of the registrant.
Number of Class "A" shares outstanding at March 26, 2003: 14,936,235
DOCUMENTS INCORPORATED BY REFERENCE: NONE
- -------------------
In this Form 10-K, except where otherwise indicated, references to
"dollars" or "$" are to United States dollars, references to "Cdn.$" are to
Canadian dollars, and references to our "common shares" are to our Class "A"
shares.
Item 1. BUSINESS
Company Overview
We are the leading provider of self-checkout systems to retailers in North
America. Our principal product is the U-Scan(R) automated self-checkout system,
which enables shoppers to scan, bag and pay for their purchases with little or
no assistance from store personnel. Based on estimates from our customers, we
estimate that in 2002, U-Scan systems processed over 500 million shopper
transactions. The U-Scan system can be operated quickly and easily by shoppers
and makes the checkout process more convenient for them. The U-Scan system 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.
Our Corporate Information
Our company was formed in 1984 and is incorporated under the federal laws
of Canada. We commenced our current business in 1991. Our principal office is
located at 4700 de la Savane, Suite 101, Montreal, Quebec, H4P 1T7, and our
telephone number is (514) 738-8885. We have three subsidiaries: Optimal Robotics
Inc., a wholly-owned Delaware corporation; Optimal Robotics (Canada) Corp., a
wholly-owned Canadian corporation; and Optimal Robotics Plc, a majority-owned
English corporation.
Our Industry
We have traditionally targeted supermarket and supercenter chains in the
United States, and more recently have targeted such chains in Canada, with
average annual sales per store in excess of $12.0 million. According to industry
sources, there are over 11,500 of these stores in the United States. In 2002, we
established a Business Development Group to support our efforts to expand our
self-checkout business into new markets, which include drug stores, convenience
stores (including gas station mini-marts), big box retailers (including
warehouse stores and home improvement stores), electronics stores, office
superstores, toy stores and general merchandise stores. See "Business - Sales
and Marketing," below. We also established our U.K. operations through a
majority-owned subsidiary. See "Business - Our Business Strategy," below.
Initial results from our efforts to expand into new markets foster our
belief that the potential market for self-checkout solutions includes
applications beyond supermarkets and supercenters. See "Business - Our
Customers," below. The U-Scan system, which can be quickly and easily operated,
addresses shoppers' needs in each of these markets, by providing them with
greater customer service and more control over the checkout process.
We believe that the demand for self-checkout systems will continue to grow.
In addition to providing stores with a dependable and economical alternative to
maintaining cashiers in both express and regular checkout lanes, we believe that
self-checkout systems allow large retailers to offer shoppers the speed of a
smaller, convenience store while maintaining the greater selection and lower
prices that a larger store generally offers.
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
have estimated 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.
2
Our Customers
Our most significant customers have been supermarkets and supercenters,
including the following retailers:
o The Kroger Co.
o Pathmark Stores, Inc.
o The Great Atlantic & Pacific Tea Company, Inc. (A&P)
o Loblaw Companies Limited
o Ingles Markets Incorporated
o The Schnucks Co.
o Ahold NV (which includes Bi-Lo, Tops, Giant Food and Stop & Shop in
the United States)
o Meijer, Inc.
o Price Chopper Supermarkets
o Dierbergs Markets
o Fleming Companies, Inc.
o Harris Teeter
o H.E.Butt Grocery Company
Some of these leading retailers figure prominently in the establishment of
market standards in the supermarket industry, 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 the U-Scan system.
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 purchased our systems, including in markets outside of the food
industry.
We believe that these customers have chosen to install the U-Scan
self-checkout system because it:
o 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,
o provides the shopper with more control over the checkout process,
similar to an ATM transaction,
o builds loyalty by making shopping easier and more convenient,
o addresses labor shortages in certain markets by replacing manned
checkout counters with automated self-checkout stations, and
o provides labor cost savings by allowing one employee to supervise up
to six unmanned stations.
In 2002, we established a Business Development Group to support our efforts
to expand our self-checkout business into new markets. See "Business - Our
Industry," above. Our efforts to expand into new markets have resulted in the
installation of a store evaluation system for a national drugstore chain as well
as requests for testing facility systems from a national gasoline retailer, for
use in a mini-mart environment, and from a home improvement retailer. While
there can be no assurance that any of these potential customers will determine
to
3
commit to a volume order for our U-Scan self-checkout systems, we believe
that our customers will in the future include non-food retailers.
A majority of the systems that we sold in 2002 were sold to The Kroger Co.
through its various divisions and affiliates. The loss of this customer would
have a material adverse effect upon our company.
Our Competitive Advantages
We believe that the following competitive advantages have helped us become
the leading provider of self-checkout systems to retailers in North America:
o the largest installed base of self-checkout systems in North America and
well-established relationships with leading retailers,
o an established brand name and corporate identity,
o nine years' experience and expertise in designing self-checkout
solutions for retailers,
o a focused business strategy targeting the self-checkout market,
o a senior management team and experienced sales force familiar with the
needs of retailers, and
o superior customer service through a 24 hours per day, 365 days per year
on-line helpdesk supported by a dedicated, nationwide network of service
personnel.
Our Business Strategy
Our primary objectives are to sell more U-Scan systems for installation in
additional supermarkets and supercenters, to begin selling U-Scan systems and
other self-checkout systems for installation in other kinds of stores, and to
initiate volume sales of our systems in Europe.
Key elements of our business strategy are to:
Increase Sales in Existing and New Supermarket and Supercenter Accounts. We
plan to further increase our penetration of existing customer accounts and
continue to develop new customers in North America, both through a direct sales
effort and the establishment of a third party distribution channel. Through our
United Kingdom subsidiary, we have installed an evaluation system with one of
the United Kingdom's largest regional independent co-operative societies and we
are continuing to develop opportunities in Europe.
Extend Retail Applications of Our Products and Services. In 2002, we began
installing new, lower profile, ergonomically advanced variants of our U-Scan
system. Each of these new units enables shoppers to scan, bag and pay for their
purchases with limited or no assistance from store personnel, much like the
U-Scan Express(R) system, and we believe that these new units will serve to
expand our potential customer base. These lower profile systems are being
installed in the stores of supermarket customers and should also respond to the
requirements of smaller retail environments such as drug stores and convenience
stores.
Advance Our Leadership Position Through Innovation. Based on our research
and development efforts and in response to initiatives developed by our
customers, with whom we maintain an ongoing dialogue, we continuously enhance
our self-checkout product line. We plan to continue our efforts to offer the
most advanced peripherals and further automate certain processes of the
self-checkout experience.
4
Products and Systems
U-Scan System
A U-Scan system, in a typical configuration for a supermarket or
supercenter application, consists of four self-checkout stations and one manned
supervisor terminal. Some of our customers have installed systems consisting of
up to six self-checkout stations. Each checkout station consists of the
following components linked by a PC platform:
o a bar code scanner with a scale,
o a bagging station equipped with a scale,
o a touchscreen monitor,
o an overhead video camera,
o a credit/debit terminal (with available support for signature capture
devices),
o bill and coin acceptors and dispensers, and
o a receipt printer.
The supervisor terminal consists of:
o a monitor that allows the supervisor to observe the activity at each
checkout station,
o a hand-held scanner, either wired or wireless, that enables the
supervisor to assist shoppers with large items,
o an easy-to-use touchscreen that makes it simple for the supervisor to
interact with the system, and
o a receipt printer for credit/debit transactions.
The supervisor terminal may also be configured with magnetic ink character
recognition (MICR) for check verification.
In a typical configuration, the U-Scan system occupies the same floor space
as would three manned checkout lanes. As a result, shoppers are provided with at
least one, and up to three additional checkout stations.
Operation
The U-Scan 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 the shopper scans each item, 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 system 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 system 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 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
5
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 system 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 system then prompts the shopper to select the form of payment. The
U-Scan system can accept any form of payment, either at the self-checkout
station or at the supervisor 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. The U-Scan system 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.
Security
The close proximity of the system supervisor to the U-Scan stations helps
to deter theft. Moreover, the U-Scan system 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:
o a bagging station equipped with a scale that detects any unscanned or
substituted items,
o an overhead video camera that discourages non-scanning or substitution,
and
o an integrated payment mechanism that substantially reduces the
opportunity for cashier fraud or error.
The U-Scan system 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 supervisor 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 system can also be customized to support a retailer's
electronic anti-theft system.
Customization and Flexible Technology
The U-Scan system 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 system 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 system operates on an industry-standard, PC-based platform with
the Windows NT or Windows 2000 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 system obtains
most of the information it
6
needs to operate from the store's information systems, just as cashier-operated
terminals do. A local area network links up to six checkout stations to the
supervisor terminal.
We have developed software that allows the U-Scan 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 system and a store's information systems on a real-time
basis, including such information as:
o product movement data,
o inventory management data,
o cash balance information, and
o transaction summaries.
