SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number 0-28572
OPTIMAL ROBOTICS CORP.
(Exact name of registrant as specified in its charter)
CANADA 98-0160833
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
4700 de la Savane, Suite 101, Montreal, Quebec, Canada H4P 1T7
(514) 738-8885
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __x__ No ____
At July 15, 2002, the registrant had 14,936,235 Class "A" shares (without
nominal or par value) outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
-1-
OPTIMAL ROBOTICS CORP.
Consolidated Balance Sheets
(Unaudited)
June 30, 2002 and December 31, 2001
(expressed in US dollars)
====================================================================================================
June 30, December 31,
2002 2001
- ----------------------------------------------------------------------------------------------------
(Audited)
Assets
Current assets:
Cash and cash equivalents $ 7,592,684 $ 9,616,430
Short-term investments 75,419,503 94,487,326
Accounts receivable, net of allowance for doubtful accounts of
$66,494 ($300,000 at December 31, 2001) 19,438,357 9,009,445
Inventories (note 3) 25,605,008 22,355,267
Tax credits receivable 289,408 884,057
Future income taxes 211,936 284,253
Prepaid expenses and deposits 811,007 989,107
- ----------------------------------------------------------------------------------------------------
129,367,903 137,625,885
Property, plant and equipment 6,795,196 6,130,347
Goodwill 2,730,353 2,730,353
Intangibles (note 4) 1,012,701 904,810
Future income taxes 190,212 --
- ----------------------------------------------------------------------------------------------------
$ 140,096,365 $ 147,391,395
====================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 10,020,278 $ 6,673,804
Income taxes payable 303,717 4,794,476
Deferred revenue 4,945,534 1,307,312
- ----------------------------------------------------------------------------------------------------
15,269,529 12,775,592
Future income taxes -- 1,143,213
Shareholders' equity:
Share capital (note 5) 122,102,244 126,476,633
Other capital 5,282 5,282
Retained earnings 4,203,781 8,475,146
Cumulative translation adjustment (1,484,471) (1,484,471)
- ----------------------------------------------------------------------------------------------------
124,826,836 133,472,590
Contingencies (note 6)
- ----------------------------------------------------------------------------------------------------
$ 140,096,365 $ 147,391,395
====================================================================================================
See accompanying notes to unaudited consolidated financial statements.
-2-
OPTIMAL ROBOTICS CORP.
Consolidated Statements of Operations
(Unaudited)
Periods ended June 30, 2002 and 2001
(expressed in US dollars)
==================================================================================================
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------
Revenues $ 19,544,455 $ 31,084,738 $ 39,918,844 $ 50,692,736
Cost of sales 13,057,378 19,334,127 25,976,055 31,605,134
- --------------------------------------------------------------------------------------------------
Gross margin 6,487,077 11,750,611 13,942,789 19,087,602
Expenses (income):
Selling, general and
administrative 6,988,824 4,545,568 13,517,003 7,963,461
Research and development
(note 7) 708,185 427,568 1,108,919 757,572
Amortization 650,491 368,523 1,265,438 666,198
Operating lease 369,451 277,897 764,643 484,249
Investment income (475,176) (808,914) (1,180,182) (1,865,425)
---------------------------------------------------------------------------------------------
8,241,775 4,810,642 15,475,821 8,006,055
- --------------------------------------------------------------------------------------------------
(Loss) earnings before income taxes (1,754,698) 6,939,969 (1,533,032) 11,081,547
(Recovery of) income tax provision
(note 8) (1,687,058) 2,692,088 (1,571,608) 4,314,228
- --------------------------------------------------------------------------------------------------
Net (loss) earnings $ (67,640) $ 4,247,881 $ 38,576 $ 6,767,319
==================================================================================================
Weighted average number of shares:
Basic 14,983,916 14,247,188 15,182,856 14,028,380
Plus impact of stock options
and warrants 147,429 972,425 84,376 1,097,361
- --------------------------------------------------------------------------------------------------
Diluted 15,131,345 15,219,613 15,267,232 15,125,741
==================================================================================================
Earnings per share (note 10):
Basic $ 0.00 $ 0.30 $ 0.00 $ 0.48
Diluted 0.00 0.28 0.00 0.45
==================================================================================================
See accompanying notes to unaudited consolidated financial statements.
-3-
OPTIMAL ROBOTICS CORP.
Consolidated Statements of Retained Earnings
(Unaudited)
Periods ended June 30, 2002 and 2001
(expressed in US dollars)
==========================================================================================
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------
Retained earnings (deficit),
beginning of period $ 5,395,891 $ 1,688,893 $ 8,475,146 $ (830,545)
Net (loss) earnings (67,640) 4,247,881 38,576 6,767,319
Excess of purchase price over
book value of shares (note 5) (1,124,470) -- (4,309,941) --
- ------------------------------------------------------------------------------------------
Retained earnings, end of period $ 4,203,781 $ 5,936,774 $ 4,203,781 $ 5,936,774
==========================================================================================
See accompanying notes to unaudited consolidated financial statements.
-4-
OPTIMAL ROBOTICS CORP.
