UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2009
Commission file number 0-28572.
OPTIMAL GROUP INC.
(Exact name of registrant as specified in its charter)
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Canada
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98-0160833
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(State or other jurisdiction
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(I.R.S. Employer
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of incorporation or organization)
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Identification No.)
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3500 de Maisonneuve Blvd. West, Suite 800,
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(514) 738-8885
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Montreal, Quebec, Canada, H3Z 3C1
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(Address of principal executive offices and postal code)
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(Registrant telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Class A shares, no par value
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Nasdaq Stock Market
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes
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No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
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No
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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 registrants 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
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer , accelerated filer and smaller reporting company in Rule 12 b-2 of the Exchange Act
(Check one):
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes
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No
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Aggregate market value of the voting stock of the registrant held by non-affiliates of the
registrant as of June 30, 2009 (computed by reference to the last reported sale price of the Class
A shares on the Nasdaq Global Market on such date): $8,879,547. 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 17, 2010: 5,148,735
DOCUMENTS INCORPORATED BY REFERENCE: None.
TABLE OF CONTENTS
Each of Optimal, Optimal Group, WowWee, WowWee Robotics, WowWee Flytech, WowWee Alive, WowWee
Entertainment, WowWee Technologies, Think Wow Toys, Robosapien, Roboraptor, Roboreptile, Robopet,
Robopanda, Roboquad, Roboboa, Femisapien, RS Tri-bot, Roborover, Joebot, Roboscooper, Flytech
Dragonfly, Fun Flyer Moth, Fun Flyer Mosquito, Fun Flyer Butterfly, FlyTech Bladestar, FlyTech
Dragon, Flytech Bat, Lightstar, Hoverpod, Crash-FX, Facetronics, Sleeping Cuties, Woodland Friends,
The Perfect Puppy, Fin Fin Friends, Paper Jamz, Rovio, True Track, Cinemin, EZ2 Make, Hot Locks and
associated logos, are trademarks or registered trademarks of our company or an affiliate of our
company. Disney Fairies Tinkerbell and Silvermist, Elvis, Jonas Brothers, Winnie the Pooh, Mr. Men
Little Miss, Thumb Wrestling Federation (TWF), Chuck E Cheese, Jamba Juice, Mrs. Fields, Texas
Instruments DLP Technology, Apple, iPod, iPhone, U-Scan and all other trademarks appearing in this
annual report are the property of their respective owners.
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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, references to our common
shares are to our Class A shares and all references to our consolidated financial statements
are to our audited consolidated financial statements, which are included in Item 8. Financial
Statements and Supplementary Data.
Our consolidated financial statements are prepared on the basis of generally
accepted accounting principles (GAAP) in the United States, which is different in some respects
from Canadian GAAP. For a description of the material differences between U.S. GAAP and Canadian
GAAP in regard to our consolidated financial statements, see note 25 of the notes to our
consolidated financial statements.
Cautionary Statements Regarding Forward-Looking Statements
This Form 10-K contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
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. Forward-looking statements include, but are not limited to, statements about our
current expectations with respect to our future growth strategies, results, opportunities and
prospects, competitive position and industry environment. These forward-looking statements are
subject to a number of risks, uncertainties and other factors that could cause our actual results,
performance, prospects or opportunities, or those of the markets we serve, to differ materially
from those expressed in, or implied by, these forward-looking statements, including:
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our ability to continue as a going concern;
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general economic, legal and business conditions in the markets we serve;
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our existing cash and cash equivalents could prove to be inadequate to meet our
funding requirements;
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our ability to continue to satisfy Nasdaqs conditions for continued listing of our
common shares on The NASDAQ Global Market;
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our ability to complete, integrate and benefit from acquisitions, divestitures,
joint ventures and strategic alliances;
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our ability to successfully implement our strategies for our WowWee business;
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changing consumer preferences for electronics and play products;
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the seasonality of retail sales;
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concentration among our major retail customers for the products of our WowWee
business;
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our ability to protect our intellectual property;
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currency exchange rate fluctuations;
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the price and supply of raw materials used to manufacture WowWees products;
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economic, social and political conditions in China, where WowWees products are
manufactured;
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existing and future government regulations and disputes with governmental
authorities;
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product liability claims and product recalls;
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litigation;
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our ability to retain key personnel;
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consumer confidence in the security of financial information transmitted via the Internet;
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levels of consumer and merchant fraud, disputes between consumers and merchants and
merchant insolvency;
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liability for merchant chargebacks;
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our ability to safeguard against breaches of privacy and security when processing
electronic transactions and use of our payments systems for illegal purposes;
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the imposition of and our compliance with rules and practice procedures implemented
by credit card associations;
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our relationships with our suppliers and the banking associations that we rely upon
to process our electronic transactions;
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disruptions in the function of our electronic payments systems and technological
defects; and
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the other risks, uncertainties, trends and other factors discussed under the
headings Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations, Item 1A. Risk Factors and Item 1. Business and elsewhere in
this annual report.
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There may be additional risks and uncertainties and other factors that we do not currently
view as material or that are not necessarily known. The forward looking statements made in this
annual report are only made as of the date of this annual report.
Except as required by applicable securities laws, we undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result of new information,
future events, changes in circumstances or any other reason after the date of this annual report.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements to encourage companies to provide prospective information about their
companies without fear of litigation. We are relying on the safe harbor provisions of the Private
Securities Litigation Reform Act in connection with the forward-looking statements included in this
annual report.
PART I
Company Overview
Through WowWee (our business segment established by the acquisition in November 2007, and
currently comprised of WowWee Group Limited, WowWee Canada Inc., WowWee USA, Inc. and WW Sablon
Holdings), we design, develop, market and distribute technology-based, consumer robotic, toy and
entertainment products. In 2009, we operated in a second segment, through Optimal Merchant Services
Inc. (formerly, Optimal Payments Corp.) where we processed credit card payments for retail
point-of-sale merchants, and which is now primarily considered discontinued operations with the
exception of a portfolio of small and medium-sized retail point-of-sale merchant processing.
Optimal Merchant Services Inc. also holds a balance of sale from the disposition in 2009 of a
stream of residual payments under a card-present merchant portfolio.
On March 17, 2010, we entered into a support agreement with a corporation established by
Richard Yanofsky, President of WowWee Canada Inc., for the purpose of making an offer to acquire,
by way of a take-over bid to Optimal Group shareholders, all of the outstanding Class A shares of
the Company, including shares issuable upon the conversion, exchange or exercise of options and
warrants, at a price of US$2.40 per share in cash. WowWee Canada Inc. is a wholly-owned subsidiary
of Optimal Group. The offer represents a premium of approximately 50% over the closing price of the
Class A shares of US$1.60 on the NASDAQ, on March 16, 2010. Under the terms of the support
agreement, Optimal Group may solicit, respond to and consider competing third-party proposals until
closing of the offer.
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Our Corporate Organization
Our company was formed in 1984 and is incorporated under the federal laws of Canada. We
entered the consumer robotic, toy and entertainment products business segment by the acquisition in
November 2007 (see note 5 (a) of the notes to our consolidated financial statements) and we entered
the credit card payment processing business segment through the acquisition of Terra Payments Inc.
in April 2004. Our principal office is located at 3500 de Maisonneuve Blvd. West, Suite 800,
Montreal, Quebec, H3Z 3C1, and our telephone number is (514) 738-8885.
WowWee
Our Products
Based in Hong Kong, with offices in Carlsbad, California, New York, New York, Montreal,
Quebec, and Wauthier-Braine, Belgium, WowWee designs, develops, markets and distributes
technology-based, consumer robotic, toy and entertainment products that can be sold at a variety of
price points.
For 2010, WowWees product offering encompasses five distinct lines:
WowWee Robotics
WowWee is best known for its robo line of consumer robotic products. Robosapien, introduced
in 2004, was the first in a line of award winning entertainment robotic products that incorporate
applied biomorphic robotics technology and are uniquely programmed to perform a variety of
functions. The WowWee Robotics line currently includes:
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Robosapien, a robotic humanoid
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Roboraptor, a robotic dinosaur
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Tri-bot, a quick-moving, talkative, interactive robot
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Roborover, a tread-based, talking, roving explorer robot complete with sensor-based
LED headlights
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In 2010, the WowWee Robotics line will include the following new products:
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Roboscooper, a six wheeled, animated recycling robot with scooper hands who
detects and picks up small household objects and deposits them in his flatbed
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Each of the foregoing items bears the iconic Robohead symbol to signify that it is a fusion
of technology and personality.
WowWee also markets battery-operated mini versions of most of its current and archival
robotic characters.
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WowWee Alive
In 2005, WowWee introduced its WowWee Alive brand, based on highly sophisticated, proprietary
Facetronics animatronic technology. The technology was embedded into a realistic Chimpanzee,
followed by an Elvis Presley likeness that was introduced in 2007.
In 2008, WowWee Alive introduced the Alive Cubs life-like plush animals that come alive when
nurtured. Touch sensors trigger animated facial and vocal expressions; tilt sensors trigger
responses to positional changes.
Available in four styles Lion, White Tiger, Panda and Polar Bear the WowWee Alive Cubs
were the featured toy in TIME magazines The Best Inventions of the Year/Tech Buyers Guide in
2008.
In 2009, the WowWee Alive brand was expanded to include:
- WowWee Alive II, four new styles including Alive Seal Pup, Husky Puppy, Koala Joey and
Leopard Cub
- WowWee Alive Minis, collectible versions of the Lion, White Tiger, Panda and Leopard with
sound activating feeding bottle, touch and tilt sensors
-WowWee Alive Sleeping Cuties, Labradoodle and Beagle puppies, which respond to touch by
curling up into a sleeping position, and raising their heads when awakened
In 2010 the WowWee Alive brand will include additional Alive and Alive mini styles and will
also include:
- Alive Woodland Friends a series of 6 pocket sized collectible creatures, each of which
makes five unique sounds when gently squeezed
- Bella, The Perfect Puppy and Buddy, The Perfect Puppy life-size plush puppies featuring
Alive Touch Technology, which enables them to recognize the difference between a tickle,
pat, stroke or hug and respond differently to each action
- Fin Fin Friends, a collection of interactive aquarium play sets and accessories, will be
introduced as part of the WowWee Alive brand in 2010. The themed play sets feature animated
fish which interact with their environment and exhibit an increased number of behaviors as
you spend more time with them
WowWee Entertainment
In 2010 WowWee is introducing Paper Jamz, a brand of affordable and innovative play
instruments that provide an instant rock star experience and open-ended play. The creative blend
of technology and play is made possible by Active Graphics Technology, a system of touch sensitive
circuit embedded paper.
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The 2010 line will include guitars, drums, amplifiers and guitar straps.
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Think Wow Toys
Think Wow Toys (TWT), a division of WowWee USA, Inc. with an office located in New York City,
develops, manufactures and markets various novelty and plush toys at a variety of price points.
TWT products include plush, pillows, novelty food, action figures, dolls, and fashion accessories
primarily based on well known third party brands.
TWTs portfolio of licenses for 2010 include but are not limited to Disneys Fairies and
Princess, Jonas Brothers and Winnie the Pooh, Mr. Men Little Miss, Thumb Wrestling Federation (TWF)
and more. In addition, TWT has acquired several food brand licenses including Chuck E Cheese, Jamba
Juice and Mrs. Fields and has launched the EZ2 Make a line of functional food play kits based on
these well known brands.
In 2010, TWT is introducing Hot Locks dolls, a line of 4 tall collectible dolls and play
sets. The dolls are highly detailed and posable, with extremely long and manageable hair which is
the focus of all accessories and play sets.
TWT sells its products directly through its sales group and through independent sales
representatives. Purchasers of TWTs products are retail chain stores, department stores, mass
merchandisers, toys specialty stores and wholesalers. Due to TWTs broad selection of products and
key prices points (most products retail under $30.00) its products are sold to a wide variety of
retail accounts.
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WowWee Technologies
In late 2009, WowWee Technologies launched the Cinemin suite of ultra-portable, multimedia
pico projectors, powered by Texas Instruments DLP Technology, for ultra clear picture quality.