The U-Scan 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(TM) system is an open-architecture, PC-based
point-of-sale cash register system utilizing Windows NT/95 or Novel SFTIII
mirrored servers. We offer only the system software for the Optimal 6300 POS
system.
The customer is responsible for purchasing the system hardware. The Optimal
6300 POS system communicates with a store's information systems and has been
designed for use as a conventional cash register checkout system in high-volume
retailers such as supermarkets, department stores and warehouse stores.
We were engaged by Price Chopper Supermarkets of Schenectady, New York, to
develop and install the Optimal 6300 POS system. We receive a monthly fee for
the continuing development of the system. The Optimal 6300 POS system is
presently installed in all of the over 100 Price Chopper supermarkets. The
system is also installed at Atlantic Food Mart in Reading, Massachusetts.
Sales and Marketing
We primarily market our U-Scan systems directly to customers through our
own sales personnel. As of March 26, 2003, we had nine employees dedicated to
sales and marketing.
Consistent with our strategy of increasing distribution of the U-Scan
systems, we continue to actively review and evaluate other marketing
relationships. We recently announced the signing of a letter of intent with
Fujitsu Transaction Solutions Inc. for Fujitsu to develop, market and service,
in North America, self-checkout systems that combine our U-Scan systems with
software enhancements and SmartPoS peripherals from Fujitsu. This arrangement,
if completed, would also provide for the marketing of our self-checkout systems
through Fujitsu's dealer network.
Prior to 2002, we focused our sales and marketing efforts almost
exclusively on supermarket and supercenter chains in the United States. In 2002,
we began installing our systems in Loblaws and Provigo supermarkets operated by
Loblaw Companies Limited in Canada. We also installed our first evaluation
system in the United Kingdom, in a supermarket, and our efforts to expand into
new markets resulted in the installation of a store evaluation system for a
national drugstore chain in the United States, as well as requests for testing
facility systems from a national gasoline retailer in the United States, for use
in a mini-mart environment, and from a home improvement retailer in the United
States.
Sales to a retail chain typically follow a three-step process, in which the
customer takes delivery of a single U-Scan station and a supervisor terminal in
a testing facility, then places a full system in a store for evaluation, and
finally decides whether to commit to a volume order.
7
Before delivering a U-Scan system to 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 system 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 system is delivered. 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 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.
Features that have been introduced or refined during the last 12 months
include the following:
o EAS - We have continued to refine and simplify the integration of
Electronic Article Surveillance systems with any of our U-Scan systems.
This included testing of U-Scan systems in the field, containing scanner
scales with integrated EAS capability.
o Biometrics - We have incorporated the use of biometrics for age
verification.
o C-Store kiosk unit - We have developed a smaller, cash back only, kiosk
unit for use in convenience stores.
o Supervisor terminal size - We have further reduced the size of the
supervisor terminal.
o Compact signature capture pad - We have introduced a new, compact
signature capture pad, developed according to our specifications by the
supplier of these units.
o U-Scan Mobile Attendant(TM) device - We have completed the development
of a miniature, wireless handheld unit that allows a range of supervisor
functions to be performed even when the supervisor is not standing at
the traditional supervisor terminal.
o GUI - We have developed and improved the Graphical User Interface (GUI).
o Remote update - We have developed new mechanisms for automated remote
update of the U-Scan system software.
We intend to increase research and development efforts in the following
areas:
o Developing new products and designs and extending our existing products
into additional retail applications.
o Continuing our efforts to adapt U-Scan self-checkout solutions for use
in Europe and other international markets. We have already adapted our
U-Scan self-checkout solutions for use in the United Kingdom, where a
system is installed for evaluation purposes.
o Continuing to identify and test new (intelligent) devices to increase
reliability and improve serviceability of the U-Scan system.
o Developing input and output conveyor belt options that will easily
integrate with our lower profile, smaller footprint U-Scan1, U-Scan3 and
U-Scan5 systems, which we began manufacturing in 2002. o Developing more
sophisticated and smaller security scales.
8
o Developing wireless connectivity for the system terminals.
o Developing support for alternative lane configurations, including six
lanes supervised by a single supervisor terminal.
o Researching the use of higher resolution digital cameras.
Our research and development expenses, net of tax credits, were approximately
$1,290,000 in 2002, $1,224,000 in 2001 and $913,000 in 2000.
Product Assembly
We assemble all of our systems at our Plattsburgh, New York facility. See
Item 2--"Description of Properties."
Suppliers
The U-Scan system is assembled from components that are readily available
from numerous suppliers. Given the open architecture of our system, we are not
dependent on any single supplier for any particular component. The U-Scan system
casing is specially manufactured for us by any one of three 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 system for a fee.
Software support is provided to all customers via our helpdesk on a 24
hours per day, 365 days per year basis. Our helpdesk and support personnel are
trained to diagnose software and hardware problems that may arise in the field.
Software problems are typically solved on-line, as the U-Scan system can be
accessed on-line from our premises.
Hardware support is provided by our own technicians and a small number of
independent service companies with whom we have contracted and who are certified
by us. Alternatively, U-Scan system customers can elect to have their own
facility engineering group perform hardware maintenance on the system, in which
case we train such personnel.
If there is a problem caused by a hardware malfunction, which cannot be
solved by the customer with the support of our helpdesk, or another matter
requiring personnel to be on-site, a technician is dispatched to assist the
customer. We maintain certified technicians at our headquarters in Montreal, and
in 45 states and two Canadian provinces.
Installation Personnel
It is important that our systems are able to be quickly and reliably
installed with minimal impact on store operations. Installations can be
performed by our technicians, by the customer's trained and certified employees
or by certified third party installers. When we perform this service, an
experienced technician visits the store before the delivery of the system to
coordinate all aspects of the installation. The goal is to ensure that our
systems are 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
9
of governmental regulation in all countries in which we sell and expect to sell
our products. We also voluntarily submit our products to Underwriters
Laboratories Inc., for certification for product safety, in the United States by
Underwriters Laboratories Inc., and in Canada by Underwriters' Laboratories of
Canada, which is recognized by the Standards Council of Canada.
Competition
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, PSC and
Productivity Solutions. Certain of our competitors are larger and have greater
financial, technical, and marketing resources. We believe, however, that the
U-Scan system performs more functions than any other self-checkout system for
retail use currently available on the market.
We believe that the principal criteria for competition within the
self-checkout system market are the following:
o technological capability,
o product features,
o price,
o product support,
o ease of use,
o name recognition,
o distribution channel capability, and
o financial strength of the provider.
Intellectual Property
We have registered or have filed applications for the registration of over
one dozen different trademarks in the United States, Canada and the European
Union.
We hold patents issued in the United States, Canada and certain member
states of the European Union and have additional patents pending in the United
States for various components of our system. Patents pending in the United
States may also be filed, within prescribed periods, in various member states to
the international Patent Cooperation Treaty.
As a general policy, we file patent applications, in jurisdictions where we
consider it to be appropriate, to protect our technological position and new
product development. Although we believe that our patents provide some
competitive advantage and market protection, we rely for our success primarily
upon our proprietary know-how, innovative skills, technical competence and
marketing abilities. Furthermore, there is no assurance that these patents will
not be challenged, invalidated or circumvented in the future. 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.
10
Employees
As of December 31, 2002, we employed 529 full time employees, as compared
to 502 at the end of 2001. Due to continued economic weakness throughout North
America, we reduced our total workforce in February 2003 by approximately 12%,
to approximately 470 full-time employees, in an effort to increase operating
efficiencies in each department, decrease overall general and administrative
expenses and improve financial results.
Our employees are not represented by any collective bargaining unit and we
have never experienced a work stoppage. We believe that our employee relations
are good.
Financial Information About Segments and Geographic Areas
See note 17(a) of the notes to our consolidated financial statements, which
are included in Item 8 - "Financial Statements and Supplementary Data."
Where You Can Find Additional Information
We are required to furnish to our shareholders annual reports containing
audited consolidated financial statements certified by our auditors in Canada
and quarterly reports containing unaudited financial data for the first three
quarters of each fiscal year following the end of the respective fiscal quarter.
We prepare our consolidated financial statements in accordance with accounting
principles which are generally accepted in Canada with a reconciliation to
accounting principles generally accepted in the United States.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address or telephone number:
Optimal Robotics Corp.
4700 de la Savane
Suite 101
Montreal, Quebec H4P 1T7
Attention: Secretary
(514) 738-8885
Internet Access
Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are
available free of charge on or through our website (www.optimal-robotics.com) as
soon as reasonably practicable after we electronically file the material with,
or furnish it to, the Securities and Exchange Commission.