Consolidated Statements of Cash Flows
(Unaudited)
Periods ended June 30, 2002 and 2001
(expressed in US dollars)
==============================================================================================================
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) earnings $ (67,640) $ 4,247,881 $ 38,576 $ 6,767,319
Adjustments for:
Amortization 650,491 368,523 1,265,438 666,198
Future income taxes (1,172,558) 659,096 (1,261,108) 2,289,342
Loss on sale of trade accounts
receivable -- -- -- 24,424
Changes in operating assets and
liabilities:
Trade accounts receivable 5,544,606 (9,944,872) (10,428,912) (20,958,951)
Proceeds from sale of
trade accounts receivable -- -- -- 3,038,907
Inventories (1,853,793) (436,507) (3,249,741) (3,347,411)
Tax credits receivable 694,649 (75,000) 594,649 (30,894)
Prepaid expenses and deposits (113,073) 52,294 178,100 (446,262)
Accounts payable and
accrued liabilities 728,549 (513,802) 3,346,474 2,447,050
Income taxes payable (1,521,728) 2,032,994 (4,490,759) 2,032,994
Deferred revenue (1,528,694) (619,719) 3,638,222 2,109,964
---------------------------------------------------------------------------------------------------------
1,360,809 (4,229,112) (10,369,061) (5,407,320)
Cash flows from financing activities:
Proceeds from issuance of
common shares -- 1,735,283 -- 3,471,261
Repurchase of common shares (2,467,606) -- (8,684,330) --
---------------------------------------------------------------------------------------------------------
(2,467,606) 1,735,283 (8,684,330) 3,471,261
Cash flows from investing activities:
Purchase of capital assets (1,114,515) (440,930) (2,038,178) (1,246,883)
Business acquisition -- (1,141,000) -- (1,141,000)
Decrease (increase) in short-term
investments 7,994,779 (770,073) 19,067,823 4,444,146
---------------------------------------------------------------------------------------------------------
6,880,264 (2,352,003) 17,029,645 2,056,263
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents during the period 5,773,467 (4,845,832) (2,023,746) 120,204
Cash and cash equivalents,
beginning of period 1,819,217 9,973,018 9,616,430 5,006,982
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 7,592,684 $ 5,127,186 $ 7,592,684 $ 5,127,186
==============================================================================================================
Cash and cash equivalents consist of:
Cash balances with banks $ 7,592,684 $ 2,040,464 $ 7,592,684 $ 2,040,464
Short-term investments -- 3,086,722 -- 3,086,722
- --------------------------------------------------------------------------------------------------------------
$ 7,592,684 $ 5,127,186 $ 7,592,684 $ 5,127,186
==============================================================================================================
Supplemental disclosure to cash flow statement:
Income taxes paid $ 207,228 $ 53,621 $ 3,380,258 $ 63,621
==============================================================================================================
See accompanying notes to unaudited consolidated financial statements.
-5-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements
(Unaudited)
Periods ended June 30, 2002 and 2001
(expressed in US dollars)
================================================================================
1. Interim financial information:
These consolidated financial statements have been prepared by management
in accordance with Canadian generally accepted accounting principles. The
unaudited balance sheet as at June 30, 2002 and the unaudited statements
of operations, retained earnings and cash flows for the periods ended June
30, 2002 and 2001 reflect all adjustments which, in the opinion of
management, are necessary to a fair statement of the results of the
interim periods presented. The Company's revenue and income are subject to
seasonal variations. Consequently, the results of operations for any
quarter are not necessarily indicative of the results for the full year.
These interim consolidated financial statements follow the same accounting
policies and methods of their application as described in note 2 of the
annual consolidated financial statements for the year ended December 31,
2001. The interim consolidated financial statements do not include all
disclosures required for annual financial statements and should be read in
conjunction with the most recent annual consolidated financial statements
of the Company as at and for the year ended December 31, 2001.
Certain of the prior year amounts have been reclassified to conform to the
current fiscal year presentation. These changes had no impact on
previously reported results of operations, financial position, cash flow
or shareholders' equity.
All amounts in the attached notes are unaudited unless specifically
identified.
2. Significant accounting policies:
(a) Stock-based compensation:
Effective January 1, 2002, the Company adopted prospectively the new
recommendations of the Canadian Institute of Chartered Accountants
("CICA"), Handbook Section 3870, with respect to the accounting for
stock-based compensation and other stock-based payments. The new
recommendations require that all stock-based payments to
non-employees, and employee awards that are direct awards of stock,
call for settlement in cash or other assets, or are stock
appreciation rights that call for settlement by the issuance of
equity instruments, granted on or after January 1, 2002 be accounted
for using the fair value method. The Company presently does not have
any such awards which must be accounted for using the fair value
method. For all other stock-based employee compensation awards, the
new standards permit the Company to continue to follow its existing
policy of using the settlement date method of accounting. Under this
method, no compensation expense is recognized when stock options are
issued to employees. Any consideration received from the plan
participants upon exercise of stock options is credited to share
capital.
-6-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2002 and 2001
(expressed in US dollars)
================================================================================
2. Significant accounting policies (continued):
(a) Stock-based compensation (continued):
The new standard requires that the Company disclose the pro forma
effect of accounting for all stock-based awards granted during the
three and six-month periods ended June 30, 2002 under the fair
value-based method (refer to note 10). In the first year of
application, comparative disclosures need not be provided for prior
periods.