The Cinemin projectors have been designed to work with popular mobile devices such as the Apple
iPod and iPhone. The Cinemin Swivel is an affordable lightweight micro projector that features
2-hour battery life, full volume control and a unique 90- degree hinge for ceiling projection.
Our Competitive Strengths
We believe that WowWees key competitive strengths are in product development, engineering and
design, including its ability to work with third party manufacturers, technology suppliers and
intellectual property owners to develop innovative consumer technology-based products.
We believe that WowWees core competency is its ability to identify cutting-edge technologies
and, through its flexible design process, to incorporate these technologies in the development of
innovative products. The Cinemin suite of products, incorporating Texas Instruments DLP
technology; Active Graphics Technology in Paper Jamz, Alive Touch Technology in Alive Perfect Puppy
that enhances interaction and quality of experience for the consumer.
WowWee has developed robust partnerships with high quality Chinese manufacturers that have
demonstrated their commitment to WowWee by investing in advanced manufacturing methodologies and
human resources to support WowWees product development process. WowWees design and engineering
team takes a hands-on approach, managing these manufacturing relationships with a view to
ensuring that each product is manufactured and assembled at the highest quality levels.
Our Business Strategy
We have implemented specific strategies in an effort to enhance WowWees growth and financial
performance. These strategies have included:
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expanding sales and distribution through a broadening of the sales channels,
particularly outside North America;
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shifting reliance on an international distributor network to direct sales and
distribution;
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refining product design, development and production capabilities to produce a
broader assortment of products at varying price points;
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adjusting and smoothing out the seasonality of revenues
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We have also considered embarking on branded entertainment initiatives, licensing, publishing
and merchandising.
We have incurred operating cash flow deficiencies in 2009 and our current financial position
requires additional sources of financing to support operations in 2010 as further discussed in Item
7 Critical Accounting Policies and Estimates.
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Our Customers
WowWee products are sold in a range of brick and mortar channels including grocery stores,
pharmacies, toy shops, department stores and high-end consumer technologies stores. Key North
American retail customers include:
Manufacturing
WowWees products are predominantly produced in China by third party manufacturers, many with
whom WowWee has long-standing relationships. Consistent with industry practice, the use of third
party manufacturers allows WowWee to avoid incurring fixed manufacturing costs, while improving
flexibility, capacity and production technology.
By outsourcing its manufacturing process, WowWee maintains a flexible business model that
enables it to be responsive to changing technology. In addition, once a product has reached its
commercialization phase, WowWee is able to minimize inventory risk by manufacturing products based
upon actual customer orders; however, certain customer orders may be subject to cancellation. Upon
final assembly, products can be shipped directly from the manufacturing locations to retailers and
distributors, with title to the products passing to retail customers in the country of origin.
Although WowWee does not conduct the day-to-day manufacturing of its products, it is
extensively involved in the design of the product prototype and production tools, dies and molds
for its products and seeks to ensure quality control by actively reviewing the production process
and testing the products produced by its manufacturers. WowWee employs quality control inspectors
who rotate among its manufacturers factories to monitor the production of substantially all of its
products.
WowWees quality assurance personnel advise as to compliance with applicable regulations
during each phase of product development, and perform compliance testing, and coordinate third
party independent compliance testing, on all WowWee products. See Government Regulation below.
Once pre-production testing has been completed and product production has been approved, WowWees
quality assurance personnel monitor production at the manufacturers facility for compliance with
WowWees quality requirements.
Suppliers
The principal raw materials used in the production and sale of WowWees products are plastics,
metals, plush, integrated circuits and standard electronic components, most of which are currently
available from a variety of sources. In certain instances, WowWee purchases components under
license from the rights holder. Although WowWee does not manufacture its products, it owns the
tools, dies and molds used in the manufacturing process, and these are transferable among
manufacturers should WowWee choose to employ alternative manufacturers.
Sales, Marketing and Distribution
Within the United States and Canada, WowWee sells its products directly to its retailer
customers through its direct sales channel, through independent sales representatives and through
distributors. WowWee products are sold to most European countries directly through WowWee Europe.
For retailers in the rest of the world, WowWee utilizes a network of distributors located in
various jurisdictions. In 2009, approximately 56% of its products were sold in North America, with
the balance being sold internationally.
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WowWee does not have written agreements with its customers. Instead, sales are made based on
purchase orders, primarily against letters of credit. The majority of orders are traditionally
written during the first two quarters of the year, with shipments occurring throughout the year as
new product becomes available. The majority of the product shipments occur during the third and
fourth quarters of the year.
WowWee presents products to its customers at trade shows, such as International CES, and
various toy fairs, as well as at private meetings throughout the year. WowWee generally introduces
new products to its major customers during the year prior to the year of their introduction for
retail sale. WowWee employs a range of advertising and promotional vehicles to promote its products
to consumers including broadcast, Internet and print advertising, Social Media, PR outreach,
product placements and sampling and exhibition at consumer expositions. WowWee also maintains a
corporate website and individual sites for its brands and products.
WowWee products have been recognized for excellence in technology, design and quality by
numerous organizations around the world; including over 30 awards and commendations garnered by the
2008 product line.
In 2008, products from the WowWee Robotics product line were a featured toy in McDonalds
Happy Meal boys brand in Europe, the Middle East and Latin America, following a successful program
in most McDonalds territories worldwide during 2007.
Research and Development; Product Development
WowWees engineering and design team develops new technologies using internal
capabilities and seeks to identify emerging or underutilized innovations that are currently being
developed or that are available in the marketplace. In order to leverage the man-hours invested in
prior products, older generations of products frequently form the foundation for the next
generation of products as well as new product lines. New technologies are then integrated to
enhance the overall functionality of the product.
In sourcing technologies, WowWee reviews the latest technology innovations at trade-shows,
conferences, colleges and universities, on the Internet, and through word-of-mouth. WowWee
regularly reviews technologies or product concepts from third party sources that it believes could
have potential synergies with WowWees current product line or that could be successfully
commercialized based upon WowWees development process.
WowWee generally brings all sought-after third party technologies in-house, but once inside,
allows its internal engineering and design team to develop new product concepts with relative
autonomy. WowWee also licenses third party technologies for development within unique consumer
applications developed by WowWee.
In the course of its product development, WowWee leverages its retail relationships to help
gauge potential consumer demand. WowWee conducts roadshow meetings with its key retail customers
to solicit immediate feedback on its new product concepts. Based upon this early feedback, WowWee
determines the course of further development or, as necessary, modifies the products. In the early
phases of product development, WowWee works with its third party manufacturers to engineer a
manufacturing prototype to determine if the potential product can be manufactured on a commercially
viable scale. Once further development work has been conducted, and a preliminary sample is
available, WowWee moves to solicit further feedback from key retail customers, and begins to take
preliminary orders for the product. If the initial orders from these key retail customers indicates
that the product might achieve sufficiently profitable unit sales, WowWee continues its development
work and initiates the product tooling process with one of its product manufacturers.
Safety testing of WowWees products is done at the manufacturers facilities by quality
control personnel employed by WowWee or by independent third party contractors engaged by WowWee.
Safety testing is designed to ensure compliance with applicable product safety regulations (see
Government Regulation below). In addition, certain of WowWees larger customers use independent
laboratories to test WowWees products according to their own standards before shipment.
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Government Regulation
As a developer and supplier of consumer products, WowWee operates in a highly regulated
environment in the United States and international markets. In the United States, WowWees products
are subject to the provisions of the Consumer Product Safety Act (CPSA), the American Society for
Testing and Materials (ASTM), Underwriters Laboratories (UL), the Federal Hazardous Substances
Act (FHSA), the Flammable Fabrics Act (FFA) and the regulations promulgated thereunder, as well
as the rules and regulations of the Federal Communications Commission (FCC Rules). The CPSA and
the FHSA enable the Consumer Products Safety Commission (CPSC) to exclude from the market
consumer products that fail to comply with applicable product safety regulations or otherwise
create a substantial risk of injury, and articles that contain excessive amounts of a banned
hazardous substance. The FFA enables the CPSC to regulate and enforce flammability standards for
fabrics used in consumer products. The FCC Rules require conformity with technical standards that
limit radio frequency emissions in order to control potential interference to radio communications.
Similar laws exist in various international markets. WowWee maintains a quality control program
designed to ensure compliance with all applicable laws (see Research and Development; Product
Development above). Regulations that apply to the sale of WowWees products also include
guidelines for advertising directed toward children. All food products must conform to all rules
and regulations of the United States Food and Drug Administration. Our products are manufactured in
accordance with the U.S. Food & Drug Administrations requirements for current Good Manufacturing
Practices (cGMPs) per 21CFR110. All products produced comply with all applicable government
safety regulations and confirm to the safety requirements of ASTM F963.
Competition
WowWee competes with numerous domestic and foreign manufacturers, importers and marketers in
each of its product categories. Globally, certain of WowWees competitors have greater financial
resources, larger sales and marketing and product development departments, stronger brand name
recognition, longer operating histories and benefit from greater economies of scale.
Intellectual Property
All of WowWees products are produced and sold under trademarks owned by it or, in certain
cases, licensed to it. WowWee registers some of its trademarks in certain jurisdictions where its
products are sold, based on the managements determination as to the long-term value of the
trademark. WowWee also files design patents in China and other jurisdictions for most of its
products and has recently instituted a program under which utility patents will be filed where it
is deemed appropriate as a means of protecting WowWees proprietary technology.
WowWee maintains ownership of all of the tooling associated with its products.
Employees
As of December 31, 2009, we employed 135 full-time employees. 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 19 of the notes to our consolidated financial statements.
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 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 the United States with reconciliation to
accounting principles generally accepted in Canada.
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You may request a copy of these filings, at no cost, by writing or telephoning us at the
following address or telephone number:
Optimal Group Inc.
3500 de Maisonneuve Boulevard West
Suite 800
Montreal, Quebec, H3Z 3C1
Tel: (514) 738-8885
We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on
Form 8-K with the Securities and Exchange Commission. You may read and copy any materials we file
with the Securities and Exchange Commission at the Commissions Public Reference Room at 450 Fifth
Street, NW, Washington, DC 20549. You may obtain information on the hours of operation of the
Securities and Exchange Commissions Public Reference Room by calling the Commission at
1-800-SEC-0330. The Securities and Exchange Commission maintains an Internet site
(
http://www.sec.gov
) that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the Commission. Such reports and all amendments to
such reports regarding the Company are available free of charge or through the Companys website,
www.optimalgrp.com
, as soon as reasonably practicable after such reports are electronically filed
with the Securities and Exchange Commission. Information contained in or otherwise accessed through
our website does not form part of this Annual Report. All such references to our website are
inactive textual references only.
An investment in our common shares involves a high degree of risk. You should carefully
consider the risks described below before making an investment decision. Our business, financial
condition and results of operations could be materially and adversely affected by any of these
risks. The trading price of our common shares could decline due to any of these risks or other
factors, and you may lose all or part of your investment. The risks described below are those that
we currently believe may materially affect us.
We may be unable to continue as a going concern.
Our consolidated financial statements have been prepared on a going concern basis in
accordance with U.S. GAAP. The going-concern basis of presentation assumes that we will continue
our operations for the foreseeable future and be able to realize our assets and discharge our
liabilities and commitments in the normal course of business.
We have incurred a net loss from continuing operations of $67.8 million and a net cash
outflows from operating activities excluding discontinued operations of $19.8 million. The recent
banking and financial crisis and the global economic recession have created an extremely
challenging retail and economic environment in the United States, Canada and Europe, which has
negatively impacted our operating performance and potentially that of our customers and suppliers.
Our ability to continue as a going concern depends on the success of managements plans to overcome
these conditions and ultimately achieve positive cash flows from operations and become profitable.
We currently fund the majority of our operations from our cash and cash equivalents and bank
indebtedness. The majority of our bank indebtedness is based on qualifying accounts receivable and
is otherwise not fully available to be drawn on during seasonal low sale periods due to the lack of
accounts receivable available at the time. We have been unable to secure any new sources of
financing not secured by accounts receivable which will be required during low seasonal sale
periods of the year. Our balance of cash and cash equivalents generally decreases during the second
and third quarters of the year, as cash is used to fund product development and production, and
increases in the fourth and first quarters in connection with the shipping and collection periods.