11
Item 2. DESCRIPTION OF PROPERTIES
Facilities
Our headquarters are located in approximately 51,000 square feet of leased
space at 4700 de la Savane, Montreal, Quebec, under a lease that expires on
January 31, 2006, subject to our right to renew the lease for an additional
28-month period. Our systems are assembled in a facility located in
approximately 43,000 square feet of leased space in Plattsburgh, New York, under
a lease that expires on March 31, 2006. The Plattsburgh lease may be renewed for
an additional three-year period. We repair and distribute our replacement parts
out of a facility located in approximately 66,000 square feet of leased space in
Santa Ana, California, under a lease that expires on September 30, 2006.
We also maintain parts storage facilities in 22 states and two Canadian
provinces. Additional hub facilities may be opened and existing hub facilities
may be expanded, in the United States and Canada, to the extent required to
support current and future installations.
Item 3. LEGAL PROCEEDINGS
Legal Proceedings
In each of 1995 and 1996, we received a demand letter from the same
claimant alleging that the U-Scan system infringes upon the claimant's patent.
In July 1999, this claimant, International Automated Systems, Inc. ("IAS"),
filed a civil action in the United States District Court for the District of
Utah against us and PSC, the former assembler of the U-Scan system, alleging
patent infringement. A second party also sent a demand letter to us in 1999, and
again in February 2001, alleging a different patent infringement. Although after
consultation with counsel, we believe that the former claimant should not
prevail in its lawsuit and that the latter claimant should not prevail if a
lawsuit is brought to assert its claim, and that these claims will not have a
material adverse effect on our business or prospects, no assurance can be given
that a court will not find that the system infringes upon one or both of such
claimants' rights. A determination by a court that the system infringes upon
either of the claimant's rights would have a material adverse effect on our
business and results of operations.
A subsidiary of Kroger has also been sued by IAS in the State of Utah based
upon the same issues underlying its suit filed against us in 1999. At our
expense, our counsel is also defending the subsidiary of Kroger in such action.
Furthermore, we are contractually bound to indemnify Kroger for any damages that
it may incur in connection with such suit.
In March 2003, the claimant that sent the demand letters of 1999 and 2001,
sent a third demand letter to us alleging infringement of additional patents. We
are reviewing the claim asserted in the March 2003 demand letter with counsel.
Due to the recentness of this claim, we have not yet formed an opinion as to its
merit or materiality to our business.
We are also party to litigation arising in the normal course of operations.
We do not expect the resolution of such matters to have a materially adverse
effect on our financial position or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
Our common shares trade on the Nasdaq National Market under the symbol
"OPMR." The following table sets forth the range of high and low bid
prices for our common shares as reported by the Nasdaq Stock Market.
These quotations reflect inert-dealer prices without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
Nasdaq Stock Market
-------------------
$ High $ Low
------ -----
2002
4th Quarter............................ 7.68 5.57
3rd Quarter............................ 8.45 6.69
2nd Quarter............................ 17.50 7.29
1st Quarter............................ 36.15 13.86
2001
4th Quarter............................ 37.77 18.47
3rd Quarter............................ 53.48 24.50
2nd Quarter............................ 38.15 23.19
1st Quarter............................ 38.38 25.56
(b) Holders
At March 26, 2003, there were 1,841 stockholders of record of our
common shares.
(c) Dividends
Our policy is to retain all earnings, if any are realized, for the
development and growth of our business. We have never declared or paid cash
dividends on our common shares and we do not anticipate paying cash dividends in
the foreseeable future. Any determination to pay dividends will be at the
discretion of our Board of Directors and will depend upon our financial
condition, results of operations, capital requirements, limitations contained in
loan agreements, if any, and such other factors as our Board of Directors deems
relevant.
Item 6. SELECTED FINANCIAL AND OTHER DATA
The following selected financial data as of December 31, 2002 and 2001 and
for the years ended December 31, 2002, 2001 and 2000 are derived from and are
qualified by reference to our audited consolidated financial statements, which
are included in Item 8--"Financial Statements and Supplementary Data." The
following selected financial data as of December 31, 2000, 1999 and 1998 and for
the years ended December 31, 1999 and 1998 are derived from our audited
financial statements, which are not included herein. Effective December 31,
1998, we adopted the U.S. dollar as the reporting currency for our financial
statements, and so our audited financial statements for the year ended December
31, 1998 have been restated for this change in reporting currency. The financial
data for all periods prior to 1999, for Canadian generally accepted accounting
principle ("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(k) of the notes to our
consolidated financial statements, which are 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," our consolidated
financial statements, the related notes and the other financial information
included elsewhere in this Form 10-K.
13
Our consolidated financial statements are prepared on the basis of Canadian
GAAP, which is different in some regards from U.S. GAAP. For a description of
the material differences between Canadian GAAP and U.S. GAAP in regard to our
consolidated financial statements, see note 20 of the notes to our consolidated
financial statements, which are included in Item 8--"Financial Statements and
Supplementary Data."
Year ended December 31,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(U.S. dollars, in thousands except per share data)
Income Statement Data:
Revenues...................................................... $ 75,718 $101,421 $ 60,971 $ 29,634 $ 5,618
Cost of sales................................................. 50,262 63,159 45,558 23,457 5,135
-------- -------- -------- -------- --------
Gross margin.................................................. 25,456 38,262 15,413 6,177 483
Selling, general, administrative and other expenses........... 33,212 21,280 10,629 6,126 4,633
Research and development expenses, net of tax credits......... 1,290 1,224 913 220 210
Closure costs................................................. 1,039 -- -- -- --
Write-down of inventory....................................... -- -- -- 604 --
Investment income............................................. (1,817) (3,148) (3,896) (893) (449)
-------- -------- -------- -------- --------
(Loss) earnings before income taxes........................... (8,268) 18,906 7,767 120 (3,911)
(2,941) 9,600 2,972 (3,532) --
-------- -------- -------- -------- --------
Net (loss) earnings........................................... $ (5,327) $ 9,306 $ 4,795 $ 3,652 $ (3,911)
======== ======= ======== ======== ========
Weighted average number of common shares outstanding
(thousands)................................................ 15,059 14,705 13,104 9,699 7,464
Weighted average diluted number of common shares
outstanding (thousands) (1)................................ 15,101 15,573 14,499 10,929 7,464
Basic net (loss) earnings per common share (2)................ $ (0.35) $ 0.63 $ 0.37 $ 0.38 $ (0.52)
======== ======== ======== ======== ========
Diluted net (loss) earnings per common share (1)(2)........... $ (0.35) $ 0.60 $ 0.33 $ 0.33 $ (0.52)
======== ======== ======== ======== ========
Balance Sheet Data: December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(U.S. dollars, in thousands)
Cash, cash equivalents and short-term investments............. $ 85,762 $104,104 $ 76,149 $ 29,136 $ 6,063
Working capital............................................... 108,650 124,550 100,030 36,032 7,319
Total assets.................................................. 129,691 147,691 111,273 44,206 9,329
Shareholders' equity.......................................... 119,461 133,473 104,746 39,705 7,596
U.S. GAAP Financial Data: 31, Year ended December 31,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(U.S. dollars, in thousands except per share data)
Revenues...................................................... $ 75,718 $101,421 $ 60,971 $ 29,634 $ 5,618
Net earnings (loss)........................................... 4,451 (23,294) (14,105) (5,575) (16,403)
Basic net earnings (loss) per common share.................... 0.30 (1.58) (1.08) (0.57) (2.20)
Diluted net earnings (loss) per common share.................. 0.29 (1.58) (1.08) (0.57) (2.20)
Year ended December 31,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(U.S. dollars, in thousands)
Total assets.......................................... $129,691 $147,691 $111,273 $ 44,191 $ 9,312
(1) In 2001, we adopted the new recommendations of the Canadian Institute of
Chartered Accountants with respect to the calculation of diluted earnings
per share, which requires the use of the treasury stock method. The new
recommendations have been applied retroactively and accordingly, all
figures presented for the periods prior to 2001 have been adjusted to
conform to the new recommendations. See note 2(n) of the notes to our
consolidated financial statements, which are included in Item 8 "Financial
Statements and Supplementary Data."
(2) See note 16 of the notes to our consolidated financial statements, which
are included in Item 8 "Financial Statements and Supplementary Data," for
supplementary measure of net earnings per share.
14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of our company should be read in conjunction with our consolidated
financial statements for the years ended December 31, 2002, 2001 and 2000, which
are included in Item 8--"Financial Statements and Supplementary Data", and the
factors set forth below under "Forward-Looking Statements." All dollar amounts,
other than those expressed in millions of dollars, have been rounded to the
nearest thousand.
Overview
We are the leading provider of self-checkout systems to retailers in North
America. Our principal product is the U-Scan automated self-checkout system,
which enables shoppers to scan, bag and pay for their purchases with little or
no assistance from store personnel.