(b) Goodwill and other intangible assets:
Effective January 1, 2002, the Company adopted the new
recommendations of the CICA, Handbook Section 3062, with respect to
the accounting for goodwill and other intangible assets. The
standard changes the accounting for goodwill from an amortization
method to an impairment-only approach. In addition, the standard
requires acquired intangible assets to be separately recognized if
the benefit of the intangible assets is obtained through contractual
or other legal right, or if the intangible assets can be sold,
transferred, licensed, rented or exchanged.
The change was accounted for prospectively. The Company did not
record an amortization of goodwill in the three and six months ended
June 30, 2002. Goodwill was tested for impairment during the first
quarter of fiscal 2002. The fair value of the Alpha Microsystems
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. Management considered
that there was no impairment in the carrying value of goodwill.
There has been no change in the estimated useful life of the other
intangible assets which continue to be amortized using the
straight-line method at the following annual rates:
====================================================================
Customer list 25%
Patents 5%
====================================================================
-7-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2002 and 2001
(expressed in US dollars)
================================================================================
2. Significant accounting policies (continued):
(b) Goodwill and other intangible assets (continued):
As required under CICA Handbook Section 3062, the following
information is presented:
=======================================================================
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
2002 2001 2002 2001
-----------------------------------------------------------------------
Reported net (loss)
earnings $ (67,640) $4,247,881 $ 38,576 $6,767,319
Add back goodwill
amortization,
net of tax -- 12,354 -- 12,354
-----------------------------------------------------------------------
Adjusted net (loss)
earnings $ (67,640) $4,260,235 $ 38,576 $6,779,673
=======================================================================
Earnings per share:
Basic $ 0.00 $ 0.30 $ 0.00 $ 0.48
Diluted 0.00 0.28 0.00 0.45
=======================================================================
The acquisition which gave rise to the recording of goodwill only
occurred during the second quarter of fiscal 2001. Accordingly,
there was no goodwill or amortization thereof recorded in the
accounts during the first three months of fiscal 2001.
3. Inventories:
================================================================================
June 30, December 31,
2002 2001
- --------------------------------------------------------------------------------
(Audited)
Finished goods $ 2,368,686 $ 2,778,678
Work in process 792,860 542,378
Raw materials 8,939,685 6,969,536
Replacement parts 13,503,777 12,064,675
- --------------------------------------------------------------------------------
$25,605,008 $22,355,267
================================================================================
-8-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2002 and 2001
(expressed in US dollars)
================================================================================
4. Intangibles:
================================================================================
June 30,
2002
- --------------------------------------------------------------------------------
Gross carrying Accumulated Net book
amount amortization value
- --------------------------------------------------------------------------------
Customer list $ 786,414 $ 104,641 $ 681,773
Patents 351,459 20,531 330,928
- --------------------------------------------------------------------------------
$1,137,873 $ 125,172 $1,012,701
================================================================================
================================================================================
December 31,
2001
- --------------------------------------------------------------------------------
(Audited)
Gross carrying Accumulated Net book
amount amortization value
- --------------------------------------------------------------------------------
Customer list $ 786,414 $ 26,000 $ 760,414
Patents 158,364 13,968 144,396
- --------------------------------------------------------------------------------
$ 944,778 $ 39,968 $ 904,810
================================================================================
-9-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2002 and 2001
(expressed in US dollars)
================================================================================
5. Share capital:
Changes in the issued and outstanding share capital were as follows:
===============================================================================================
June 30, 2002 June 30, 2001
---------------------- ----------------------
Number Dollars Number Dollars
- -----------------------------------------------------------------------------------------------
Balance, December 31,
2001 and 2000 15,471,335 $ 126,476,633 13,708,690 $ 107,050,914
Issued for cash pursuant to
exercise of stock options -- -- 402,000 1,483,375
Issued pursuant to exercise
of warrants: -- -- 353,420 --
- Ascribed value from other
capital -- -- -- 4,402
- Cash -- -- -- 1,987,886
Stock repurchase program (i) (535,100) (4,374,389) -- --
- -----------------------------------------------------------------------------------------------
Balance, June 30, 2002
and 2001 14,936,235 $ 122,102,244 14,464,110 $ 110,526,577
===============================================================================================
(i) On February 26, 2002, the Board of Directors approved a stock
repurchase program authorizing the Company to purchase up to 750,000
of the Company's Class "A" shares in the open market commencing
March 5, 2002 and ending March 4, 2003. As at June 30, 2002, 535,100
shares having a book value of $4,374,389 had been repurchased for a
total consideration of $8,684,330. The excess of the purchase price
over book value of the shares in the amount of $4,309,941 was
charged to retained earnings.
(ii) On June 20, 2002, the shareholders approved an amendment to increase
the number of shares available for issuance under the Company's
stock option plan by 3,000,000 shares. The approval of the option
plan amendment also serves to approve 1,715,000 options granted on
March 2, 2002 at an exercise price of $13.86, which become
immediately exercisable as to 1,385,000 of the underlying shares and
exercisable as to 165,000 of the underlying shares on each of March
2, 2003 and 2004. In May 2002, the Company granted 45,000 options to
acquire Class "A" shares at an exercise price of $14.83. These
options become exercisable as to 22,500 shares on each of May 6,
2003 and 2004.
-10-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2002 and 2001
(expressed in US dollars)
================================================================================
6. Contingencies:
(a) In 1995 and 1996, the Company received demand letters from the same
claimant alleging patent infringement. In July 1999, the claimant
filed a civil action alleging patent infringement in the United
States District Court for the District of Utah against the Company
and PSC Inc., one of the Company's suppliers. In addition, a similar
suit has been filed in the State of Utah against one of the
Company's customers. The Company is contractually bound to indemnify
the customer for any damages it incurs in connection with such suit.