If operating performance continues in its current trend, we will require financing in order to
meet our cash flow requirements and fund our operations especially during the second and third
quarters of 2010. However, additional financing may not be available in amounts or on terms that
are acceptable to us. Without financing, we may be unable to fund product development and the
production of inventory required for sales in the third and fourth quarters and therefore will not
be able to capitalize on potential future sales. Refer to note 27, of the notes to our consolidated
financial statements Subsequent events, for the details of a take-over bid which we are
supporting. If we are unable to obtain additional financing in the near term, we may be required to
curtail operations in order to offset the lack of available funding, which could have a material
adverse impact on us, and consequently, there is a substantial doubt about us ability to continue
as a going concern.
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Our consolidated financial statements do not reflect adjustments that would be necessary if
the going concern basis was not appropriate. If the going concern basis was not appropriate for
these consolidated financial statements, then significant adjustments would be necessary in the
carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet
classifications used. The appropriateness of the going concern basis is dependent upon, among other
things, future profitable operations, the ability to negotiate new sources of financing, if
necessary, and the ability to generate sufficient cash from operations and financing arrangements
to meet its obligations.
The results of certain payment processing portfolios which were sold in 2009, as well as the
card-not-present and the Canadian card-present payment processing businesses sold in 2008, are
presented separately under discontinued operations in the consolidated statements of operations and
comprehensive loss for the current and prior periods. The balance sheet also presents the assets
and liabilities related to the discontinued operations separately for current and prior years.
The effect of the take-over transaction described in note 27 of the notes to our consolidated
financial statements Subsequent events, on its financial position and future cash flows of ours,
if any, have not been considered in the preparation of our consolidated financial statements.
If the current global economic conditions continue to deteriorate and the current financial crisis
deepens, WowWees business and our financial results may continue to be adversely affected.
The recent global economic deterioration and financial crisis adversely affected WowWees
business and our financial results in 2008 and 2009. WowWee designs, manufactures and markets a
variety of consumer robotic, toy and entertainment products worldwide. WowWees sales of these
products are affected by the level of discretionary consumer spending, which has deteriorated
sharply in the United States and in many countries around the world in which WowWees products are
sold. Consumers discretionary purchases of consumer robotic, toy and entertainment products may
be negatively affected by job losses, foreclosures, bankruptcies, reduced access to credit,
significantly falling home prices, lower consumer confidence and other macroeconomic factors that
curtail consumer spending behavior. If WowWees retail customers encounter liquidity problems due
to weak retail sales or their inability to raise sufficient capital due to credit constraints,
WowWee may not be able to collect accounts receivable from the affected customers. Finally, many of
the ultimate effects and consequences of the current global economic crisis are not yet known. Any
one or all of these factors could potentially have a material adverse effect on WowWees liquidity
and capital resources, including increasing our cost of capital or our ability to raise additional
capital if needed, or otherwise negatively affect WowWees business and our financial results
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We may be subject to litigation from the Internet gambling merchants that used our former payments
processing business for their U.S. Internet gambling business activities seeking to force us to pay
to them related processing reserve account balances.
Pursuant to the non-prosecution agreement that we entered into with the Office of the United
States Attorney for the Southern District of New York, on October 30, 2009, we have recognized that
the services provided by certain Internet gambling merchants of our former payments processing
business violated certain United States laws. On the basis of advice received by management that a
court would not enforce our obligation to pay to these merchants their respective processing
reserve account balances (an aggregate amount of $9.6 million) due to the illegality of their
related Internet gambling activities, we have, for accounting purposes, derecognized (reversed) our
liability to pay such account balances and we will refuse the demand of any such Internet gambling
merchant for the payment of its reserve account balance. Certain of these merchants may
nevertheless initiate legal proceedings against us in an attempt to enforce payment of their
respective account balances, which we would be forced to defend. We could incur significant costs
in the defense or settlement of any such legal proceedings and there can be no assurance that a
court would not enforce the payment of any particular account balance(s).
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Liquidity problems or bankruptcy of WowWees key customers could have a material adverse effect on
WowWees business, our financial condition and our results of operations.
Many of WowWees key customers are mass-market retailers. In the past, the mass-market retail
channel in the United States has experienced significant shifts in market share among competitors,
causing some large retailers to experience liquidity problems. Certain of WowWees customers filed
for bankruptcy in 2008 and the recent global economic crisis has adversely affected the financial
condition of most retailers. WowWees sales to customers are typically made on credit without
collateral. There is a risk that customers will not pay, or that payment might be delayed because
of bankruptcy, contraction of credit availability to such customers or other factors beyond
WowWees control, which could increase WowWees exposure to losses from bad debts. In addition, if
these or other customers were to cease doing business as a result of bankruptcy or significantly
reduce the number of stores operated, it could have a material adverse effect on WowWees business,
our financial condition, and our results of operations.
If the bid price for our common stock fall below $1.00 per share, we may not be able to maintain
our listing on the NASDAQ Global Market, which would subject the trading of our common share to the
SECs penny stock rules and would decrease the liquidity of our common shares.
Our common shares are currently listed on The NASDAQ Global Market (Nasdaq), which has
quantitative maintenance criteria that provide that a stock may be delisted if the closing bid
price per share of such stock falls below $1.00 for 30 consecutive business days. In accordance
with Nasdaq Marketplace Rules, we would have a period of 180 calendar days to regain compliance
after the receipt of a Nasdaq staff deficiency letter by maintaining a closing bid price of $1.00
per share for a minimum of 10 consecutive business days. If we do not regain compliance, we may
appeal Nasdaqs delisting determination to a Nasdaq Listing Qualifications Panel. If we fail to
maintain continued listing, our common shares may be traded over-the-counter on the OTC Bulletin
Board or in the pink sheets. These alternative markets, however, are generally considered to be
less efficient than, and not as broad as, Nasdaq. Many OTC stocks trade less frequently and in
smaller volumes than securities traded on the Nasdaq markets, which could have a material adverse
effect on the liquidity of our common shares, and impair our ability to raise additional capital.
In addition, our common shares may become subject to penny stock rules. The SEC generally
defines penny stock as an equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. We are not currently subject to the penny stock rules because our
common shares qualify for an exception to the SECs penny stock rules for companies that have an
equity security that is quoted on The NASDAQ Stock Market. However, if our common shares were
delisted, our common shares would become subject to the penny stock rules, which impose additional
sales practice requirements on broker-dealers who sell our common shares. If our common shares were
considered penny stock, the ability of broker-dealers to sell our common shares and the ability of
our stockholders to sell their shares in the secondary market would be limited and, as a result,
the market liquidity for our common shares would be adversely affected. We cannot assure you that
trading in our common shares will not be subject to these or other regulations in the future
The obligations of United Bank Card Inc. under the Purchase and Sale Option Agreement among Optimal
Payments Corp., United Bank Card, Inc. and Jared Isaacman, dated as of February 2, 2009, are
unsecured and there is a risk that we will not receive payment in full of the purchase price
payable thereunder.
On February 2, 2009, Optimal Payments Corp. entered into a Purchase and Sale Option Agreement
with United Bank Card, Inc. and its principal, Jared Isaacman. Under the terms of the agreement,
United Bank Card has the right to cause Optimal Payments Corp. to sell, and Optimal Payments Corp.
has the right to require United Bank Card to purchase, Optimal Payments Corp.s right to residual
payments and other ancillary revenues from the processing of credit card-present transactions for a
portfolio of merchant accounts. The purchase price to be paid by United Bank Card under the
agreement is $11 million. The purchase price will be subject to adjustment monthly by: (i)
subtracting revenues that have been retained by Optimal Payments Corp. after deducting payment to
United Bank Card of fees relating to the servicing of the merchant accounts by United Bank Card and
(ii) adding a notional rate of 12% per annum to the resulting amount. United Bank Card will be
entitled to exercise its purchase right at any time up to December 31, 2014 and Optimal Payments
Corp. will be entitled to exercise its sale right at any time on or following the earlier of: (i)
February 2, 2011 and (ii) the sale of United Bank Card. United Bank Cards obligations under the
agreement are being guaranteed by Jared Isaacman, however, neither United Bank Cards obligations
nor Jared Isaacmans guarantee are secured. If United Bank Card and Jared Isaacman were to default
under their obligations, we might not be in a position to collect the purchase price (as reduced
pursuant to the adjustments described above) and we might not find another buyer for the portfolio
of residual payments and ancillary revenues.
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Our business depends upon the services of key personnel.
Our ability to successfully integrate acquisitions and to grow our business depends largely
upon the services of our Chief Executive Officer and our Chief Financial Officer, the loss of any
of whom could adversely affect our business and overall results of operations.
WowWees future success depends largely on the continued contribution of its key executives,
designers and technical personnel. The loss of services of any of these key personnel could harm
WowWee. Recruiting skilled designers and technical personnel is highly competitive. If WowWee fails
to retain any of these key personnel, and/or fails to hire, train and integrate replacement
personnel, it might not be able to maintain and expand its business, and our results of operations
could be adversely affected.
We may be unable to find suitable acquisition candidates and we may not be able to successfully
integrate businesses we acquire into our operations.
Our future growth strategy may include acquiring other businesses. For example, in November
2007 we acquired WowWee. However, we may not be able to identify and acquire suitable target
businesses or, to the extent required, obtain financing for such acquisitions on satisfactory terms
or at all. Integrating acquired businesses into our operations may involve unforeseen difficulties
and may require a disproportionate amount of resources and management attention. Acquisitions
involve a number of special risks, including:
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the time and expense associated with identifying and evaluating an acquisition,
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the diversion of managements attention from day-to-day operations,
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the difficulty in integrating widely dispersed operations with distinct corporate
cultures,
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the potential loss of key employees of the acquired business,
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the difficulty of incorporating acquired technologies successfully,
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the potential impairment of relationships with employees, customers and strategic
partners, and
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the inability to maintain uniform standards, controls, procedures and policies.
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Customer satisfaction or performance problems at an acquired business could adversely affect
the reputation of our entire business. Future acquisitions may be financed through the issuance of
common shares, which may dilute the ownership of our shareholders, or through the incurrence of
indebtedness. Acquisitions may also result in significant charges to earnings. Furthermore,
competition for acquisition candidates could escalate, thereby increasing the costs of making
acquisitions or making suitable acquisitions more difficult to find.
We are subject to the risk that a taxation authority could challenge certain filing positions we
have taken, and that a successful challenge could require us to pay significant additional taxes.
Although we believe that all filing positions we take in our tax returns are reasonable and
appropriate, there is no assurance that a taxation authority will not challenge those positions.
Such challenges could include disputing positions taken in connection with the transfer of our
online gaming processing business to FireOne Group plc and its affiliates in 2005, and the
subsequent public offering of a portion of the FireOne Group plc ordinary shares. A challenge to
certain filing positions we have taken, if successful, could result in us being required to pay
additional taxes (including penalties and interest) and the amount of such additional taxes could
be material to us.
We are subject to exchange rate fluctuations between the U.S. dollar and the Canadian dollar and
Euros.
The majority of our revenues are generated in U.S. dollars and Euros. A significant portion of
our expenses are incurred in both Canadian dollars and Euros. A fluctuation in the value of the
U.S. dollar relative to the Canadian dollar or the Euro may result in variations in our revenues,
expenses and earnings. We have not implemented a currency hedging program.
Our operating strategy for WowWee might not succeed and the anticipated benefits to us from our
acquisition of WowWee might not be realized.
Our ability to realize the anticipated benefits of our acquisition of the WowWee business will
depend, in part, on the successful implementation of specific strategies designed to enhance the
growth and financial performance of the WowWee business. These include:
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Expanding sales and distribution through a broadening of WowWees sales channels,
particularly outside North America in emerging markets;
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Expanding product design, development and production capabilities to produce an
increased number of products at varying price points;
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Broadening development initiatives into products that combine computer connectivity,
utility and entertainment; and
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Embarking on branded entertainment initiatives, licensing, publishing and
merchandising; and
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We have encountered challenges in implementing these strategies thus far. If we fail to
succeed in implementing these and other strategies that we might develop, WowWee could fail to
grow, we may not realize the benefits anticipated from the acquisition of the WowWee business, and
our financial performance and results of operations could continue to be significantly adversely
affected.