In 2002, we established a Business Development Group to support our efforts
to expand our self-checkout business into new markets, which include drug
stores, convenience stores (including gas station mini-marts), big box retailers
(including warehouse stores and home improvement stores), electronics stores,
office superstores, toy stores and general merchandise stores. Initial results
from our efforts to expand into new markets foster our belief that the potential
market for self-checkout solutions includes applications beyond supermarkets and
supercenters.
We prepare our consolidated financial statements in accordance with
Canadian GAAP, with a reconciliation to United States GAAP, as disclosed in note
20 of the notes to our consolidated financial statements, which are included in
Item 8--"Financial Statements and Supplementary Data."
Seasonality
Our revenue and gross margins vary from quarter to quarter as a result of
the level of business volumes and seasonality of demand.
Our contracts with key customers generally provide a framework for the
overall relationship with the customer. Actual production volumes are based on
purchase orders for the delivery of systems. We minimize risk relative to our
production inventory, which comprised 19.7% of our total inventory as at
December 31, 2002, by ordering materials and components mainly to the extent
necessary to satisfy customer orders.
Our annual and quarterly operating results are primarily affected by the
level and timing of customer orders. Historically, we have experienced seasonal
variation in revenue, with revenue typically being highest in the second and
third quarters and lowest in the first and fourth quarters.
Trends in our revenues and cost of sales
Service revenue accounted for approximately 21% of our total revenues in
2002, as compared to approximately 9.9% for 2001. The increase of service
revenue as a percentage of total revenues resulted in a decrease in our overall
gross margins in 2002.
We are witnessing increased competition in the food retailing industry
among traditional supermarket chains and low-cost supercenter operators. This
competition is putting pressure on the profitability and performance of some of
our core customers, which could lead to continuing reluctance on their part to
spend on capital, if and when general economic conditions in North America
improve.
Gross margins on the sale of U-Scan systems in 2003 are expected to remain
consistent with gross margins realized in 2002. Gross margins on service
contracts are expected to increase during 2003 as a result of leveraging within
our customer base.
15
We continue to focus on taking advantage of economies of scale and reducing
the costs of installing and servicing our systems. One of the primary
responsibilities of our purchasing department is the sourcing of new suppliers
and obtaining the best possible component prices. As a result of these
cost-cutting initiatives, we achieved a reduction in some of our component costs
in 2002. In addition, during the course of the year, we transitioned from using
third party support providers to mainly using our own technicians, to provide
service under our after-sales maintenance contracts, which we expect will result
in a significant reduction in the costs of providing this service.
We continue to make investments in certain areas of our infrastructure to
support our plan to further increase our penetration of existing customer
accounts and sell to new customers.
On February 27, 2003 we reduced our workforce by approximately 12% in an
effort to increase operating efficiencies in each department, decrease overall
general and administrative expenses and improve financial results. We expect
this employment reduction to produce annualized cost savings of approximately
$3.0 million.
Acquisition of Alpha Microsystems
On May 29, 2001, we acquired certain assets and the ongoing business of
Alpha Microsystems, LLC ("Alpha"), based in Santa Ana, California, for a total
purchase price of approximately $6.8 million, of which $5.7 million was paid by
the assumption of liabilities and $1.1 million was paid in cash. The acquired
assets formed the basis for the Optimal Systems Services division of our
company. Optimal System Services performs installation and on-site service
support for the U-Scan systems as well as computer hardware maintenance support
for third party accounts. See note 3 of the notes to our consolidated financial
statements, which are included in Item 8--"Financial Statements and
Supplementary Data."
Critical accounting policies
The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with Canadian GAAP. On an ongoing basis, we evaluate our
estimates, including those related to bad debts, inventories, investments,
intangible assets, income taxes, and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
A critical accounting policy is one that is important to the understanding
of a company's financial condition and results of operations and requires the
management of the company to exercise judgment or make estimates. We believe the
following are the critical accounting policies used in the preparation of our
consolidated financial statements:
o Revenue Recognition: Approximately 80% of our revenues are derived
from the sale of our U-Scan systems. Revenue from these product sales is
recognized upon shipment, delivery or upon customer acceptance of the
product, based upon the terms as defined in the customer contract. In
general, sales to a retail chain follow a three-step process, in which the
customer takes delivery of a single U-Scan station for testing purposes,
then places a full system in a store for evaluation and finally decides
whether to commit to a volume order. No revenue is recognized for a new
customer until the customization and integration process is complete and
accepted by the customer. Installation service revenue, which is billed
separately from product sales, is recognized at the time the service has
been provided to the customer. Installations can be performed by our
technicians, by the customer's trained and certified employees, or by
certified third party installers. Revenue from maintenance, which is
subject to separate service and support contracts, is deferred and
amortized ratably over the term of the contract.
o Inventories: Raw material inventory is stated at the lower of landed
cost or replacement cost. Finished goods and work in process inventory are
stated at the lower of cost or net realizable value. Cost is determined on
the basis of weighted average costs.
16
In order to provide maintenance and repair services to our customers, we
are required to maintain significant levels of replacement parts. Parts are
stated at cost, less an allowance for obsolescence and shrinkage. The costs
of refurbishing parts are included in the cost of sales as incurred.
Periodic revisions to allowance estimates are required, based upon the
evaluation of several factors, including changes in estimated product life
cycles, usage levels, and technological changes. Changes in these estimates
are reflected immediately in income. Management bases its allowance
estimates on the expected service life of replacement parts and its
expectation as to parts obsolescence.
Supplementary measure of net earnings
The Company's tax provision includes the effect of future taxes on
unrealized foreign exchange gains and losses, which arise on the conversion of
short-term investments and other monetary assets and liabilities into Canadian
dollars for purposes of determining taxable income under Canadian income tax
regulations. Because the U.S. dollar is our measurement currency and our
consolidated financial statements are presented in U.S. dollars, these foreign
exchange gains/losses do not impact earnings before income taxes even though the
income tax provision includes a net tax liability for these gains/losses. In
2002, our tax provision includes a future tax recovery of $178,000 related to
unrealized foreign exchange gains compared to a charge of $2,173,000 for 2001.
To illustrate the impact of the foreign exchange gains/losses, management has
also included in this discussion a supplementary measure of net earnings as a
measure of its operating performance, which excludes the effects of future
income taxes on unrealized foreign exchange gains/losses. Supplementary net
earnings is not a measure of performance under Canadian GAAP or U.S. GAAP and
should not be considered in isolation or as a substitute for net earnings
prepared in accordance with Canadian GAAP or U.S. GAAP. See note 16 of the notes
to our consolidated financial statements, which are included in Item
8--"Financial Statements and Supplementary Data."
Functional currency
During the third quarter of fiscal 2000, we determined that our functional
currency had clearly changed from the Canadian dollar to the U.S. dollar as at
the beginning of the quarter. As a result of this change, which has been applied
prospectively from July 1, 2000, transactions denominated in currencies other
than the U.S. dollar are translated into U.S. dollars using the temporal method.
Under this method, monetary assets and liabilities are translated into U.S.
dollars at the exchange rate in effect on the balance sheet date. Non-monetary
assets and liabilities are translated into U.S. dollars at historical exchange
rates. Revenues and expenses are translated into U.S. dollars at the exchange
rates prevailing at the dates of the respective transactions. Translation gains
and losses are reflected in the statement of operations.
Prior to July 1, 2000, our functional currency was the Canadian dollar.
Accordingly, the financial statements were translated from Canadian dollars into
U.S. dollars using the current rate method. Gains and losses resulting from
translation of the financial statements were included in the cumulative
translation adjustment in shareholders' equity. The translated amounts for the
non-monetary items as at June 30, 2000 become the historical basis for those
items in subsequent periods. With the adoption of the U.S. dollar as our
functional currency on July 1, 2000, the amount of the cumulative translation
adjustment became fixed.
Goodwill and other intangible assets
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
141, "Business Combinations" and SFAS 142 "Goodwill and Other Intangible
Assets". SFAS 141, which replaces APB Opinion No. 16, revises the accounting
standards for business combinations and is effective for acquisitions initiated
after June 30, 2001. SFAS 142, which replaces APB Opinion No. 17, revises the
standards in accounting for goodwill and other intangibles and is effective for
fiscal years beginning after December 15, 2001. Similar standards have been
adopted by the Canadian Institute of Chartered Accountants (the "CICA").
Effective for our fiscal year beginning January 1, 2002, SFAS 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach, with the effect that goodwill and other intangibles determined to have
an indefinite life are no longer to be amortized but are to be tested for
impairment at least annually. In addition, SFAS 142 requires acquired intangible
assets to be separately recognized if the benefit of
17
the intangible assets is obtained through contractual or other legal right, or
if the intangible assets can be sold, transferred, licensed, rented or
exchanged.