At the Company's expense, the Company's legal counsel is defending
this suit. The Company also received a lawyer's letter from another
party in 1999, and again in February 2001, alleging infringement of
another patent.
The Company believes these claims to be without merit and intends to
vigorously defend its position. Consequently, no provision has been
made in these financial statements with respect to the above claims.
(b) The Company is party to litigation arising in the normal course of
operations. The Company does not expect the resolution of such
matters to have a materially adverse effect on the financial
position or results of operations of the Company.
7. Research and development:
================================================================================
Three months ended Six months ended
June 30, June 30,
------------------- --------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------
Research and development
expenses $ 908,185 $ 502,568 $ 1,408,919 $ 902,128
Less tax credits (200,000) (75,000) (300,000) (144,556)
- --------------------------------------------------------------------------------
$ 708,185 $ 427,568 $ 1,108,919 $ 757,572
================================================================================
-11-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2002 and 2001
(expressed in US dollars)
================================================================================
8. Income taxes:
The income tax provision differs from the amount computed by applying the
combined Canadian federal and Quebec tax rates to earnings before income
taxes. The reasons for the difference and the related tax effects are as
follows:
==========================================================================================
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------
(Loss) earnings before
income taxes $(1,754,698) $ 6,939,969 $(1,533,032) $11,081,547
==========================================================================================
Combined Canadian federal and
Quebec provincial income taxes
at 36% (2001 - 37%) $ (631,692) $ 2,567,789 $ (551,892) $ 4,100,172
Foreign exchange (1) (1,377,580) -- (1,326,163) --
Permanent differences and other 322,214 124,299 306,447 214,056
- ------------------------------------------------------------------------------------------
(Recovery of) income tax
provision $(1,687,058) $ 2,692,088 $(1,571,608) $ 4,314,228
==========================================================================================
(1) For purposes of calculating the income tax provision of the Company,
a tax liability or recovery is recognized on foreign exchange gains
and losses which arise on the conversion into Canadian dollars of
the net monetary assets denominated in U.S. dollars which is
required for tax purposes. Because these financial statements are
presented in U.S. dollars, these foreign exchange gains and losses
do not impact earnings before income taxes even though the income
tax provision includes a tax liability or recovery for these items.
Future fluctuations in the foreign exchange rate between the
Canadian and U.S. dollar will change the amount of the foreign
exchange gains (losses) and thus the provision or recovery for
income taxes thereon.
The (recovery of) provision for income taxes is composed of the following:
================================================================================
Three months ended Six months ended
June 30, June 30,
------------------- --------------------
2002 2001 2002 2001
- -------------------------------------------------------------------------------
Current income taxes $ (514,500) $ 2,032,992 $ (310,500) $ 2,024,886
Future income taxes (1,172,558) 659,096 (1,261,108) 2,289,342
- -------------------------------------------------------------------------------
$(1,687,058) $ 2,962,088 $(1,571,608) $ 4,314,228
================================================================================
-12-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2002 and 2001
(expressed in US dollars)
================================================================================
9. Segmented information:
The Company operates in one segment, the development, marketing,
installation, servicing and sale of automated transaction products
designed for use in the retail sector. Substantially all of the Company's
revenue is derived from sales to retailers located in the United States
and is denominated in U.S. dollars. Property, plant and equipment,
goodwill and intangibles by geographic area are as follows:
================================================================================
June 30, December 31,
2002 2001
- --------------------------------------------------------------------------------
(Audited)
Canada $ 5,362,835 $ 4,436,119
United States 5,175,415 5,329,391
- --------------------------------------------------------------------------------
$10,538,250 $ 9,765,510
================================================================================
10. Earnings per share:
(a) Stock-based compensation:
If the fair value-based accounting method under Handbook Section
3870 had been used to account for stock-based compensation costs
relating to exempt options and warrants issued to employees during
the period ended June 30, 2002, the net earnings and related
earnings per share figures would be as follows:
================================================================================
June 30, 2002
------------------------------------
Three months Six months
ended ended
- --------------------------------------------------------------------------------
Reported net (loss) earnings $ 67,640) $ 38,576
Pro forma adjustments to compensation expense 16,941,450 16,941,450
- --------------------------------------------------------------------------------
Pro forma net loss $(17,009,090) $(16,902,874)
================================================================================
Pro forma loss per share:
Basic $ (1.14) $ (1.11)
Diluted (1.14) (1.11)
================================================================================
The fair value of each option grant was determined using the
following method and assumptions.
-13-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2002 and 2001
(expressed in US dollars)
================================================================================
10. Earnings per share (continued):
(a) Stock-based compensation (continued):
The weighted average fair value of each option granted is estimated
on the date of grant using the Black-Scholes pricing model with the
following weighted average assumptions:
================================================================================
Risk free interest rate 3.32%
Expected volatility 81%
Expected life in years 10
Expected dividend yield nil
================================================================================
The following table summarizes the weighted average grant-date fair
value per share for options granted during the three months ended
June 30, 2002:
======================================================================================================
Weighted
average
grant-date
Number of fair value
options per share
- -----------------------------------------------------------------------------------------------------
Exercise price per share equal to market price per share 1,760,000 $ 11.52
======================================================================================================
Management believes that the effects of applying Handbook Section
3870 on a pro forma basis are not likely to be representative of the
effects on reported pro forma net earnings for future years as the
estimated compensation costs reflect only options granted between
January 1, 2002 and June 30, 2002 and do not consider awards which
may occur in future years, the terms and conditions of which may
vary.