If WowWee does not satisfy consumer preferences our results of operations may be adversely
affected.
WowWee competes with a wide range of manufacturers, marketers and sellers of consumer
electronics and play products, many of which are larger than us and have greater financial
resources than we do. Consumer preferences change. If its competitors products achieve greater
market acceptance than WowWees products, WowWees products are unable to satisfy consumer
preferences, or WowWee fails to respond to changes in consumer preferences with products that
achieve and sustain market acceptance in a timely and cost-effective manner, demand for WowWees
products could decrease and our results of operations could be adversely affected.
WowWees business is seasonal and its annual operating results depend, in large part, upon the
relatively brief holiday season in the fourth quarter of the year.
Retail sales of WowWees products are susceptible to seasonal variations, with a majority of
sales occurring between September and December. As a result, WowWees operating results depend, in
large part, upon sales made during this period. If WowWees sales, operating earnings or cash flows
from operating activities during the September to December period in any fiscal year are low, we
may not be able to compensate sufficiently for the generally lower sales, operating earnings, or
cash flows from operating activities during the first eight months of the fiscal year.
Tighter inventory management by retailers resulting in shorter lead times for production and
possible shipping disruptions during peak demand times may adversely affect WowWees ability to
deliver its products in time to meet retailer demands.
As retailers attempt to manage their inventories better by requiring suppliers to ship
products closer to the time the retailers expect to sell products to consumers, suppliers such as
WowWee have experienced shortened lead times for production. Disruptions in shipping, for any
reason, from China during peak demand times may affect the ability of WowWee to deliver its
products in time to meet retailer demand.
WowWees sales are concentrated among a relatively small number of major retailer customers, which
exposes WowWee to any financial difficulties or changes in purchasing preferences or policies of
these customers.
A small number of major retail customers account for a large proportion of WowWees sales.
WowWees customers make purchases by one-time purchase orders, as opposed to making long-term
purchase commitments. These customers could reduce their overall purchases of WowWees products for
any reason, including due to financial difficulties, or could reduce the shelf space allotted for
such products. Any such change by a major customer of WowWee could significantly harm WowWees
business and our results of operations.
Consolidation among WowWees major customers could compound the effect upon us of any
financial difficulties suffered by such customers or any changes in the purchasing preferences or
policies of such customers. Increased consolidation among its customers could negatively impact the
ability of WowWee to negotiate higher sales prices for its products and could result in lower gross
profit margins.
All of WowWees products are manufactured in China and we are subject to the risk that political
developments, including currency revaluation and trade relations between China and the markets in
which WowWees products are sold, could increase the costs of producing and delay or prevent
shipping such products.
All of WowWees products are manufactured by third parties in the Peoples Republic of China.
Social and economic conditions in China affecting the movement of products from China to the
markets in which WowWees products are sold, particularly North America, and the labor and other
costs of doing business in China could have a significant negative impact on our results of
operations. Factors that could negatively affect WowWee include a
potential revaluation of the Chinese yuan, which may increase the cost of producing products
in China, increased
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labor costs and labor disputes that could result in difficulties in
transporting products manufactured in China to the ports on the western coast of North America.
Also, a negative change in Chinas trade status with the United States or the European Union,
including the imposition of trade sanctions, could significantly increase the cost of products
imported from China. Any increase in the cost of producing and the cost of, or disruptions in,
shipping WowWees products in and from China could significantly adversely affect our results of
operations.
A reduction or interruption in the supply of raw materials, parts and components or a significant
increase in the price of supplies used to produce WowWees products could negatively affect
WowWees gross profit margins.
WowWee may from time to time encounter shortages of materials, parts and components from its
suppliers or a price increase in such materials, parts and components resulting from their
shortage. Price increases for components such as resin used in plastics, rising fuel and
transportation costs and raw material prices, may significantly increase WowWees operating costs,
reduce WowWees gross profit margins and our results of operations. Due to market conditions,
timing of pricing decisions, competition and other factors, there can be no assurance that WowWee
will be able to offset any of such increased costs by adjusting the prices of its products because
increases in the prices of WowWees products could result in lower sales.
As a developer and supplier of consumer products, WowWee is subject to various government
regulations, violation of which could subject us to sanctions.
As a developer and supplier of consumer products, WowWee operates in a highly regulated
environment in the United States and international markets. Regulations that apply to its products
and their importation include regulation of advertising directed toward children and product
safety. There can be no assurance that WowWee or its products will be in compliance in the future
with such regulations. In addition, changes in laws or regulations may lead to increased
compliance-related costs in WowWees business. Failure to comply with such regulations could result
in monetary liabilities and other sanctions which could have a negative impact on WowWee, our
financial condition and our results of operations. WowWee could also be subject to involuntary
product recalls or may voluntarily conduct a product recall, the costs of which could be
significant. In addition, any product recall, regardless of direct costs of the recall, may harm
consumer perceptions of WowWees products.
WowWee could be the subject of future product liability suits or product recalls, which could harm
WowWee.
Products that have been or may be developed by WowWee may expose us to potential liability
from personal injury or property damage claims by the users of such products. There can be no
assurance that a claim will not be brought against us in the future. While we currently maintain
product liability insurance coverage, we may not be able to maintain such coverage or such coverage
may not be adequate to cover all potential claims. Moreover, even if we maintain sufficient
insurance coverage, any successful claim could significantly harm WowWees reputation among
consumers, which could result in decrease sales, harming our financial condition and our results of
operations.
Failure by WowWee to protect its proprietary intellectual property and information could have a
material adverse effect on WowWee, our financial condition and results of operations.
The value of WowWee depends to a large degree on its ability to protect its intellectual
property and information, including its trademarks, trade names, copyrights and trade secrets.
WowWees business is subject to the risk of third parties counterfeiting its products or infringing
on its intellectual property rights. Any failure by WowWee to protect its proprietary intellectual
property and information or a successful challenge by a third party that WowWee has infringed its
intellectual property rights, could have a material adverse effect on WowWee, our financial
condition and our results of operations.
Optimal Payments is at risk of loss due to fraud, disputes and merchant insolvency
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Optimal Payments faces risks of loss due to fraud and disputes between consumers and
merchants, including the unauthorized use of credit card and bank account information and identity
theft, merchant fraud, disputes over the quality of goods and services, breaches of system
security, employee fraud and use of its system for illegal or improper purposes. When a consumer
pays a merchant for goods or services using a credit card and the cardholder disputes the charge,
the amount of the disputed item gets charged back to Optimal Payments and the relevant credit card
association may levy fees against Optimal Payments. Chargebacks can arise from the unauthorized use
of a cardholders card number or from a cardholders claim that a merchant failed to perform a
transaction. In addition, if Optimal Payments chargeback or dispute rate becomes excessive, credit
card associations
may require it to pay fines and have done so in the past. There is a risk that Optimal Payments may
be required to pay fines in the future and the amount of such fines may be material. While Optimal
Payments attempts to recover
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from the merchant the amount charged back and the amount of any fines
imposed upon it by credit card associations, Optimal Payments may not always be successful in doing
so for various reasons, such as merchant insolvency.
Optimal Payments may not be able to safeguard against security and privacy breaches in its
electronic transactions.
A significant element of electronic commerce and communication is the secure transmission of
confidential information over public networks. Although Optimal Payments strives to use only proven
applications for premium data security and integrity to process electronic transactions, use of
these applications may not be sufficient to address changing market conditions or developments in
technology or the security and privacy concerns of Optimal Payments existing and potential
customers.
Optimal Payments may not be able to prevent security or privacy breaches. A security or
privacy breach could:
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expose Optimal Payments to liability and to potentially costly litigation;
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cause Optimal Payments to incur expenses relating to the remediation of these
breaches; and
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cause Optimal Payments customers to lose confidence in its services, harm its
reputation, and deter customers from using Optimal Payments services.
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Although Optimal Payments requires that its agreements with service providers who have access
to merchant and consumer data include confidentiality obligations that restrict these parties from
using or disclosing any consumer or merchant data except as necessary to perform their services
under the applicable agreements, there can be no assurance that these contractual measures will
prevent the unauthorized disclosure of merchant or consumer data. Individuals may attempt to
circumvent the measures that Optimal Payments takes to protect customer transaction data. Security
breaches could result in the disclosure of proprietary information, such as bank account or credit
card information.
If Optimal Payments is unable to protect the security and privacy of its electronic
transactions and data, it could be exposed to risk of loss, litigation and possible liability, and
its business volume, revenues and results of operations will be materially adversely affected.
Optimal Payments payments systems might be used for illegal or improper purposes.
Despite its measures to detect and prevent identity theft, unauthorized use of
credit cards, and similar misconduct, and to monitor and comply with laws and regulations
restricting or prohibiting the processing of certain types of transactions for its merchant
customers, Optimal Payments payments systems are susceptible to illegal or improper uses by third
parties. These uses may include illegal online gaming, fraudulent sales of goods or services,
illicit sales of prescription medications or controlled substances, software and other intellectual
property piracy, money laundering, bank fraud, child pornography trafficking, prohibited sales of
alcoholic beverages and tobacco products and online securities fraud. Illegal or improper use of
payments systems may lead to increased government regulation of Optimal Payments or other legal
consequences which may have an adverse impact on its revenues and results of operations. In
addition, laws or regulations that restrict or prohibit the business activities of Optimal
Payments merchant customers may prevent Optimal Payments from providing, or may make it
impracticable for it to continue to provide, its payments systems to such merchants and their
customers, which would adversely affect its revenues and results of operations.
Optimal Payments must comply with credit card association rules and practices, which could impose
additional costs and burdens on its payments business
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Optimal Payments must comply with the operating rules of the various credit card associations
with which it is registered. The associations could adopt operating rules with which it may be
difficult or impossible for Optimal Payments to comply. In addition, cases of fraud or disputes
between consumers and merchants can result in chargebacks. If Optimal Payments chargebacks or
disputes become excessive, its processing suppliers could fine it or terminate its ability to
accept credit cards for payments. The termination of Optimal Payments relationships with credit
card associations, or acquiring banks, would limit its ability to provide transaction processing
services.
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The failure of Optimal Payments systems, the systems of third parties or the Internet could
negatively impact its business and harm its reputation for reliability.
Computer viruses, disgruntled or rogue employees, electronic break-ins, power losses,
telecommunications failures, security breaches, natural disasters and similar events could damage
or disrupt the function of Optimal Payments systems and those of third parties upon whom it
relies, such as bank processing and credit card systems, thereby adversely affecting Optimal
Payments business and reputation. Optimal Payments insurance policies may not adequately
compensate it for any losses that may occur due to any failures or interruptions in these systems.
If Optimal Payments relationships with its banking partner deteriorates, its ability to process
transactions could be impaired or halted
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Optimal Payments relies on strategic partnerships and suppliers to help supply, promote and
distribute its services. Optimal Payments particularly depends upon its strategic banking
relationship. The credit card association members and financial institutions that process
electronic transactions have adopted guidelines that apply to online transactions. While we believe
that Optimal Payments operations comply with these guidelines, credit card association members and
financial institutions could nonetheless decide in the future to refuse to process transactions for
Optimal Payments. Such a decision could be implemented with little or no advance notice to Optimal
Payments. If such a situation occurred and Optimal Payments were not able to conclude alternative
arrangements with other credit card association members or financial institutions, its ability to
carry out payment transactions could be impaired or even halted.
Optimal Payments operates in a competitive market for its services
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Potential competitors in Optimal Payments market include credit card association members,
financial institutions, payment processors and other similar entities, many of which may have
greater financial resources than Optimal Payment does, more firmly entrenched market positions or
greater brand recognition.
Optimal Payments may not be able to identify, develop, manufacture, market or support new
services or offer new services that appeal to its customers as fast as its competitors. If Optimal
Payments fails to anticipate or respond effectively to customer requirements or experiences
significant delays in product developments or roll-outs, it may lose its market share and our
revenues and results of operations could be adversely affected.