As of December 31, 2002, we had unamortized goodwill in the amount of
approximately $3.0 million, and unamortized identifiable intangible assets in
the amount of approximately $1.4 million, all of which were subject to the
transition provisions of SFAS 141 and SFAS 142. The Company did not record an
amortization of goodwill for the year ended December 31, 2002. Goodwill was
tested for impairment during the first quarter of fiscal 2002. The fair value of
the Alpha business, which was acquired during the second quarter of fiscal 2001
and from which the goodwill arose, was estimated using the expected present
value of future cash flows. See "Overview - Acquisition of Alpha Microsystems,"
above. We consider that there was no impairment in the carrying value of
goodwill. Amortization expense related to goodwill was $142,000 for the year
ended December 31, 2001.
Financial Condition
Our cash and short-term investment portfolio amounted to $85,762,000 as at
December 31, 2002, compared to $104,104,000 as at December 31, 2001. The
decrease relates primarily to the following: cash used in operations of
$5,929,000, the repurchase of common shares by our company of $8,684,000, the
purchase of property and equipment of $3,084,000 and patent costs of $645,000.
Our portfolio of short-term investments consists of short-term discounted notes
with a weighted average effective yield of 1.56%. Our investments are liquid and
investment grade. The portfolio is invested in U.S. and Canadian dollar
denominated securities, which are short-term to minimize interest rate risk.
Our inventory position at year-end was $22,657,000, increased from
$22,355,000 at the end of 2001. The year-end inventory position included
$1,648,000 of finished goods and $356,000 of work in process, compared to
$2,779,000 of finished goods and $542,000 of work in process at the end of 2001.
In addition, included in the inventory were raw materials and replacement parts
amounting to $4,469,000 and $16,185,000, respectively, for 2002 and $6,970,000
and $12,065,000, respectively, for 2001. The replacement parts inventory
increased in order to service additional systems sold during the year and to
support our U-Scan1, U-Scan3 and U-Scan5 next generation systems. We believe,
considering our current installed base and our anticipated sales for 2003, that
this level of replacement parts is appropriate for the current servicing and
support of our customers.
We have no long-term debt. Shareholders' equity as at December 31, 2002 was
$119,461,000 as compared to $133,473,000 as at December 31, 2001.
We will continue to evaluate areas in which to invest further, such as
sales, marketing and product support infrastructure. We will continue to
increase our research and development spending on new technologies.
Share Repurchase Program
Pursuant to a 12-month share repurchase program which terminated on March
4, 2003, we repurchased 535,100 of our common shares for total consideration of
$8,684,330. See note 10 of the notes to our consolidated financial statements,
which are included in Item 8- "Financial Statements and Supplementary Data."
Quarterly Results
The following table sets forth certain summarized unaudited quarterly
financial data for the periods presented. The financial data has been derived
from unaudited financial statements that, in the opinion of management, reflect
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of such quarterly data. The operating results for any
quarter are not necessarily indicative of the results to be expected for any
future period.
The unaudited financial statements are prepared on the basis of Canadian
GAAP, which is different in some regards from U.S. GAAP. For a description of
the material differences between Canadian GAAP and U.S. GAAP in regard to our
consolidated financial statements, see note 20 of the notes to our consolidated
financial statements, which are included in Item 8--"Financial Statements and
Supplementary Data."
18
For the quarter ended
------------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2002 2002 2002 2002 2001 2001 2001 2001
---- ---- ---- ---- ---- ---- ---- ----
(U.S. dollars, in thousands except per share data)
(unaudited)
Revenues .......................... $ 14,410 $ 21,390 $ 19,544 $ 20,374 $ 16,971 $ 33,757 $ 31,085 $ 19,608
Cost of sales ..................... 10,021 14,266 13,057 12,918 10,836 20,718 19,334 12,271
-------- -------- -------- -------- -------- -------- -------- --------
Gross margin ...................... 4,389 7,124 6,487 7,456 6,135 13,039 11,751 7,337
-------- -------- -------- -------- -------- -------- -------- --------
(Loss) earnings before income taxes (5,950) (785) (1,755) 222 15 7,809 6,940 4,142
(Recovery of) provision for
income taxes ................. (1,986) 616 (1,687) 116 2,028 3,258 2,692 1,622
-------- -------- -------- -------- -------- -------- -------- --------
Net (loss) earnings ............... $ (3,964) $ (1,401) $ (68) $ 106 $ (2,012) $ 4,551 $ 4,248 $ 2,520
======== ======== ======== ======== ======== ======== ======== ========
Basic net (loss) earnings per
common share ................... $ (0.27) $ (0.09) $ 0.00 $ 0.01 $ (0.13) $ 0.30 $ 0.30 $ 0.18
Diluted net (loss) earnings
per common share ............... $ (0.27) $ (0.09) $ 0.00 $ 0.01 $ (0.13) $ 0.28 $ 0.28 $ 0.17
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,
2002 2002 2002 2002 2001 2001 2001 2001
---- ---- ---- ---- ---- ---- ---- ----
(unaudited)
Revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 69.5 66.7 66.8 63.4 63.9 61.4 62.2 62.6
------ ------ ------ ------ ------ ------ ------ ------
Gross margin....................... 30.5 33.3 33.2 36.6 36.1 38.6 37.8 37.4
------ ------ ------ ------ ------ ------ ------ ------
(Loss) earnings before
income taxes......... (41.3) (3.7) (9.0) 1.1 0.0 23.1 22.3 21.1
(Recovery of) provision for
income taxes................. (13.8) 2.8 (8.6) 0.6 11.9 9.7 8.7 8.2
------ ------ ------ ------ ------ ------ ------ ------
Net (loss) earnings........ (27.5)% (6.5)% (0.4)% 0.5% (11.9)% 13.4% 13.6% 12.9%
====== ====== ====== ====== ======= ====== ====== ======
Results of Operations
2002 Compared with 2001
Total revenues decreased by $25,703,000, or 25%, from 2001 to 2002. Sales
of our U-Scan systems declined by $31,220,000, or 34%, from 2001 to 2002. The
decline in sales was due to a significant decrease in orders from existing
customers compounded by reluctance of major retailers to spend on capital, as a
result of the continued economic weakness throughout North America. Service
contract revenue recognized for hardware and software maintenance increased by
$5,517,000, or 55%, from 2001 to 2002, in part because of the increased number
of customers that entered into service contracts with us after purchasing U-Scan
systems. In total, service revenue accounted for approximately 21% of our total
revenues in 2002 as compared to approximately 9.9% in 2001.
Cost of sales decreased by $12,897,000, or 20%, from 2001 to 2002. Overall
gross margin decreased as a percentage of sales from 38% in 2001 to 34% in 2002,
primarily due to the increased percentage of service contract revenue in 2002
compared to 2001, which generated a lower gross margin compared to the gross
margin generated by system sales.
Gross research and development expenses increased by $122,000, or 6%, from
2001 to 2002. As a percentage of total revenues, gross research and development
expenses increased from 2% in 2001 to 3% in 2002. Research and development
expenses during the year included the continuing development costs of the U-Scan
Mobile Attendant(TM) device; the integration of an electronic signature capture
interface and process; the integration of a biometric access interface and
process; a lower profile, smaller footprint U-Scan system; and the improvement
of the graphical user interface (GUI).
19
During the fourth quarter of 2002, we closed our assembly facility in
Phoenix, Arizona and a support hub in Covington, Kentucky, in an effort to
consolidate operations. The costs incurred as a result of these closures, in the
approximate amount of $1,039,000, related mainly to lease costs, severance
costs, and the write down of inventories and leasehold improvements. As at
December 31, 2002, a provision of $288,000 relating to future lease obligations
is included in accounts payable and accrued liabilities in the consolidated
balance sheet. We expect these closures to produce an annualized cost savings of
approximately $1.4 million.
Selling, general, administrative and other expenses (including operating
lease expenses) increased by $11,932,108, or 56%, from 2001 to 2002. As a
percentage of total revenues, these expenses increased from 19% to 40%. The
increase in selling, general, administrative and other expenses in 2002 was
primarily due to the hiring of additional sales and business development people;
expansion of our service organization as a result of our increased number of
system installations; the cost of hiring and training service technicians as a
result of the termination of third party support providers; the design of our
U-Scan1, U-Scan2 and U-Scan3 next generation of systems, along with the training
of our technicians and customers for these systems; marketing and trade show
expenses; and the establishment of Optimal Robotics Plc, our U.K. subsidiary.
Other expenses incurred include the migration and upgrade of our computer
systems as well as the standardization of software for a major customer in order
to consolidate the number of versions required to run its self-checkout systems.