Dividend yield was excluded from the calculation since it is the
present policy of the Company to retain all earnings to finance
operations. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
their fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the
fair value of its stock options.
-14-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2002 and 2001
(expressed in US dollars)
================================================================================
10. Earnings per share (continued):
(b) Supplementary measure of earnings per share:
Supplementary measures of earnings do not have any standardized
meaning prescribed by generally accepted accounting principles and
are therefore unlikely to be comparable to similar measures
presented by other companies. The purpose of presenting a
supplementary measure of net earnings and earnings per share is to
illustrate the tax impact of the foreign exchange loss which arises
on the conversion of the short-term investments into Canadian
dollars for purposes of determining taxable income under Canadian
income tax regulations as described in note 8.
==========================================================================================================
Three months ended Six months ended
June 30, June 30,
---------------------- ---------------------
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------
Net (loss) earnings $ (67,640) $ 4,247,881 $ 38,576 $ 6,767,319
Add back effect of future
income taxes
on foreign exchange loss (1,377,580) -- (1,326,163) --
- ----------------------------------------------------------------------------------------------------------
Supplementary measure
of net (loss)
earnings $(1,445,220) $ 4,247,881 $(1,287,587) $ 6,767,319
==========================================================================================================
Supplementary measure of earnings per share:
Basic $ (0.10) $ 0.30 $ (0.08) $ 0.48
Diluted (0.10) 0.28 (0.08) 0.45
==========================================================================================================
-15-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2002 and 2001
(expressed in US dollars)
================================================================================
11. Additional disclosures required by U.S. GAAP and differences between
Canadian GAAP and U.S. GAAP:
(a) Consolidated statement of operations:
The reconciliation of earnings reported in accordance with Canadian
GAAP with U.S. GAAP is as follows:
==========================================================================================
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------
Net (loss) earnings in
accordance with
Canadian GAAP $ (67,640) $ 4,247,881 $ 38,576 $ 6,767,319
Stock-based compensation (i) 32,310 (17,705,079) 9,778,143 (31,713,704)
- ------------------------------------------------------------------------------------------
Net (loss) earnings in
accordance
with U.S. GAAP $ (35,330) $(13,457,198) $ 9,816,719 $(24,946,385)
==========================================================================================
Earnings (loss) per share:
Basic $ 0.00 $ (0.94) $ 0.65 $ (1.78)
Diluted 0.00 (0.94) 0.64 (1.78)
==========================================================================================
(i) Accounting for stock-based compensation:
For stock-based compensation plans, the Company has chosen to use,
for U.S. GAAP purposes, the intrinsic value method (APB Opinion No.
25), which requires compensation costs to be recognized on the
difference, if any, between the quoted market price of the stock at
the grant date and the amount the individual must pay to acquire the
stock. Certain of the Company's stock options are variable because
the exercise price is not known until the options are exercised. As
a result, compensation cost is estimated each quarter from the date
of grant until the options are exercised, based on the difference
between the quoted market price of the Company's stock and the
exercise price.
Under Canadian GAAP, the Company uses the settlement method of
accounting for options and compensation expense is not recognized.
-16-
OPTIMAL ROBOTICS CORP.
Notes to Consolidated Financial Statements, Continued
(Unaudited)
Periods ended June 30, 2002 and 2001
(expressed in US dollars)
================================================================================
11. Additional disclosures required by U.S. GAAP and differences between
Canadian GAAP and U.S. GAAP (continued):
(b) Consolidated balance sheets:
==============================================================================================
June 30, 2002 December 31, 2001
--------------------------- --------------------------
Canadian US Canadian US
GAAP GAAP GAAP GAAP
- ----------------------------------------------------------------------------------------------
(Audited)
Shareholders' equity:
Share capital $ 122,102,244 $ 164,558,807 $ 126,476,633 $ 168,933,196
Other capital 5,282 29,862,009 5,282 39,640,152
Retained earnings
(deficit) 4,203,781 (66,575,747) 8,475,146 (72,082,525)
Cumulative translation
adjustment (1,484,471) -- (1,484,471) --
Accumulated other
comprehensive loss -- (3,018,233) -- (3,018,233)
- ----------------------------------------------------------------------------------------------
$ 124,826,836 $ 124,826,836 $ 133,472,590 $ 133,472,590
==============================================================================================
(c) Recent accounting pronouncements:
In August 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires the Company to record
the fair value of an asset retirement obligation as a liability in
the period in which it incurs a legal obligation associated with the
retirement of tangible long-lived assets. This statement is
effective for the Company's fiscal year beginning January 1, 2003.
The Company does not expect SFAS No. 143 to have a material impact
on its financial statements.
In October 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 establishes a
single accounting model, based on the framework established in
Statement of Financial Accounting Standards no. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("SFAS 121"), for long-lived assets to be disposed of
by sale, and resolves implementation issues related to SFAS 121.
This statement is effective for the Company's fiscal year beginning
January 1, 2002. The adoption of this standard did not have an
initial material impact on its financial statements.