Optimal Payments relies upon non-exclusive arrangements with independent sales agents to acquire
and retain its customers
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Optimal Payments relies solely upon independent sales agents to acquire and retain its
customers. Its arrangements with these independent sales agents are non-exclusive. As a result,
Optimal Payments sales agents may enter into arrangements with Optimal Payments competitors that
provide preferential treatment to those competitors or they may terminate their arrangements with
Optimal Payments. If Optimal Payments fails to maintain strong relationships with its independent
sales agents or fails to provide its independent sales agents with sufficient incentives to
motivate their sales efforts, Optimal Payments customer base may not expand and could decrease.
Optimal Payments business is subject to fluctuations in general business conditions.
The current downturn in general economic conditions has caused some of Optimal Payments
merchant customers to experience difficulty in supporting their current operations and implementing
their business plans. If these merchants make fewer sales of their products and services, Optimal
Payments will have fewer transactions to process, resulting in lower revenues.
In addition, in a recessionary environment, the merchants Optimal Payments serves become
subject to a higher risk of insolvency, which could adversely affect our results of operations.
Optimal Payments bears the credit risk for chargebacks related to billing disputes between credit
card holders and merchants. If a merchant seeks protective relief under bankruptcy laws or is
otherwise unable or unwilling to reimburse Optimal Payments for chargebacks borne by Optimal
Payments, Optimal Payments may be liable for the full transaction amount of a chargeback.
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The legal status of online gaming is uncertain in some of the jurisdictions in which Optimal
Payments has provided settlement processing services for online gaming activities. Future
enforcement proceedings may subject us to substantial penalties. Reports of enforcement proceedings
that are unfavorable to Optimal Payments or to its customers or suppliers may adversely affect the
trading price of our common shares.
In many jurisdictions there are few, if any, laws or regulations that deal directly with
payment processing for online gaming transactions. The legal status of online gaming itself is
uncertain in many of the jurisdictions in which Optimal Payments has operated. While some
jurisdictions have taken the position that online gaming is legal and have adopted or are in the
process of reviewing legislation to regulate online gaming, other jurisdictions have taken the
opposite view and enacted legislation to attempt to restrict or prohibit online gaming. For
example, the United States Unlawful Internet Gambling Enforcement Act of 2006 prohibits any person
engaged in the business of betting or wagering from knowingly accepting payments related to
unlawful bets or wagers transmitted over the Internet, which resulted in our then majority owned
subsidiary, FireOne Group plc, ceasing to process settlement transactions originating from United
States customers that may be viewed as related to online gaming. We may be exposed to adverse
consequences as a result of future enforcement proceedings, governmental investigations or lawsuits
initiated against Optimal Payments in jurisdictions where online gaming is restricted or
prohibited. Any adverse findings, rulings or judgments rendered against Optimal Payments could
involve substantial penalties, fines, injunctions or other sanctions being invoked against it and
could have a material adverse effect on our financial condition. Any future enforcement or legal
proceedings threatened or commenced against Optimal Payments relating to online gaming, whether or
not ultimately successful, could involve substantial litigation expense and the diversion of the
attention of key executives. The outcome of any such litigation cannot be predicted. From time to
time, reports about regulatory initiatives, or enforcement proceedings that are or would be
unfavorable to us, or to Optimal Payments customers or suppliers, have had a swift and negative
impact on the trading price of our common shares, and our common shares may again experience
trading price volatility in the future due to such reports.
Optimal Payments status under certain financial services regulations is unclear.
Optimal Payments operates in an industry subject to government regulation. Optimal Payments
currently is subject to money laundering regulations and may in the past have been subject to money
transmitter or electronic money regulations in various jurisdictions. If Optimal Payments is found
to have been in violation of any such regulations, it could be exposed to financial liability,
including substantial fines which could be imposed on a per transaction basis, and disgorgement of
our profits.
We have a material amount of intangible assets which, if they become impaired, would result in a
reduction in our net income.
Current accounting standards require that goodwill and intangible assets be periodically
evaluated for impairment. Goodwill is the amount by which the cost of an acquisition accounted for
using the purchase method exceeds the fair value of the identifiable net assets we acquire. Any
further declines in our assessment of future cash flows from the WowWee segment could result in a
further write-down of our intangible assets and a reduction in our net income. Due largely to a
general deterioration of the economic environment, sales, operating profits and cash flows in the
consumer robotic, toy and entertainment products business were lower in 2009. We recalculated a
fair value of intangibles and considered an impairment charge was required in the amount of $12.4
million during the year.
During the year, we tested for impairment in the customer relations and ISO/ISA intangible
assets related to certain merchant portfolios that are part of the payment processing business, as
we determined that the estimated attrition rate should be increased based on new information. As a
result of this analysis, we recorded a non-cash impairment charge of $4.0 million based on an
estimated fair value established using a discounted cash flow methodology.
We may be subject to additional litigation stemming from our operation of the U-scan self-checkout
business.
In 2004, we settled an action alleging that the
U-Scan
self-checkout systems that we marketed
infringed upon the claimants patent. In 1999, 2001 and 2003, a second party sent demand letters to
us alleging a different patent infringement. We may in the future be subject to other litigation
relating to our prior involvement in the self-checkout business. Defending against such litigation
may be time consuming, expensive and distracting from the conduct of our current businesses, 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.
19
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ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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We have nothing to report under this item.
Facilities
Our corporate headquarters and the offices of our subsidiary, WowWee Canada Inc. are currently
located in approximately 11,000 square feet of leased space at 3500 de Maisonneuve Blvd West, Suite
800, Montreal, Quebec under a lease that expires on April 30, 2013. We also have a commitment for
approximately 12,000 square feet of leased space on the 16
th
floor at 3500 de
Maisonneuve Blvd West, Montreal, Quebec; this space under a lease that expires on October 30, 2010.
Since May 1
st
, 2009, all of this space has been sublet to a third party.
WowWee Group Limited is located in approximately 20,000 square feet of leased space at Energy
Plaza, 92 Granville Road, Tsimshatsui East Kowloon, Hong Kong under leases that expire at various
dates between June 2010 and November 2010. WowWee USA, Inc. occupied approximately 1,600 square
feet of leased space in La Jolla, California under a lease that expired and was not renewed on
December 31, 2009 and 3,400 square feet of leased space in Carlsbad, California under a lease that
expires on July 31, 2013. The Think Wow Toys division of WowWee USA, Inc. occupies approximately
2,500 square feet of leased space in New York, New York under a lease that expires on March 31,
2013; this lease is in the name of the former operator of the Think Wow Toys business, however, we
bear the rent expense.
Sablon Distribution is located in approximately 3,900 square feet of leased space at Avenue
Reine Astrid 2, B-1440 Wauthier Braine, Belgium, under a lease that expires on September 4, 2013.
The Sablon Distribution group of companies also has showrooms in Darmstadt, Germany, Lelystad,
Netherlands and Sceaux, France.
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ITEM 3.
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LEGAL PROCEEDINGS
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Legal Proceedings
Following announcements by the U.S. Attorneys Office in the Southern District of New York
relating to its investigation of the U.S. Internet gambling industry, we announced on May 8, 2007
that we had initiated discussions with the U.S. Attorneys Office in the Southern District of New
York and were in the process of responding to a voluntary request for information issued by the
U.S. Attorneys Office. In connection with such ongoing investigation, we announced on May 11, 2007
that we had received a copy of warrants of seizure issued by the U.S. Attorneys Office against
funds of certain payment processors that were on deposit with two U.S. banks. These funds included
$19.2 million on deposit to the credit of our affiliates. The total amount seized of $19.2 million
was presented as long-term asset related to discontinued operations on our consolidated balance
sheets through June 30, 2009. On October 30, 2009, we announced that we had entered into a
non-prosecution agreement with the Office of the United States Attorney for the Southern District
of New York. Under the terms of the non-prosecution agreement, a total of $19.2 million has been
forfeited to the United States by us and our subsidiaries, as disgorgement of property involved in
and proceeds received from the payment processing services that were provided by our subsidiaries
to Internet gambling merchants in relation to U.S. customers of such merchants. We and the U.S.
Attorneys Office agreed that the $19.2 million previously seized would be applied to satisfy the
forfeiture obligation.
OGOP Payments Inc. (formerly Optimal Payments Inc.) received in the first half of 2008 a
request for information from the U.S. Attorneys Office in the Eastern District of New York
pertaining to its former involvement in processing transactions for internet pharmacies. OGOP
Payments Inc. has had discussions with that Office relating to those processing activities. No
provision has been recorded by OGOP Payments Inc. for this matter because the outcome of these
discussions and the amount of any loss, if any, are not determinable.
We are also party to litigation arising in the normal course of operations. We do not expect
the resolution of such matters to have a material adverse effect on our financial position or
results of operations.
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ITEM 4.
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of our security holders during the fourth quarter of
fiscal 2009.
20
PART II
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ITEM 5.
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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Market Information
Our common shares trade on the Nasdaq Global Market under the symbol OPMR. The
following table sets forth the range of high and low sales prices for our common shares as reported
by the Nasdaq Global Market. These prices reflect the one for five stock split in August 2009.
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Nasdaq Global Market
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$ High
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$ Low
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2009
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4
th
Quarter
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3.59
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1.56
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3
rd
Quarter
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3.80
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1.60
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2
nd
Quarter
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3.85
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1.35
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1
st
Quarter
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4.40
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1.12
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2008
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4
th
Quarter
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9.65
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2.16
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3
rd
Quarter
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13.70
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8.30
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2
nd
Quarter
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17.10
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10.45
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1
st
Quarter
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23.30
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13.75
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Holders
At March 17, 2010, there were 205 stockholders of record of our common shares.
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.
21
Performance Graph
The following graph compares the cumulative total shareholder return on our common
shares with the Nasdaq Composite Index for the five years ended December 31, 2009. The graph sets
the beginning value of our common shares and the Nasdaq Composite Index at $100 and assumes that
all dividends are reinvested.
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Dec-04
(1)
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Dec-05
(1)
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Dec-06
(1)
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Dec-07
(1)
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Dec-08
(1)
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Dec-09
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Optimal Group Inc. common shares
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100.00
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171.99
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80.81
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35.23
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4.07
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3.23
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Nasdaq Composite Index
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100.00
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101.37
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111.03
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121.92
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72.49
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104.31
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(1)
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December 31, 2004 to December 31, 2008 have been restated to reflect the one for five stock
split in August 2009.
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Purchases of Equity Securities
We have nothing to report under this item.
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ITEM 6.
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SELECTED FINANCIAL AND OTHER DATA
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We are now a smaller reporting company, disclosure under this item is not required.
22
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of our company
describes our business, our vision and strategy, seasonality and trends within our business
environment, the critical accounting policies of our company that will help you understand our
consolidated financial statements, the principal factors affecting our results of operations, and
our liquidity and capital resources. This discussion should be read in conjunction with our
consolidated financial statements, the factors set forth under Item 1A. Risk Factors and
Cautionary Statement Regarding Forward-Looking Statements and all other financial information
contained elsewhere in this annual report. All dollar amounts are expressed in United States
dollars (unless otherwise stated) and, other than those expressed in millions of dollars, have been
rounded to the nearest thousand.
We prepare our consolidated financial statements in accordance with U.S. GAAP, with a
reconciliation to Canadian GAAP, as disclosed in note 25 of the notes to our consolidated financial
statements. For a description of the material differences between U.S. GAAP and Canadian GAAP as
they relate to our consolidated financial statements, see note 25 of the notes to our consolidated
financial statements.
The effect of the take-over transaction as described below under Matters Arising Subsequent
to December 31, 2009 upon our financial position and future cash flows, has not been considered in
the preparation of our consolidated financial statements.
Overview
Through WowWee (our business segment established by the acquisition in November 2007, and
currently comprised of WowWee Group Limited, WowWee Canada Inc., WowWee USA, Inc. and WW Sablon
Holdings), we design, develop, market and distribute technology-based, consumer robotic, toy and
entertainment products. In 2009, we operated in a second segment, through Optimal Merchant Services
Inc. (formerly, Optimal Payments Corp.) where we processed credit card payments for retail
point-of-sale merchants, and which is now primarily considered discontinued operations with the
exception of a portfolio of small and medium-sized retail point-of-sale merchant processing.
Optimal Merchant Services Inc. also holds a balance of sale from the disposition in 2009 of a
stream of residual payments under a card-present merchant portfolio.