The recovery of income taxes amounted to $2,941,000 in 2002 as compared to
a tax provision of $9,600,000 in 2001. The 2002 amount included the recovery of
tax from losses carried back to prior years, as well as the future benefit of
the remaining non-capital losses carry forward, undeducted research and
development expenditures and other temporary differences that may be used to
reduce taxable income for Canadian federal and Quebec provincial income tax
purposes in future years. With respect to the future income tax assets recorded
as at December 31, 2002, we determined that it is more likely than not that we
will earn sufficient taxable income during the allowable carry-forward period to
fully realize all of our future income tax assets. Our ability to ultimately
realize these future income tax assets is dependent upon our realizing certain
sales levels within the allowable carry-forward period, thus creating sufficient
taxable income to realize the benefit of these assets. Our ability to realize
these assets is also dependent on effective control over our selling, general
and administrative expenses.
Our effective tax rate for 2002 was 35%, as compared to 51% for 2001. In
2001, we recognized Canadian income taxes on foreign exchange gains in the
amount of approximately $2.2 million. Because our consolidated financial
statements are presented in U.S. dollars, the foreign exchange gains, which for
Canadian income tax purposes arise on the conversion into Canadian dollars of
our net monetary assets denominated in U.S. dollars, create a tax liability even
though foreign exchange gains do not impact our earnings before income taxes.
Excluding the effect of Canadian income taxes on these foreign exchange gains,
the effective tax rate in 2001 would have been 39%, instead of 51%. In 2002, we
recognized a tax recovery of $178,000 on these foreign exchange items.
The net loss in 2002 was $5,327,000 (or $(0.35) per share (diluted)),
compared to net earnings of $9,306,000 in 2001 (or $0.60 per share (diluted)).
As a measure of our financial performance, management uses supplementary net
earnings/loss of operating performance. Supplementary net (loss) earnings
exclude the effect of future income taxes on unrealized foreign exchange
gains/losses, as discussed in note 16 of the notes to our consolidated financial
statements, which are included in Item 8--"Financial Statements and
Supplementary Data." Excluding the future income taxes on foreign exchange
gains, supplementary measure of net (loss) earnings was $(5,505,000) for 2002,
compared to $11,479,000 for 2001. On a per-share basis, the supplementary
measure of net earnings was $(0.37) basic and diluted for 2002, as compared to
$0.78 (basic) and $0.74 (diluted) for 2001.
2001 Compared with 2000
Total revenues increased by $40,451,000, or 66%, from 2000 to 2001. Sales
of our U-Scan systems produced $33,512,000 of additional systems revenues, an
increase of 58%. The growth in sales was due to a significant increase in orders
from existing customers as well as new customers. Service contract revenue
recognized for hardware and software maintenance increased by $6,682,000, or
198%, in part because of the increased number of customers that entered into
service contracts with us after purchasing U-Scan systems and in part due to our
decision in the third quarter of 2001 to service an increased number of
maintenance contracts
20
using our own technicians rather than third party support providers. In total,
service revenue accounted for approximately 9.9% of our total revenues in 2001
compared to approximately 5.5% in 2000.
Cost of sales increased by $17,601,000, or 39%, from 2000 to 2001. Overall
gross margin increased as a percentage of sales from 25% in 2000 to 38% in 2001,
primarily due to the increase in gross margin on system sales. This margin
increase resulted primarily from the fact that commencing January 1, 2001 we
began to assemble all of our U-Scan systems.
Gross research and development expenses increased by $966,000, or 91%, from
2000 to 2001. As a percentage of total revenues, gross research and development
expenses remained constant at 2% for both 2000 and 2001. Research and
development expenses during the year included the cost of the U-Scan Mobile
Attendant device; the development of an electronic signature capture interface
and process; a paging feature; a lower profile, smaller footprint U-Scan system;
and the improvement of the graphical user interface (GUI).
Selling, general, administrative and other expenses (including operating
lease expenses) increased by $10,651,000, or 100%, in 2001 compared to 2000. As
a percentage of total revenues, these expenses increased from 16% to 19%. The
increase in selling, general, administrative and other expenses in 2001 was
primarily due to increased investment in sales and marketing, support and
administrative staff required to service the increased customer base and
strategic acquisitions.
The provision for income taxes amounted to $9,600,000 in 2001 as compared
to $2,972,000 in 2000. We utilized all unclaimed scientific research and
experimental development expenditures and federal investment tax credits carried
forward to reduce our cash taxes payable for 2001.
Our effective tax rate for 2001 was 51% as compared to 38% for 2000. The
increase was due to Canadian income taxes recognized on foreign exchange gains
in the amount of approximately $2.2 million. Because our consolidated financial
statements are presented in U.S. dollars, the foreign exchange gains which, for
Canadian income tax purposes, arise on the conversion into Canadian dollars of
our net monetary assets denominated in U.S. dollars create a tax liability even
though foreign exchange gains do not impact our earnings before income taxes.
Excluding the effect of Canadian income taxes on these foreign exchange gains,
the effective tax rate in 2001 would have been 39%, instead of 51%.
Net earnings in 2001 were $9,306,000 (or $0.60 per share (diluted)),
compared to $4,795,000 in 2000 (or $0.33 per share (diluted)), an increase of
94%. As a measure of our financial performance, management uses supplementary
net earnings as a measure of operating performance. Supplementary net earnings
exclude the effect of future income taxes on unrealized foreign exchange gains,
as discussed in note 16 of the notes to our consolidated financial statements,
which are included in Item 8--"Financial Statements and Supplementary Data."
Excluding the income taxes on the foreign exchange gains, supplementary measure
of net earnings is $11,479,000 for 2001, an increase of 139% from $4,795,000 for
2000. On a per-share basis, the supplementary measure of net earnings is $0.78
(basic) and $0.74 (diluted) for 2001, as compared to $0.37 (basic) and $0.33
(diluted) for 2000.
Liquidity and Capital Resources
As of December 31, 2002, we had cash, cash equivalents and short-term
investments of $85,762,000, compared to $104,104,000 as of December 31, 2001,
and working capital of $108,650,000, compared to $124,550,000 as of December 31,
2001.
Operating activities used $5,929,000 of cash and cash equivalents in 2002,
as compared to having generated $13,678,000 in 2001. In 2002, the Company
repurchased 535,100 common shares for a total amount of $8,684,000. In 2001, we
issued 1,762,645 common shares pursuant to the exercise of options and warrants,
which resulted in net cash proceeds of $19,421,000.
In 2002, we had capital expenditures of $3,084,000, which principally
related to computer equipment, testing units and leasehold improvements related
to the expansion of our facility in Santa Ana, California.
21
We believe that our cash, cash equivalents and short-term investments will
be adequate to meet our needs for at least the next 12 months.
We have no financial obligations of significance other than long-term lease
commitments for our premises in the United States and Canada. These are
summarized in note 12(a) of the notes to our consolidated financial statements,
which are included in Item 8--"Financial Statements and Supplementary Data."
The timing of our contractual commitments during the next five years,
related to our operating leases, is as follows:
- ---------------------- ------------- --------------- --------------- --------------- -------------- --------------
Contractual Cash
Obligations Total 2003 2004 2005 2006 2007
- ---------------------- ------------- --------------- --------------- --------------- -------------- --------------
Operating Leases $3,652,000 $1,084,000 $1,023,000 $1,024,000 $511,000 $10,000
- ---------------------- ------------- --------------- --------------- --------------- -------------- --------------
Forward-Looking Statements
This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. Words such as "expects", "intends",
"anticipates", "plans", "believes", "seeks", "estimates", or variations of such
words and similar expressions are intended to identify such forward-looking
statements. Investors are cautioned that all forward-looking statements involve
risk and uncertainty. Although we believe that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Form 10-K will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation of our company or any other person
that the objectives and plans of our company will be achieved.
The following factors are not intended to represent a complete list of the
general or specific factors that may affect us. It should be recognized that
other factors, including general economic factors and business strategies, may
be significant, presently or in the future, and the factors discussed below may
affect us to a greater extent than indicated. All forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements set forth herein. Except as required
by law, we undertake no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise.
WE PRINCIPALLY DEPEND ON ONE LINE OF PRODUCTS. Our short-term success
depends principally on the sales volume of one line of products, the U-Scan
self-checkout system. Our longer-term success depends upon the continued
acceptance of and demand for this one product line, as well as new products that
we may bring to market. If the U-Scan systems experience significant problems,
competition from superior technology, or customer resistance, we could be harmed
significantly.
Sales growth will depend on our generating additional orders from existing
U-Scan system customers, as well as finding new customers for the system. We
believe that our customers will only purchase the system if they conclude that
shoppers will use it and that there are financial benefits to their stores from
its installation. We believe that shoppers will use the system only if it is
convenient, easy to use and reliable.
WE RELIED ON ONE CUSTOMER FOR A SUBSTANTIAL AMOUNT OF OUR REVENUES IN 2002.
One significant customer, through its various divisions and affiliates,
accounted for approximately 44% of our revenues in 2002, and we rely on this
customer's continued willingness to purchase our U-Scan systems. We may not be
able to generate new customers for our U-Scan systems.