In April 2002, FASB issued SFAS No 145, "Rescission of FASB
Statements No. 54 and 64, Amendment of FASB Statement No. 13 and
Technical Corrections". SFAS 145 will be effective for the Company's
fiscal year beginning January 1, 2003. The Company does not expect
SFAS No. 145 to have a material impact on its financial statements.
-17-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. These statements are based on
current expectations and assumptions that are subject to risks and
uncertainties. Actual results could differ materially because of factors such
as: we principally depend on one line of products; we relied on one customer for
a majority of our revenues in 2001; we may not be able to manage our growth; we
rely on third party suppliers; our U-Scan(R) systems are assembled at two
facilities; we may not be able to keep pace with changes in technology; we
depend upon key personnel; competition could reduce revenue from the U-Scan
system; our products may contain defects; the adverse resolution of litigation
against us could adversely impact our business; organized labor may resist
U-Scan; we may be vulnerable to technological problems; and economic conditions
in the United States and Canada, affecting the self-checkout industry, are
beyond our control and may result in reduced demand and pricing pressure on our
products, all as discussed in our annual report on Form 10-K for the year ended
December 31, 2001.
The following discussion of the financial condition and results of
operations of our Company should be read in conjunction with our audited
consolidated financial statements for the year ended December 31, 2001, and the
foregoing factors. All dollar amounts are expressed in U.S. dollars and, other
than those expressed in millions of dollars, have been rounded to the nearest
thousand.
Overview
We are the leading provider of self-checkout systems to retailers in the
United States. Our principal product is the U-Scan automated self-checkout
system which enables shoppers to scan, bag and pay for their purchases with
little or no assistance from store personnel.
The U-Scan system can be operated quickly and easily by shoppers and makes
the checkout process more convenient. The U-Scan system reduces the cost of
checkout transactions to retailers and addresses labor shortage problems by
replacing manned checkout counters with our automated self-checkout stations.
We believe that the potential market for self-checkout solutions includes
applications beyond supermarkets and supercenters. General merchandise stores,
home improvement stores and other big-box retailers have begun to purchase
self-checkout systems. Other types of stores that we have identified where
self-checkout systems could be used include drug stores, warehouse stores,
office superstores and toy stores.
Our revenue and gross margins vary from quarter to quarter as a result of
the level of business volumes and seasonality of demand. Our quarterly operating
results are primarily affected by the level and timing of customer orders.
We prepare our consolidated financial statements in accordance with
accounting principles which are generally accepted in Canada with a
reconciliation to accounting principles generally accepted in the United States,
as disclosed in note 11 of the notes to our interim consolidated financial
statements for the periods ended June 30, 2002 and 2001.
-18-
Change in accounting policy
Effective January 1, 2002, the Company adopted the new recommendations of
the Canadian Institute of Chartered Accountants with respect to the accounting
for goodwill and other intangible assets. The standard changes the accounting
for goodwill from an amortization method to an impairment-only approach. In
addition, the standard requires acquired intangible assets to be separately
recognized if the benefit of the intangible assets is obtained through
contractual or other legal right, or if the intangible assets can be sold,
transferred, licensed, rented or exchanged.
The change was accounted for prospectively. The Company did not record an
amortization of goodwill in the six months ended June 30, 2002. Goodwill was
tested for impairment during the first quarter of fiscal 2002. The fair value of
the Alpha Microsystems ("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. We considered that there was no
impairment in the carrying value of goodwill.
Financial Condition
Our cash and short-term investment portfolio amounted to $83,012,000 as at
June 30, 2002, compared to $104,104,000 as at December 31, 2001. The decrease
relates primarily to cash used in operations (primarily the increase in accounts
receivable) and funds used for the repurchase for cancellation of our Class "A"
shares. Our portfolio of short-term investments consists of short-term
discounted notes. 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 June 30, 2002 was $25,605,000 up from
$22,355,000 at the end of 2001. This increase is mainly attributable to raw
materials and replacement parts amounting to $8,940,000 and $13,504,000,
respectively, for June 30, 2002 compared to $6,970,000 and $12,065,000,
respectively, for December 2001. Raw materials increased in order to provide for
deliveries in the third quarter of 2002. The replacement parts inventory
increased in order to service additional systems sold during the period. We
believe that, considering our current installed base, 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 June 30, 2002 was
$124,827,000 as compared to $133,473,000 as at December 31, 2001. The decrease
is attributable to the repurchase of 535,100 shares under the Company's stock
repurchase program for a total consideration of $8,684,000. On February 26,
2002, the Board of Directors had approved the stock repurchase program
authorizing the Company to purchase up to 750,000 Class "A" shares in the open
market. The share repurchase program expires March 4, 2003.
Results of Operations
First Six Months of 2002 Compared with First Six Months of 2001
Total revenues decreased by $10,774,000 or 21%, in the first six months of
the year compared to last year. Our sales were impacted by a continued weakness
in the economy and in particular, the postponement and reduction of Information
Technology ("IT") spending by our customers.
-19-
Total cost of sales decreased by $5,629,000, or 18%, in the six-month
period ended June 2002 compared to the six-month period ended June 30, 2001. The
decrease was consistent with the decrease in sales. Overall, gross margins
decreased as a percentage of sales from 38% to 35%. The decrease was mainly
attributable to changes in our revenue mix, specifically the increased
percentage of revenues attributable to service over total revenues.