On October 31, 2009, we entered into an agreement to dispose of the contractual rights
relating to a U.S. card present portfolio of merchants forming part of our remaining payment
processing business. Proceeds on sale comprise a total cash consideration of up to $0.3 million
payable on an earn-out basis over the two-year period following closing of the transaction, and the
assumption of certain liabilities. We retain rights to residual payments and other interests in
merchant account portfolios in the payment processing business not included in this transaction.
On October 30, 2009, we announced that we had entered into a non-prosecution agreement with
the Office of the United States Attorney for the Southern District of New York. Under the terms of
the non-prosecution agreement, a total of $19.2 million was forfeited to the United States by us
and our subsidiaries as disgorgement of property involved in and proceeds received from the payment
processing services that were provided by our subsidiaries to Internet gambling merchants in
relation to U.S. customers of such merchants. We and the U.S. Attorneys Office have agreed that
the $19.2 million previously seized be applied to satisfy the forfeiture obligation. Accordingly,
the long-term asset of $19.2 million was considered fully impaired with the expense included in the
net loss from discontinued operations.
Furthermore, we had long-term liabilities related to discontinued operations of $9.6 million,
which represented payment processing reserve account balances payable to Internet gambling
merchants of our former payments processing business, which liabilities resulted from the payment
processing services that our subsidiaries provided to such merchants in relation to their U.S.
customers. Pursuant to the non-prosecution agreement that we entered into with the U.S. Attorneys
Office, we recognized that the services provided by these merchants violated certain United States
laws. On the basis of advice received by management that a court would not enforce our obligation
to pay these merchants their respective processing reserve account balances, should they attempt to
enforce payment, these liabilities in the amount of $9.6 million were derecognized (reversed)
during the year-ended December 31, 2009. Certain of these merchants may nevertheless initiate legal
proceedings against us in an attempt to enforce payment of the liabilities that have been
derecognized (reversed), which we would be forced to defend. We have not recorded any provision in
relation to these potential proceedings because the amount of loss, if any, is not determinable.
23
On August 7, 2009, our shareholders approved an amendment to our Articles of Continuance to
consolidate all issued and outstanding Class A shares on the basis that each holder of a
Class A share shall receive one (1) Class A share for every five (5) Class A shares so
consolidated. The share consolidation became effective on August 26, 2009 upon the filing of the
Articles of Amendment and the issuance of a Certificate of Amendment in respect thereof. As a
result, the issued and outstanding Class A shares decreased from 25,742,223 Class A shares to
5,148,735 Class A shares, which includes 290 shares required to satisfy the fractional share
requirements. All share, stock option, EPS and warrant amounts have been retroactively adjusted for
all periods presented.
Effective February 4, 2009, we sold a portfolio of merchant processing contracts and
associated sales channel contracts for a cash consideration of approximately $1.0 million.
On February 2, 2009, we entered into an agreement with a buyer, giving us the right to cause
the buyer to purchase, and giving the buyer the right to cause us to sell, a portfolio of residual
payments from merchants processing credit card-present transactions. In substance, the transaction
represents the sale of a portfolio of residual payments from merchants processing credit
card-present transactions for proceeds of approximately $11.0 million. The aggregate amount of
monthly residuals earned on the portfolio, net of a service fee, will be set-off against and will
reduce the balance of sale receivable. The agreement established that the calculation be based on
the results of this portfolio from November 2008 onwards. The adjustment for the amount earned
between November 2008 to the transaction date is reflected as a reduction to the proceeds. The
adjusted balance of sale is increased monthly by a rate of interest of 1% per month. Our right to
cause the buyer to purchase (to effectively settle the balance of sale) may be exercised any time
on or after February 2, 2011. The buyers right to cause us to sell the portfolio (to effectively
settle the balance of sale) may be exercised at any time up to December 31, 2014. Under the terms
of this agreement, we have also received a warrant, exercisable for a nominal consideration, giving
us the right to acquire treasury shares, representing up to 3.5% of the outstanding shares of the
purchaser, if the purchase price is not settled prior to specified dates.
The results of operations for the portfolios that were disposed of on February 4 and February
2, 2009, are included as discontinued operations in the consolidated statements of operations and
comprehensive loss for the year ended December 31, 2009.
On August 29, 2008 we acquired all the outstanding shares of Sablon Distribution S.A., a
Belgium-based toy distributor operating in the Benelux countries, France, Germany and the United
Kingdom.
Matters Arising Subsequent to December 31, 2009
On March 16, 2010, we entered into a Support Agreement with a corporation (the Offeror)
established by the President of one of our wholly-owned subsidiaries. Under the terms of the
Support Agreement, the Offeror has agreed to make an offer by way of a take-over bid for all of our
outstanding shares at an offer price of $2.40 per share, paid in cash and we have agreed to support
the Offer. As a result of that officers involvement with the Offeror, the offer will be an
insider bid and a going private transaction for purposes of applicable securities laws. Under the
terms of the support agreement, we have agreed to pay a termination fee of approximately $0.5
million to the Offeror if the support agreement is terminated in certain circumstances. The
take-over bid circular containing the full terms of the offer is expected to be mailed to
shareholders on or before March 31, 2010. The offer will remain open for acceptance for a period of
not less than 35 days following the mailing of the offer. There were 5,148,735 shares outstanding
as of March 16, 2010.
In connection with the offer, certain senior officers of ours have entered into an agreement
with the Offeror whereby the officers will receive certain assets of ours in partial satisfaction
of the severance payments that will be owing to them upon the closing of the transaction. Included
in the assets to be transferred to the senior officers are the balance of sale receivable and other
intangible assets related to the discontinued payment processing business with a carrying value of
$7.3 million at December 31, 2009.
WowWee
Based in Hong Kong, with offices in Carlsbad, California, New York, New York, Wauthier-Braine,
Belgium, and Montreal, Quebec, WowWee designs, develops, markets and distributes technology-based,
consumer robotic, toy and entertainment products that can be sold at a variety of price points. For
2010, WowWees product offering encompassed five distinct lines: WowWee Robotics, WowWee Alive,
WowWee Entertainment, WowWee Technologies and Think Wow Toys. See Item 1 Business for details
of WowWees product lines.
24
WowWee products are sold in a range of brick and mortar channels. Some of our retail customers
in the U.S. also carry certain WowWee products on their Internet sales sites. Online sales of
WowWees products are also made through Internet-based e-tailers such as Amazon.com and Buy.com.
WowWees products are predominately produced in China by third party manufacturers with which
WowWee has long-standing relationships. Consistent with industry practice, the use of third party
manufacturers allows WowWee to avoid incurring fixed manufacturing costs, while improving
flexibility, capacity and production technology. By outsourcing its manufacturing process, WowWee
maintains a flexible business model that enables it to be responsive to changing technology. In
addition, once a product has reached its commercialization phase, WowWee is able to minimize
inventory risk by manufacturing products based upon actual customer orders, nonetheless, certain
customer orders may be subject to cancellation. Upon final assembly, products can be shipped
directly from the manufacturing locations to retailers and distributors, with title to the products
passing to retail customers in the country of origin. Although WowWee does not conduct the
day-to-day manufacturing of its products, it is extensively involved in the design of the product
prototype and production tools, dies and molds for its products and seeks to ensure quality control
by actively reviewing the production process and testing the products produced by its
manufacturers. WowWee employs quality control inspectors who rotate among its manufacturers
factories to monitor the production of substantially all of its products. WowWees quality
assurance personnel advise as to compliance with applicable regulations during each phase of
product development, perform compliance testing and coordinate third party independent compliance
testing on all WowWee products. Once pre-production testing has been completed and product
production has been approved, WowWee`s quality assurance personnel monitor production at the
manufacturers facility for compliance with WowWees quality requirements.
Within the United States, Canada and Europe, WowWee sells its products directly to its retail
customers through its direct sales channel and through independent sales representatives. For
retailers across the rest of the world, WowWee utilizes a network of distributors located in
various jurisdictions. In 2009, WowWee distributed its products in Europe directly to retailers
through Sablon. In 2009, approximately 56% of its products were sold in North America, with the
balance being sold internationally. WowWee does not have written agreements with its customers.
Instead, sales are made based on purchase orders, primarily against letters of credit. The majority
of orders are traditionally written during the first two quarters of the year. The majority of
product shipments occur during the third and fourth quarters of the year. Revenue is recognized
when (i) persuasive evidence of an arrangement exists; (ii) products are shipped to customers who
assume risk of loss, (iii) collection of the respective receivable is probable and (iv) sales price
is fixed or determinable. Accruals for customer discounts, rebates, incentives and allowances are
recorded when the related revenues are recognized, as a reduction of revenues.
WowWees engineering and design team develops new technologies using internal capabilities and
seeks to identify emerging or underutilized innovations that are currently being developed or that
are available in the marketplace. In order to leverage the man-hours invested in prior products,
older generations of products frequently form the foundation for the next generation of products as
well as new product lines. New technologies are then integrated to enhance the overall
functionality of the product. In sourcing technologies, WowWee reviews the latest technology
innovations at trade-shows, conferences, colleges and universities, on the Internet, and through
word-of-mouth. WowWee regularly reviews technologies or product concepts from third party sources
that it believes could have potential synergies with WowWees current product line or that could be
successfully commercialized based upon WowWees development process. WowWee also licenses third
party technologies for development within unique consumer applications developed by WowWee.
Seasonality
Revenue in our business is subject to seasonal variability. In 2009, the majority of our net
sales were made in the third and fourth quarters. In our business, and the toy business in general,
the first quarter is the period of lowest shipments and sales and therefore the least profitable
due to various fixed costs. Seasonality factors will cause our operating results to fluctuate
significantly from quarter to quarter. Our results of operations may also fluctuate as a result of
factors such as the timing of new products (and related expenses), the advertising activities of
our competitors, delivery schedules set by our customers and the emergence of new market entrants.
These seasonal purchasing patterns and requisite production lead times cause risk in our
business associated with the underproduction of popular toys and the overproduction of toys that do
not match consumer demand. Retailers are also attempting to manage their inventories more tightly
in recent years, requiring us to ship products closer to the time the retailers expect to sell the
products to consumers. These factors increase the risk that we may not be able to meet demand for
certain products at peak demand times, or that our own inventory levels may increase due to the
need to pre-build products before orders are placed.
25
In anticipation of retail sales in the traditional holiday season, we significantly increase
production in advance of the peak selling period, resulting in a corresponding build-up of
inventory levels in the first three quarters of our fiscal year. Seasonal shipping patterns result
in significant peaks in the third and fourth quarters in the respective levels of inventories and
accounts receivable, which result in seasonal working capital financing requirements.
We ship products in accordance with delivery schedules specified by our customers, who usually
request delivery of their products within three to six weeks of the date of their orders on orders
shipped FOB China or Hong Kong and within three days on orders shipped domestically. Because
customer orders may be canceled at any time without penalty, our backlog may not accurately
indicate sales for any future period.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared on a going concern basis in
accordance with U.S. generally accepted accounting principles (U.S. GAAP). The going-concern
basis of presentation assumes that we will continue our operations for the foreseeable future and
be able to realize our assets and discharge our liabilities and commitments in the normal course of
business.
Basis of Presentation and Going Concern
We have incurred a net loss from continuing operations of $67.8 million and a net cash
outflows from operating activities excluding discontinued operations of $19.8 million. The recent
banking and financial crisis and the global economic recession have created an extremely
challenging retail and economic environment in the United States, Canada and Europe, which has
negatively impacted our operating performance and potentially that of our customers and suppliers.
Our ability to continue as a going concern depends on the success of managements plans to overcome
these conditions and ultimately achieve positive cash flows from operations and become profitable.
We currently fund the majority of our operations from our cash and cash equivalents and bank
indebtedness. The majority of our bank indebtedness is based on qualifying accounts receivable and
is otherwise not fully available to be drawn on during seasonal low sale periods due to the lack of
accounts receivable available at the time. We have been unable to secure any new sources of
financing not secured by accounts receivable which will be required during low seasonal sale
periods of the year. Our balance of cash and cash equivalents generally decreases during the second
and third quarters of the year, as cash is used to fund product development and production, and
increases in the fourth and first quarters in connection with the shipping and collection periods.