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH. Prior to 2002, we experienced
significant growth in sales. As a result, we had to hire and train additional
skilled personnel. Due to the continued economic weakness throughout North
America, in February 2003 we reduced our workforce by approximately 12%. Should
sales increase, we will again have to hire and train more personnel to
customize, install and
22
support our U-Scan systems. There is no assurance that we will be able to hire
the skilled personnel we will need to meet increased demand, should it develop.
If we are unable to hire such personnel, our sales may be adversely affected.
Despite the growth that we experienced prior to 2002, we are still a small
company, and should demand for our products be unexpectedly strong, we may be
unable to fill our orders.
WE RELY ON THIRD PARTY SUPPLIERS. The U-Scan system is assembled from
components that are readily available from numerous suppliers. Although we may
use a single supplier for particular components, given the open architecture of
our system, we are not dependent on any single supplier for any particular
component. Nevertheless, should any of our suppliers fail to deliver components
to us in a timely manner, it could disrupt our business.
OUR U-SCAN SYSTEMS ARE ASSEMBLED AT A SINGLE FACILITY. We assemble our
systems at our facility in Plattsburgh, New York. A disruption of operations at
this facility for any reason, including labor unrest or natural disaster, would
have a short-term adverse effect upon our business and results of operations.
WE MAY NOT BE ABLE TO KEEP PACE WITH CHANGES IN TECHNOLOGY. The
self-checkout industry is rapidly developing. The technology used by the U-Scan
system is changing rapidly, in part due to the evolving demands of our
customers. To be successful, we will have to anticipate the demands of our
customers and improve our existing product line and develop new products to
satisfy them. If we fail to improve and develop products by the times and at the
prices demanded by our customers, our business and prospects may be adversely
affected. Our competitors may introduce new technology that is better than ours.
If so, we will have to improve our technology in order to remain competitive. If
we are unable to do so, there might be an adverse impact on us.
WE DEPEND UPON KEY PERSONNEL. Our future success depends to a great extent
on the continued services of our senior management and other key personnel,
including sales and business development people. Our success will also depend
upon our ability to hire and retain qualified personnel to assemble, install and
support our systems, to improve our existing products and to develop new ones.
These people will include:
o programmers and other software engineers,
o project managers,
o installers, and
o hardware and software support personnel.
The competition for these people may be significant, despite current
economic conditions. Should we have difficulty hiring or retaining qualified
personnel, it could adversely affect our business and prospects.
COMPETITION COULD REDUCE REVENUE FROM THE U-SCAN SYSTEM. The market for
checkout systems is very competitive. The chief rival for our U-Scan system is
the traditional manned checkout counter. Although the use of automated
self-checkout systems such as the U-Scan system is relatively new, we expect
increasing competition for sales of this product. The barriers to entering this
market may be low. Certain of our competitors are larger and have greater
financial and other resources. Competitors include NCR, Symbol Technologies, PSC
and Productivity Solutions. We may not be able to compete successfully against
these and other companies with greater financial and other resources. In the
event that general economic conditions continue to result in reduced demand in
our industry, our competitors could develop more aggressive pricing practices,
which, in turn, could result in price reductions, negatively affecting our
operating results, reducing our profit margins and potentially leading to a loss
of market share.
OUR PRODUCTS MAY CONTAIN DEFECTS. Our products, including the U-Scan
system, are complex and, despite extensive testing, may contain undetected flaws
when first installed for a new customer. This is particularly true of the
software in the U-Scan system, which must be adapted to each customer's
information systems. If serious, any such flaws could prevent or delay market
acceptance of our products and cause us to incur substantial re-engineering
expenses.
THE ADVERSE RESOLUTION OF LITIGATION AGAINST US COULD ADVERSELY IMPACT OUR
BUSINESS. We are currently a defendant in an action alleging that the U-Scan
system infringes upon the
23
claimant's patent, and a second party has sent demand letters to us alleging a
different patent infringement. See Item 3 - "Legal Proceedings." We are and may
in the future be subject to other litigation arising in the normal course of our
business. Litigation may be time consuming, expensive and distracting from the
conduct of our business, and the outcome of litigation is difficult to predict.
The adverse resolution of any specific lawsuit could have a material adverse
effect on our business, results of operations, and financial condition.
ORGANIZED LABOR MAY RESIST OUR U-SCAN SYSTEMS. The U-Scan system displaces
cashiers. For this reason, organized labor may seek provisions in collective
bargaining agreements that prevent stores from purchasing the system.
WE MAY BE VULNERABLE TO TECHNOLOGICAL PROBLEMS. We are a
technology-oriented company and depend to a significant degree upon our ability
to communicate on-line or by telephone with the systems that we have sold. If we
are unable to access these systems due to technological problems beyond our
control, it will have a material adverse effect on our ability to assist our
customers. Additionally, if our customers are unable to reach us by telephone or
via the Internet, we will also be unable to respond to questions or address
serious problems faced by these customers. If our ability to communicate with
our systems or our customers is impaired, our business may be adversely
affected. The Internet is subject to security and privacy breaches, which may
impact us or our customers.
ECONOMIC CONDITIONS IN THE UNITED STATES AND CANADA, AFFECTING THE SELF-CHECKOUT
INDUSTRY, ARE BEYOND OUR CONTROL AND MAY RESULT IN CONTINUING REDUCED DEMAND AND
PRICING PRESSURE ON OUR PRODUCTS. There are trends and factors affecting the
self-checkout industry, which are beyond our control and may affect our
operations. Such trends and factors include:
o adverse changes in the public and private equity and debt markets and
the ability of our customers to obtain financing or to fund capital
expenditures;
o visibility to, and the actual size and timing of, capital expenditures
by our customers;
o the effects of war or acts of terrorism.
Reduced capital spending and the generally negative economic conditions in
the United States and Canada have resulted in substantially reduced demand for
our products. Continuing negative economic conditions could result in further
reductions in demand for and/or pricing pressures on our products. Reduced
capital spending and/or negative economic conditions in Europe can be expected
to affect our attempt to initiate sales of our systems in Europe.
24
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about our financial instruments that
are sensitive to changes in interest rates and foreign currency exchange rates.
Interest rate and foreign currency exchange rate sensitivity table
December 31, 2002
-----------------
Maturing in Fair
2003 Value(1)
---- --------
(U.S. dollars)
Short-term discounted notes denominated in U.S.
and Canadian dollars, held for other than trading
purposes, with a weighted average effective yield
of 1.56% (2001 - 1.85%), maturing between January
13, 2003 and April 17, 2003 (2001 - matured
between March 19, 2002 and May 31, 2002), with a
maturity value of $76,555,000......................$76,147,000 $76,714,000
(1) Fair value has been determined based upon quoted market values as at
December 31, 2002.
We are exposed to foreign currency exchange rate fluctuations. Approximately 19%
of our expenses are paid in Canadian dollars, while substantially all of our
revenues are earned in U.S. dollars. If the Canadian dollar strengthens in
relation to the U.S. dollar, the effective cost of our expenses (as reported in
U.S. dollars) will increase. We have never tried to hedge our exchange rate
risk, do not plan to do so and may not be successful should we attempt to do so
in the future. We are also exposed to interest rate fluctuation risk, which we
do not systematically manage. We presently invest in short-term investment grade
paper.
25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
26
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Optimal Robotics Corp. as at
December 31, 2002 and 2001 and the consolidated statements of operations,
retained earnings and cash flows for each of the years in the two-year period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and United States 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, 2002
and 2001 and the results of its operations and its cash flows for each of the
years in the two-year period ended December 31, 2002 in accordance with Canadian
generally accepted accounting principles.
The consolidated financial statements as at December 31, 2000 and for the year
then ended were audited by other auditors who expressed an opinion without
reservation on those statements in their report dated February 9, 2001.
/s/ KPMG LLP
Chartered Accountants
Montreal, Canada
February 21, 2003
27
Auditors' Report
To the Shareholders of
Optimal Robotics Corp.
We have audited the consolidated statements of operations, deficit and cash
flows of Optimal Robotics Corp. for the year ended December 31, 2000. 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 audit in accordance with auditing standards generally accepted
in Canada and the United States. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the results of the Company's operations and its cash flows
for the year ended December 31, 2000 in accordance with Canadian generally
accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Montreal, Quebec, Canada
February 9, 2001
28
Optimal Robotics Corp.