Gross research and development expenses increased by $507,000, or 56%,
from 2001 to 2002. As a percentage of total revenues, gross research and
development expenses increased from 2% to 4%. Research and development expenses
for the six-month period ended June 30, 2002 included continuing costs of
completion of the development of the U-Scan Mobile Attendant(TM) device and the
development of an electronic signature capture interface and process; a lower
profile, smaller footprint U-Scan system; and the improvement of the graphical
user interface (GUI). In addition, we are expanding the range of point of sales
systems that integrate seamlessly with the U-Scan system, as well as enhancing
our automated software updating mechanism in order to allow us to broaden our
target customer base.
Selling, general, administrative and operating lease expenses increased by
$5,834,000, or 69%, in 2002 compared to 2001. As a percentage of total revenues,
these expenses increased from 17% to 36%. The increase was attributable to the
following items: the inclusion of the operating costs of Optimal Systems
Services (formerly Alpha) which was acquired in May 2001; increased investment
in sales and marketing; and an increase in support and technical staff in order
to service the expanded customer base.
The recovery of income taxes amounted to approximately $1.6 million in the
period. The income tax recovery differs from the amount computed by applying the
combined federal and provincial tax rates to earnings before incomes taxes. The
reasons for the differences are explained in note 8 to our interim consolidated
financial statements. The most significant component is due to Canadian income
taxes recovered of approximately $1.3 million related to foreign exchange
losses. Because our consolidated financial statements are presented in U.S.
dollars, the foreign exchange losses 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 recovery even though foreign exchange
losses do not impact our earnings before income taxes.
The Company's net earnings were $39,000 in the six-month period compared
to $6,767,000 in 2001. On a per share basis the Company earned $0.00 (basic and
diluted) compared to $0.48 ($0.45 on a diluted basis) in 2001. There was no
material impact on earnings per share for fiscal 2001 as a result of the change
in accounting policy related to goodwill and other intangible assets as
disclosed in note 2 (b) of our interim consolidated financial statements. As a
measure of our financial performance, management uses supplementary net earnings
of operating performance. Supplementary net earnings exclude the effect of
future income taxes on unrealized foreign exchange gains or losses, as disclosed
in note 10 (b) of our interim consolidated financial statements. Excluding the
recovery of income taxes on foreign exchange losses, the supplementary measure
of net loss was $1,287,000 (0.08 per share basic and diluted) for the six month
period ended June 30, 2002.
Second Quarter of 2002 Compared with Second Quarter of 2001
Total revenues decreased by $11,540,000, or 37%, in the second quarter of
the year compared to last year. Our sales were impacted by a general weakness in
the economy and in
-20-
particular due to the postponement and reduction of information Technology
("IT") spending by our customers.
Total cost of sales decreased by $6,277,000, or 32%, in the second quarter
of 2002 as compared to the same period last year. The decrease was consistent
with the decrease in sales. Overall, gross margins decreased as a percentage of
sales from 38% to 33%. The decrease was mainly attributable to changes in our
revenue mix, specifically the increased percentage of revenues attributable to
service over total revenues.
Gross research and development expenses increased by $406,000, or 81%,
from 2001 to 2002. As a percentage of total revenues, gross research and
development expenses increased from 2% to 5%. Research and development expenses
for the three-month period ended June 30, 2002 included continuing costs of
completion of the development of the U-Scan Mobile Attendant(TM) device and the
development of an electronic signature capture interface and process; a lower
profile, smaller footprint U-Scan system; and the improvement of the graphical
user interface (GUI). In addition, we are expanding the range of point of sales
systems that integrate seamlessly with the U-Scan system, as well as enhancing
our automated software updating mechanism in order to allow us to broaden our
target customer base.
Selling, general, administrative and operating lease expenses increased by
$2,535,000 or 53%, in 2002 compared to 2001. As a percentage of total revenues,
these expenses increased from 16% to 38%. The increase was attributable to the
following items: the inclusion of the operating costs of Optimal Systems
Services (formerly Alpha) which was acquired in May 2001; increased investment
in sales and marketing; and an increase in support, technical and administrative
staff in order to service the expanded customer base.
The Company incurred a net loss of $68,000 in the quarter compared to net
earnings of $4,248,000 in 2001. On a per share basis the Company earned $0.00
(basic and diluted) compared to $0.30 ($0.28 on a diluted basis) in 2001. There
was no material impact on earnings per share for fiscal 2001 as a result of the
change in accounting policy related to goodwill and other intangible assets as
disclosed in note 2 (b) of our interim consolidated financial statements. As a
measure of our financial performance, management uses supplementary net earnings
of operating performance. Supplementary net earnings exclude the effect of
future income taxes on unrealized foreign exchange gains or losses, as disclosed
in note 10 (b) of our interim consolidated financial statements. Excluding the
recovery of income taxes on the foreign exchange losses, the supplementary
measure of net loss for the quarter was $1,445,000 ($0.10 per share basic and
diluted).
Liquidity and Capital Resources
As of June 30, 2002, we had cash, cash equivalents and short-term
investments of $83,012,000 (December 31, 2001 - $104,104,000), and working
capital of $114,098,000 (December 31, 2001 - $124,850,000).