If operating performance continues in its current trend, we will require financing in order to
meet its cash flow requirements and fund our operations especially during the second and third
quarters of 2010. However, additional financing may not be available in amounts or on terms that
are acceptable to us. Without financing, we may be unable to fund product development and the
production of inventory required for sales in the third and fourth quarters and therefore will not
be able to capitalize on potential future sales. Refer to note 27 of the notes to our consolidated
financial statements Subsequent events, for the details of a take-over bid which we are
supporting. If we are unable to obtain additional financing in the near term, we may be required to
curtail operations in order to offset the lack of available funding, which could have a material
adverse impact on us, and consequently, there is a substantial doubt about our ability to continue
as a going concern.
Our consolidated financial statements do not reflect adjustments that would be necessary if
the going concern basis was not appropriate. If the going concern basis was not appropriate for
these consolidated financial statements, then significant adjustments would be necessary in the
carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet
classifications used. The appropriateness of the going concern basis is dependent upon, among other
things, future profitable operations, the ability to negotiate new sources of financing, if
necessary, and the ability to generate sufficient cash from operations and financing arrangements
to meet our obligations.
The results of certain payment processing portfolios which were sold in 2009, as well as the
card-not-present and the Canadian card-present payment processing businesses sold in 2008, are
presented separately under discontinued operations in the consolidated statements of operations and
comprehensive loss for the current and prior periods. The balance sheet also presents the assets
and liabilities related to the discontinued operations separately for current and prior years.
The effect of the take-over transaction described in note 27 of the notes to our consolidated
financial statements Subsequent events, on our financial position and future cash flows, if any,
have not been considered in the preparation of the consolidated statements for the year ended
December 31, 2009.
26
Goodwill and Other Intangibles
We account for business acquisitions using the purchase method. Accordingly, the purchase
price of a business acquisition is allocated to its identifiable net assets, including identifiable
intangible assets, on the basis of estimated fair values as at the date of purchase, with any
excess being assigned to goodwill. We estimate the fair value of assets and liabilities acquired at
the date of acquisition using a projected discounted cash flow method and other valuation methods.
We make a number of significant estimates when calculating fair value using a projected discounted
cash flow method. These estimates include estimating projected future cash flows, the number of
years used, the discount rate and others. We believe that our estimates and valuation methods are
reasonable. They are consistent with our inherent planning and reflect our best estimates, but they
have inherent uncertainties that management may not be able to control.
Goodwill is not amortized but rather evaluated under an impairment approach. Factors we
consider important which could trigger an impairment review include the following: a) significant
underperformance relative to expected historical or projected future operating results; b)
significant changes in the manner of our use of the acquired assets or the strategy for our overall
business; and c) significant negative industry or economic trends.
Due to the subjective nature of the impairment analysis, significant changes in the
assumptions used to develop the estimate could materially affect the conclusion regarding the
future cash flows necessary to support the valuation of long-lived assets, including goodwill. The
valuation of goodwill involves a high degree of judgment and consists of a comparison of the fair
value of a reporting unit with its book value. Based on the assumptions underlying the valuation,
impairment is determined by estimating the fair value of a reporting unit and comparing that value
to the reporting units book value. If the fair value is more than the book value of the reporting
unit, an impairment loss is not indicated. If impairment exists, the fair value of the reporting
unit is allocated to all of its assets and liabilities excluding goodwill, with the excess amount
representing the fair value of goodwill. An impairment loss is measured as the amount by which the
book value of the reporting units goodwill exceeds the estimated fair value of that goodwill.
To determine the fair value of our reporting units, we generally use a present value technique
(discounted cash flow). The factor most sensitive to change with respect to our discounted cash
flow analyses is the estimated future cash flows of each reporting unit which is, in turn,
sensitive to our estimates of future revenue growth and margins for these businesses. If actual
revenue growth and/or margins are lower than our expectations, the impairment test results could
differ. We applied what we believe to be the most appropriate and consistent valuation methodology
for each of the reporting units. If we had established different reporting units or utilized
different valuation methodologies, the impairment test results could differ.
Due largely to a general deterioration of the economic environment, sales, operating profits
and cash flows in the consumer robotic, toy and entertainment products segment were lower than
expected in 2008 and 2009. We tested the consumer robotic, toy and entertainment segment for
impairment at December 31, 2008. We revised our forecast to reflect lower growth expectations for
this segment. At December 31, 2008, a goodwill impairment loss of $41.4 million and an impairment
loss of $2.4 million on amortizable intangibles were recognized for this segment. The fair value of
the segment was estimated using the expected present value of future cash flows.
During 2009, the cash flows for the consumer robotic, toy and entertainment segment were lower
than the revised forecast established at the end of 2008. As a result we recalculated a fair value
of the intangibles and concluded a further impairment charge was required in the amount of $12.4
million, which was recorded in the fourth quarter.
In the near term, should our operating performance deteriorate lower than currently forecasted
for 2010, it is reasonably possible, these intangibles could be further impaired.
With respect to the continuing operations of the payment processing segment, during the year,
we tested for impairment of the customer relations and ISO/ISA intangible assets related to certain
merchant portfolios that are part of the payment processing business, we determined that the
estimated attrition rate should be increased based on new information. As a result of this
analysis, we recorded a non-cash impairment charge of $4.0 million based on an estimated fair value
established using a discounted cash flow methodology.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts is based on managements assessment of the business
environment, customers financial condition, historical collection experience, accounts receivable
aging, customer disputes and
27
the collectability of specific customer accounts. If there were a deterioration of a major
customers creditworthiness, or actual defaults were higher than our historical experience, our
estimates of the recoverability of amounts due to us could be overstated, which could have an
adverse impact on our operating results. The size of the allowance for doubtful accounts is also
affected by the timing of the realization of uncollectible accounts receivable balances as well as
the offsetting allowance.
Major customers accounts are monitored on an ongoing basis; more in-depth reviews are
performed based on changes in a customers financial condition and/or the level of credit being
extended. When a significant event occurs, such as a bankruptcy filing by a specific customer, and
on a quarterly basis, the allowance is reviewed for adequacy and the balance adjusted to reflect
our current assessment of credit loss.
Revenue Recognition
Our revenue recognition policy is to recognize revenue when persuasive evidence of an
arrangement exists, title transfer has occurred (product shipment), the price is fixed or readily
determinable, and collectability is probable. Sales are recorded net of sales returns and
discounts, which are estimated at the time of shipment based upon historical data. We routinely
enter into arrangements with our customers to provide sales incentives, support customer
promotions, and provide allowances for returns and defective merchandise. Such programs are based
primarily on customer purchases, customer performance of specified promotional activities, and
other specified factors such as sales to consumers. Accruals for these programs are recorded as
sales adjustments that reduce gross revenue in the period the related revenue is recognized.
Reserve for Inventory Obsolescence
We value our inventory at the lower of weighted average cost or net realizable value. Based
upon a consideration of quantities on hand, actual and projected sales volume, anticipated product
selling prices and product lines planned to be discontinued, slow-moving and obsolete inventory is
written down to its net realizable value.
Failure to accurately predict and respond to consumer demand could result in our under
producing popular items or overproducing less popular items. Furthermore, significant changes in
demand for our products would impact managements estimates in establishing our inventory
provision.
Management estimates are monitored on a quarterly basis and a further adjustment to reduce
inventory to its net realizable value is recorded, as an increase to cost of sales, when deemed
necessary under the lower of cost or market standard.
Income Taxes
We provide for income taxes using the asset and liability method of tax allocation. Under this
method, future income tax assets and liabilities are determined based on deductible or taxable
temporary differences between financial statement values and tax values of assets and liabilities
using enacted income tax rates expected to be in effect for the year in which the differences are
expected to reverse. We establish a valuation allowance against future income tax assets if, based
on available information, it is more likely than not that some or all of the future income tax
assets will not be realized. In assessing the reliability of tax assets, we consider whether it is
more likely than not that some portion or all of the tax assets will not be realized. The ultimate
realization of the future tax assets is dependent upon the generation of future taxable income
during the periods in which the temporary differences become deductible. We considered the
scheduled reversal of tax liabilities, projected future taxable income, and tax planning strategies
in making this assessment.
We accrue a tax reserve for additional income taxes and interest, which may become payable in
future years as a result of audit adjustments by tax authorities. The reserve is based on
managements assessment of all relevant information, and is periodically reviewed and adjusted as
circumstances warrant. As of December 31, 2009, our income tax reserves are approximately $9.1
million.
Stock-based Compensation
We use the fair value-based method to account for stock-based compensation and other
stock-based payments, such as stock options and restricted share units. Under the fair value-based
method, compensation cost is measured at fair value at the date of grant and is expensed over the
awards vesting period. The fair value of stock options granted is determined at the date of grant
using the Black-Scholes option pricing model, which requires certain assumptions, including future
stock price volatility, risk-free interest rates, and expected time to exercise.
28
Changes to any of these assumptions, or the use of a different option pricing model, would result
in different fair values for stock-based compensation.
Contingent liabilities
As previously announced, immediately following the enactment of the Unlawful Internet Gambling
Enforcement Act of 2006 (the Act) on October 13, 2006, our then majority-owned subsidiary, OPIL,
ceased to process settlement transactions originating from United States consumers. This
represented a substantial portion of our revenues derived from processing transactions from online
gambling. We are exposed to adverse consequences as a result of possible enforcement proceedings,
governmental investigations or lawsuits initiated against us in jurisdictions where online gambling
is restricted or prohibited.
Following announcements by the U.S. Attorneys Office in the Southern District of New York
relating to its investigation of the U.S. Internet gambling industry, we announced on May 8, 2007
that we had initiated discussions with the U.S. Attorneys Office in the Southern District of New
York and we were in the process of responding to a voluntary request for information issued by the
U.S. Attorneys Office. In connection with such ongoing investigation, we announced on May 11, 2007
that we had received a copy of warrants of seizure issued by the U.S. Attorneys Office against
funds of certain payment processors that were on deposit with two U.S. banks. These funds included
$19.2 million on deposit to the credit of our affiliates. The total amount seized of $19.2 million
was presented as a long-term asset related to discontinued operations on the consolidated balance
sheets through June 30, 2009. On October 30, 2009, we announced that we had entered into a
non-prosecution agreement with the Office of the United States Attorney for the Southern District
of New York. Under the terms of the non-prosecution agreement, a total of $19.2 million was
forfeited to the United States by us and our subsidiaries, as disgorgement of property involved in
and proceeds received from the payment processing services that were provided by our subsidiaries
to Internet gambling merchants in relation to U.S. customers of such merchants. We and the U.S.
Attorneys Office agreed that the $19.2 million previously seized be applied to satisfy the
forfeiture obligation.
At December 31, 2009, we had long-term liabilities related to discontinued operations of $9.6
million, which represented payment processing reserve account balances payable to Internet gambling
merchants of our former payments processing business, which liabilities resulted from the payment
processing services that our subsidiaries provided to such merchants in relation to their U.S.
customers. Pursuant to the non-prosecution agreement that we entered into with the U.S. Attorneys
Office, we have recognized that the services provided by these merchants violated certain United
States laws; on the basis of advice received by management that a court would not enforce our
obligation to pay these merchants their respective processing reserve account balances, should they
attempt to enforce payment, these liabilities in the amount of $9.6 million were derecognized
(reversed). Certain of these merchants may nevertheless initiate legal proceedings against us in an
attempt to enforce payment of the liabilities that are to be derecognized (reversed), which we
would be forced to defend. We have not recorded any provision in relation to these potential
proceedings because the amount of loss, if any, is not determinable.
OGOP Payments Inc. (formerly Optimal Payments Inc.) has received a request for information
from the U.S. Attorneys Office in the Eastern District of New York pertaining to its former
involvement in processing transactions for internet pharmacies. OGOP Payments Inc. has had
discussions with that Office relating to those processing activities. No provision has been
recorded by OGOP Payments Inc. for this matter because the outcome of these discussions and the
amount of any loss, if any, are not determinable.
We are also party to litigation arising in the normal course of operations. The results of
legal proceedings cannot be predicted with certainty. Should we fail to prevail in any of these
legal matters or should several legal matters be resolved against us in the same reporting period,
the consolidated operating results of a particular reporting period could be materially adversely
affected.