Consolidated Balance Sheet
December 31, 2002 and 2001
(expressed in U.S. dollars)
========================================================================================
2002 2001
- ----------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 9,615,348 $ 9,616,430
Short-term investments (note 4) 76,146,586 94,487,326
Accounts receivable (note 5) 5,812,656 9,009,445
Income taxes receivable 1,481,977 --
Tax credits receivable 728,408 884,057
Inventories (note 6) 22,656,666 22,355,267
Future income taxes (note 15) 243,470 284,253
Prepaid expenses and deposits 493,499 989,107
----------------------------------------------------------------------------------
117,178,610 137,625,885
Future income taxes (note 15) 1,549,856 --
Property and equipment (note 7) 6,562,344 6,130,347
Goodwill and other intangible assets (note 8) 4,399,924 3,934,963
- ---------------------------------------------------------------------------------------
$ 129,690,734 $ 147,691,195
=======================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities (note 9) $ 7,134,379 $ 6,673,804
Income taxes payable -- 4,794,476
Deferred revenue 1,394,455 1,607,112
----------------------------------------------------------------------------------
8,528,834 13,075,392
Future income taxes (note 15) 1,700,870 1,143,213
Shareholders' equity:
Share capital (note 10) 122,102,244 126,476,633
Additional paid-in capital 5,282 5,282
(Deficit) retained earnings (1,162,025) 8,475,146
Cumulative translation adjustment (1,484,471) (1,484,471)
----------------------------------------------------------------------------------
119,461,030 133,472,590
Commitments and contingencies (note 12)
- ---------------------------------------------------------------------------------------
$ 129,690,734 $ 147,691,195
=======================================================================================
See accompanying notes to consolidated financial statements.
Approved by the Board of Directors
/s/ HOLDEN L. OSTRIN Director /s/ NEIL S. WECHSLER Director
- -------------------------- ----------------------------
29
Optimal Robotics Corp.
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 2002
(expressed in U.S. dollars)
============================================================================================
2002 2001 2000
- --------------------------------------------------------------------------------------------
Revenues $ 75,717,591 $ 101,421,243 $ 60,970,505
Cost of sales 50,261,337 63,158,749 45,557,943
- --------------------------------------------------------------------------------------------
Gross margin 25,456,254 38,262,494 15,412,562
Expenses (income):
Selling, general and administrative 29,005,871 18,531,978 9,153,760
Amortization 2,655,820 1,538,366 850,872
Operating lease 1,550,962 1,210,201 624,834
Research and development (note 13) 1,289,848 1,223,956 912,679
Closure costs (note 14) 1,038,835 -- --
Investment income (1,816,889) (3,147,698) (3,896,899)
---------------------------------------------------------------------------------------
33,724,447 19,356,803 7,645,246
- --------------------------------------------------------------------------------------------
(Loss) earnings before income taxes (8,268,193) 18,905,691 7,767,316
Income tax (recovery) provision (note 15) (2,940,963) 9,600,000 2,972,239
- --------------------------------------------------------------------------------------------
Net (loss) earnings $ (5,327,230) $ 9,305,691 $ 4,795,077
============================================================================================
Earnings (loss) per share (note 16):
Basic $ (0.35) $ 0.63 $ 0.37
Diluted (0.35) 0.60 0.33
============================================================================================
Weighted average number of common shares:
Basic 15,058,533 14,704,636 13,104,361
Effect of dilutive options and warrants 42,874 867,903 1,394,373
---------------------------------------------------------------------------------------
Diluted 15,101,407 15,572,539 14,498,734
=======================================================================================
See accompanying notes to consolidated financial statements.
30
Optimal Robotics Corp.
Consolidated Statements of Retained Earnings
For each of the years in the three-year period ended December 31, 2002
(expressed in U.S. dollars)
============================================================================================
2002 2001 2000
- --------------------------------------------------------------------------------------------
Retained earnings (deficit), beginning of year $ 8,475,146 $ (830,545) $(5,625,622)
Net (loss) earnings (5,327,230) 9,305,691 4,795,077
Excess of purchase price over book value
of shares (note 10) (4,309,941) -- --
- --------------------------------------------------------------------------------------------
(Deficit) retained earnings, end of year $(1,162,025) $ 8,475,146 $ (830,545)
============================================================================================
See accompanying notes to consolidated financial statements.
31
Optimal Robotics Corp.
Consolidated Statements of Cash Flows
For each of the years in the three-year period ended December 31, 2002
(expressed in U.S. dollars)
===================================================================================================
2002 2001 2000
- ---------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) earnings $ (5,327,230) $ 9,305,691 $ 4,795,077
Adjustments for items not affecting cash:
Amortization 2,655,820 1,538,366 850,872
Future income taxes (951,416) 4,741,905 2,972,239
Loss on sale of trade accounts receivable 36,263 73,955 86,686
Unrealized foreign exchange loss
on contract advance -- -- 5,948
Non-refundable tax credits -- -- (65,539)
Write-off property and equipment 175,749 -- --
Changes in operating assets and liabilities:
Accounts receivable (1,032,186) (6,544,104) (13,365,678)
Proceeds from sale of trade accounts
receivable 4,192,712 9,458,760 7,222,898
Tax credits receivable 155,649 (560,269) (77,451)
Inventories (301,399) (4,374,837) (13,556,156)
Prepaid expenses and deposits 495,608 (519,685) (204,897)
Accounts payable and accrued liabilities 460,575 (3,960,049) 3,237,491
Income taxes (6,276,453) 4,794,476 --
Deferred revenue (212,657) (276,037) (532,007)
- ---------------------------------------------------------------------------------------------------
(5,928,965) 13,678,172 (8,630,517)
Cash flows from financing activities:
Repurchase of common shares (8,684,330) -- --
Proceeds from issuance of common shares -- 19,421,317 65,358,738
Share issue costs -- -- (4,693,285)
Decrease in contract advance -- -- (250,000)
----------------------------------------------------------------------------------------------
(8,684,330) 19,421,317 60,415,453
Cash flows from investing activities:
Purchase of property and equipment (3,083,748) (4,003,625) (3,069,584)
Purchase of intangible assets (644,779) -- --
Cost of business acquisition (note 3) -- (1,141,000) --
Decrease (increase) in short-term investments 18,340,740 (23,345,416) (47,707,424)
----------------------------------------------------------------------------------------------
14,612,213 (28,490,041) (50,777,008)
- ---------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,082) 4,609,448 1,007,928
Effect of exchange rate changes on cash and
cash equivalents -- -- (500,030)
Cash and cash equivalents, beginning of year 9,616,430 5,006,982 4,499,084
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 9,615,348 $ 9,616,430 $ 5,006,982
===================================================================================================
Supplemental disclosure of cash flow information (note 19).
See accompanying notes to consolidated financial statements.
32
Optimal Robotics Corp.
Notes to Consolidated Financial Statements
For each of the years in the three-year period ended December 31, 2002
(expressed in U.S. dollars)
================================================================================
1. Nature of operations:
Optimal Robotics Corp. (the "Company") is engaged in the development,
marketing, installation and servicing of automated transaction products
designed for use in the retail sector. The Company's principal product
focus is its U-Scan(R) system, a self-service checkout system for the
retail industry.
2. Significant accounting policies:
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada. These principles
conform, in all material respects, with accounting principles generally
accepted in the United States, except as described in note 20. The
principal accounting policies of the Company are summarized as follows:
(a) Principles of consolidation:
These consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated on consolidation.
(b) Cash and cash equivalents:
Cash and cash equivalents consist of cash on hand and balances with
banks and highly liquid debt instruments with original terms to
maturity of three months or less.
(c) Short-term investments:
Short-term investments, which management intends to hold until
maturity, include investments with maturities of greater than three
months and less than a year and are carried at the lower of amortized
cost and market value.
(d) Securitizations:
Securitization transactions are recorded as sales of assets when the
control of the asset is transferred to the purchaser. Transactions
recorded in this manner result in the removal of the assets sold from
the Company's balance sheet. Discount fees on the portfolio of
receivables sold are recorded in selling, general and administrative
expenses.
33
Optimal Robotics Corp.
Notes to Consolidated Financial Statements
For each of the years in the three-year period ended December 31, 2002
(expressed in U.S. dollars)
================================================================================
2. Significant accounting policies (continued):
(e) Inventories:
Raw material inventories are stated at the lower of landed cost or
replacement cost. Finished goods and work in process inventories are
stated at the lower of cost or net realizable value. Cost is determined
on the basis of weighted average cost.
In order to provide maintenance and repair services to its customers,
the Company is required to maintain significant levels of replacement
parts. Parts are stated at cost, less an allowance for obsolescence and
shrinkage. The costs of refurbishing parts are included in the cost of
sales as incurred.
Periodic revisions to allowance estimates are required, based upon the
evaluation of several factors, including changes in estimated product
life cycles, usage levels, and technology changes. Changes in these
estimates are reflected immediately in income.
(f) Research and investment tax credits:
Research and investment tax credits are recorded as a reduction of the
related expense or the cost of the assets acquired. Tax credits are
recorded in the accounts when reasonable assurance exists that they
will be realized.
(g) Property and equipment:
Property and equipment are recorded at cost. Amortization is provided
for over the estimated useful lives of the assets using the
straight-line method at the following annual rates:
=======================================================