Operating activities used $10,369,000 of cash and cash equivalents in the
first six months of 2002, compared to $5,407,000 used during the first six
months of 2001. The increase reflects lower earnings as well as the payment of
income taxes as at June 30, 2002. Under an agreement with a Canadian chartered
bank, the Company has the right to sell designated accounts receivable to the
bank on a non-recourse basis. The Company sold no receivables in the period
ended June 30, 2002, whereas $6,469,000 and $3,063,000 were sold in December
2001 and June 2001, respectively. The increase in deferred revenue from December
31, 2001 is due to the billing of
-21-
service contracts to our customers at the beginning of the fiscal year. These
amounts are recognized into income over the terms of the related contracts.
During the first six months of 2002, the Company, through its stock
repurchase program, repurchased for cancellation 535,100 Class "A" shares at an
average price of $16.23, for a total consideration of $8,684,000. In addition,
during the first six months in 2002, the Company did not issue any Class "A"
shares pursuant to the exercise of options or warrants, whereas during the first
six months of 2001, the Company issued 755,420 Class "A" shares pursuant to the
exercise of options and warrants, which resulted in net cash proceeds of
$3,471,000.
In the first six months of 2002, the Company invested $2,038,000 (2001-
$1,246,000), to purchase capital assets, which principally related to computer
equipment and software and testing units.
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.
-22-
Item 3. There have been no material changes since December 31, 2001.
-23-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In each of 1995 and 1996, we received a demand letter from the same
claimant alleging that U-Scan infringes upon the claimant's patent. In July
1999, this claimant filed a civil action in the United States District Court for
the District of Utah against us and PSC, the former assembler of U-Scan,
alleging patent infringement. A second party also sent a demand letter to us in
1999, and again in February 2001, alleging a different patent infringement.
Although after consultation with counsel, we believe that the former claimant
should not prevail in its lawsuit and that the latter claimant should not
prevail if a lawsuit is brought to assert its claim, and that these claims will
not have a material adverse effect on our business or prospects, no assurance
can be given that a court will not find that the system infringes upon one or
both of such claimants' rights. A determination by a court that the system
infringes upon either of the claimant's rights would have a material adverse
effect on our business and results of operations.
Kroger and one of its subsidiaries have also been sued by the same
claimant in the State of Utah based upon the same issues underlying the suit
filed against us in 1999. At our expense, our counsel is also defending Kroger
and its subsidiary in such action. Furthermore, we are contractually bound to
indemnify Kroger for any damages that it may incur in connection with such suit.
We are also party to litigation arising in the normal course of
operations. We do not expect the resolution of such matters to have a materially
adverse effect on our financial position or results of operations.
Item 2. The registrant has nothing to report under this item.
Item 3. The registrant has nothing to report under this item.
-24-
Item 4. The registrant held its annual and special meeting of the shareholders
on June 20, 2002.
The following resolutions were adopted:
- -------------------------- --------------------- ---------------- --------------- -------------- ----------------
Resolution Votes For Votes Against Withheld Spoiled Non-Voted
- -------------------------- --------------------- ---------------- --------------- -------------- ----------------
Election of Directors (1) 10,657,444 336,866 479,578
- -------------------------- --------------------- ---------------- --------------- -------------- ----------------
Appointment of KPMG LLP 11,318,618 125,607 29,663
as Auditors
- -------------------------- --------------------- ---------------- --------------- -------------- ----------------
Amendment to Section 11,319,831 97,091 56,966
4.06 of By-Law No. 1A
- -------------------------- --------------------- ---------------- --------------- -------------- ----------------
Amendment to Sections 11,288,619 122,189 63,079 1
4.02, 4.07 and 5.01 of
By-Law No. 1A
- -------------------------- --------------------- ---------------- --------------- -------------- ----------------
Amendment to Stock 3,042,307 2,356,331 73,946 6,001,304
Option Plan
- -------------------------- --------------------- ---------------- --------------- -------------- ----------------
(1) The following directors were elected to hold office for the following
respective periods:
Jonathan J. Ginns, to hold office until the close of the 2004 annual
meeting of shareholders; and
Holden L. Ostrin, James S. Gertler and Sydney Sweibel, each to hold office
until the close of the 2005 annual meeting of shareholders.
The following directors did not stand for election and continue in office
for the following respective periods:
Neil S. Wechsler and Thomas D. Murphy, each holding office until the close
of the 2003 annual meeting of shareholders; and
Henry M. Karp and Leon P. Garfinkle, each holding office until the close
of the 2004 annual meeting of shareholders.
Item 5. The registrant has nothing to report under this item.
Item 6.
(a) Exhibits
Exhibit
Number Exhibit
------ -------
3.4 Amendment to Section 4.03 of the Company's By-Laws
3.5 Amendment to Sections 4.02, 4.06, 4.07 and 5.01 of the Company's
By-Laws
3.6 By-Laws, as amended on April 26, 2000 and May 2, 2002
(b) Reports on Form 8K - One report on Form 8K was filed on June 6, 2002
relating to the Company's Annual and Special Meeting of Shareholders held
on June 20, 2002 (Item 5).
-25-
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPTIMAL ROBOTICS CORP.
Dated: July 18, 2002 By: /s/ Holden L. Ostrin
-----------------------------------
Holden L. Ostrin
Co-Chairman
By: /s/ Gary S. Wechsler
-----------------------------------
Gary S. Wechsler
Treasurer and Chief Financial
Officer
-26-