Recent Accounting Pronouncements
The following accounting standards have recently been issued by the Financial
Accounting Standards Board (FASB) and the Canadian Institute of Chartered Accountants
(CICA), that are relevant to us.
Effective January 1, 2009, we prepare our consolidated financial statements in
accordance with U.S. GAAP with a reconciliation to Canadian GAAP as described in note 25 of
the notes to our consolidated financial statements. The comparative periods have also been
prepared and presented pursuant
29
to U.S. GAAP. Previously our accounting principles conformed to Canadian GAAP and reconciled
differences with U.S. GAAP through its financial statement disclosures. There was no effect
on our results for 2009 and 2008 as a consequence of this change.
(b)
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New Accounting Policies
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SFAS No. 165 Subsequent Events
|
We adopted Statement of Financial Accounting Standards (SFAS) No. 165,
Subsequent
Events,
which was primarily codified into FASB ASC Topic 855,
Subsequent Events
, which is
effective for periods ending after June 15, 2009. SFAS No. 165 establishes general standards
for accounting for and disclosure of events that occur after the balance sheet date but
before financial statements are issued. SFAS No. 165 sets forth the period after the balance
sheet date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition in the financial statements,
identifies the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the disclosures that
should be made about events or transactions that occur after the balance sheet date.
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SFAS No. 141R Business combinations
|
Effective January 1, 2009, we adopted SFAS No. 141R,
Business Combinations,
which was
primarily codified into FASB ASC Topic 805,
Business Combinations
, on a prospective basis.
This standard is a revised standard on accounting for business combinations include the
following: all business acquisitions would be measured at fair value; the existing
definition of a business would be expanded; pre-acquisition contingencies would be measured
at fair value; most acquisition-related costs would be recognized as expenses as incurred
(they would no longer be part of the purchase consideration); obligations for contingent
consideration would be measured and recognized at fair value at the acquisition date;
non-controlling interests would be measured at fair value at the date of acquisition (i.e.,
100% of the assets and liabilities would be measured at fair value even when an acquisition
is for less than 100%); goodwill, if any, arising on a business combination reflects the
excess of the fair value of the acquiree, as a whole, over the net amount of the recognized
identifiable assets acquired and liabilities assumed, and would be allocated to the acquirer
and the non-controlling interest. The adoption of this standard did not have an impact on
our results as there were no business acquisitions in the year ended December 31, 2009.
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SFAS No. 160 Non-controlling interest in consolidated financial statements
|
Effective January 1, 2009, we adopted SFAS No. 160,
Non-controlling Interest in
Consolidated Financial Statements,
which was primarily codified into FASB ASC Topic 810,
Consolidations
. This statement specifies that non-controlling interests are to be treated as
a separate component of equity, not as a liability or other item outside of equity. Because
non-controlling interests are an element of equity, increases and decreases in the parents
ownership interest that leave control intact are accounted for as capital transactions
rather than as step acquisitions or generating dilution gains or losses. The carrying
amount of the non-controlling interests is adjusted to reflect the changes in ownership
interests, and any difference between the amount by which the non-controlling interests are
adjusted and the fair value of the consideration paid or received is recognized directly in
equity attributable to the controlling interests.
This standard requires net income and comprehensive income to be displayed for both the
controlling and the non-controlling interests. Additional required disclosures and
reconciliations include a separate schedule that shows the effects of any transactions with
the non-controlling interest on the equity attributable to the controlling interests.
This standard is applied prospectively to all non-controlling interests, including any
that arose before the effective date. The adoption of this standard did not have an impact
on our results.
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SFAS No. 161 Disclosures about derivative instruments and hedging activities, an amendment
to FASB Statement No. 133
|
Effective January 1, 2009, we adopted SFAS No. 161,
Disclosures about derivative
instruments and hedging activities, an amendment to FASB Statement No. 133
, which was
primarily codified into FASB ASC Topic 815,
derivatives and hedging
. This standard requires
qualitative disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on
30
derivative instruments, and disclosures about credit-risk related contingent features
on derivative agreements. The adoption of this standard did not have an impact on our
results.
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SFAS No. 162 The hierarchy of generally accepted accounting principles and SFAS 163 -
Accounting for financial guarantee insurance contracts
|
Effective January 1, 2009, we adopted SFAS No. 162,
The hierarchy of generally accepted
accounting principles
, which was primarily codified into FASB ASC Topic 105,
generally
accepted accounting principles
. The adoption of this standard did not have an impact on our
results.
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SFAS No. 168 The FASB Accounting Standards Codification and Hierarchy of Generally
Accepted Accounting Principles
|
In June 2009, the FASB issued
SFAS No. 168, The FASB Accounting Standards Codification
and Hierarchy of Generally Accepted Accounting Principles
, which was primarily codified into
FASB ASC Topic 105,
Generally Accepted Accounting Principles.
SFAS No. 168 replaces SFAS
No. 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB
Accounting Standards Codification (Codification) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in preparation
of financial statements in conformity with generally accepted accounting principles in the
United States of America. This standard is effective for interim and annual reporting
periods ending after September 15, 2009. The adoption of this standard did not have an
impact on our results.
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SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or
the Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly
|
In April 2009, the FASB issued FSP No. SFAS 157-4,
Determining Fair Value When the
Volume and Level of Activity for the Asset or the Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly
, which were primarily codified into FASB ASC
Topic 820,
Fair Value Measurements and Disclosures.
FSP No. SFAS 157-4 amends SFAS No. 157
to provide additional guidance on (i) estimating fair value when the volume and level of
activity for an asset or liability have significantly decreased in relation to normal market
activity for the asset or liability, and (ii) circumstances that may indicate that a
transaction is not orderly. FSP No. SFAS 157-4 also requires additional disclosures about
fair value measurements in interim and annual reporting periods. FSP No. SFAS 157-4 is
effective for interim and annual reporting periods ending after June 15, 2009. The adoption
of FSP No. SFAS 115-2 did not have an impact on our results.
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SFAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments
|
In April 2009, the FASB issued FSP No. SFAS 115-2 and SFAS 124-2,
Recognition and
Presentation of Other-Than-Temporary Impairments
(FSP No. SFAS 115-2), which were
primarily codified into FASB ASC Topic 320
,
Investments
. FSP No. SFAS 115-2 provides
additional guidance on the timing of impairment recognition and greater clarity about the
credit and non-credit components of impaired debt securities that are not expected to be
sold. FSP No. SFAS 115-2 also requires additional disclosures about impairments in interim
and annual reporting periods. FSP No. SFAS 115-2 is effective for interim and annual
reporting periods ending after June 15, 2009. The adoption of FSP No. SFAS 115-2 did not
have a material effect on our results.
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Goodwill and Other Intangible Assets; Research and Development Costs
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Effective January 1, 2009, we adopted the Canadian Institute of Chartered Accountants
(CICA) Handbook Section 3064,
Goodwill and Intangible Assets
, which replaces Section 3062,
Goodwill and Other Intangible Assets
, and Section 3450,
Research and Development Costs
. The
standard provides guidance on the recognition of intangible assets in accordance with the
definition of an asset and the criteria for asset recognition, as well as clarifying the
application of the concept of matching revenues and expenses, whether these assets are
separately acquired or internally developed. The adoption of this standard did not have a
significant impact on our financial results.
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EIC-173 Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
|
Effective January 2009, we adopted CICA EIC-173,
Credit Risk and the Fair Value of
Financial Assets and Financial Liabilities,
which clarifies that the credit risk of
counterparties should be taken into
31
account in determining the fair value of derivative financial instruments. The
adoption of this standard did not have a significant impact on our financial results.
(c)
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Future Accounting Pronouncements
|
The following accounting pronouncements have recently been issued by the FASB and CICA
and may be relevant to us.
In September 2009, FASB issued
SFAS No. 166, Accounting for Transfers of Financial
Assets
, which was primarily codified into FASB ASC Topic 860,
Transfers and Servicing
SFAS No. 166 amends SFAS No. 140,
Accounting for the Transfers and Servicing of Financial
Assets and the Extinguishments of Liabilities,
and seeks to improve the relevance and
comparability of the information that a reporting entity provides in its financial
statements about transfers of financial assets; the effects of the transfer on its financial
position, financial performance, and cash flows; and a transferors continuing involvement,
if any, in transferred financial assets. SFAS No. 166 eliminates the concept of a qualifying
special-purpose entity, creates more stringent conditions for reporting a transfer of a
portion of a financial asset as a sale, clarifies other sale-accounting criteria, and
changes the initial measurement of a transferors interest in transferred financial assets.
SFAS No. 166 is effective for interim and annual reporting periods beginning after
November 15, 2009. We have not completed our evaluation, but we do not expect the adoption
of SFAS No. 166 to have a material impact on our consolidated financial statements.
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International Financial Reporting Standards
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The Accounting Standards Board of the Canadian Institute of Chartered Accountants (CICA)
has announced its decision to require all publicly accountable enterprises to report under
International Financial Reporting Standards (IFRS) for the years beginning on or after
January 1, 2011. However, we are a domestic registrant in the U.S. and therefore file our
financial statements in accordance with U.S. GAAP. As such, we will not report under IFRS by
2011 and will continue to report under U.S. GAAP. The SEC staff released a work plan to
evaluate the impact that IFRS will have on the U.S. financial reporting system. In 2011,
after the SEC staffs fact gathering is completed, as outlined in the work plan, and certain
convergence projects are successfully completed, the SEC will consider whether, and if so,
how to incorporate IFRS into the U.S. financial reporting system.
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Financial Condition
We have incurred a net loss from continuing operations of $67.8 million and a net cash
outflows from operating activities excluding discontinued operations of $19.8 million. The recent
banking and financial crisis and the global economic recession have created an extremely
challenging retail and economic environment in the United States, Canada and Europe, which has
negatively impacted our operating performance and potentially that of our customers and suppliers.
Our ability to continue as a going concern depends on the success of managements plans to overcome
these conditions and ultimately achieve positive cash flows from operations and become profitable.
We currently fund the majority of our operations from our cash and cash equivalents and bank
indebtedness. The majority of our bank indebtedness is based on qualifying accounts receivable and
is otherwise not fully available to be drawn on during seasonal low sale periods due to the lack of
accounts receivable available at the time. We have been unable to secure any new sources of
financing not secured by accounts receivable which will be required during low seasonal sale
periods of the year. Our balance of cash and cash equivalents generally decreases during the second
and third quarters of the year, as cash is used to fund product development and production, and
increases in the fourth and first quarters in connection with the shipping and collection periods.
If operating performance continues in its current trend, we will require financing in order to
meet its cash flow requirements and fund our operations especially during the second and third
quarters of 2010. However, additional financing may not be available in amounts or on terms that
are acceptable to us. Without financing, we may be unable to fund product development and the
production of inventory required for sales in the third and fourth quarters and therefore will not
be able to capitalize on potential future sales. Refer to note 27 of the notes to our consolidated
financial statements Subsequent events, for the details of a take-over bid which we are
supporting. If we are unable to obtain additional financing in the near term, we may be required to
curtail operations in order to offset the lack of available funding, which could have a material
adverse impact on us, and consequently, there is a substantial doubt about our ability to continue
as a going concern.
Our consolidated financial statements do not reflect adjustments that would be necessary if
the going concern basis was not appropriate. If the going concern basis was not appropriate for
these consolidated financial
32
statements, then significant adjustments would be necessary in the carrying value of assets
and liabilities, the reported revenues and expenses, and the balance sheet classifications used.
The appropriateness of the going concern basis is dependent upon, among other things, future
profitable operations, the ability to negotiate new sources of financing, if necessary, and the
ability to generate sufficient cash from operations and financing arrangements to meet our
obligations.
The results of certain payment processing portfolios which were sold in 2009, as well as the
card-not-present and the Canadian card-present payment processing businesses sold in 2008, are
presented separately under discontinued operations in the consolidated statements of operations and
comprehensive loss for the current and prior periods. The balance sheet also presents the assets
and liabilities related to the discontinued operations separately for current and prior years.
The effect of the take-over transaction described in note 27 of the notes to our consolidated
financial statements Subsequent events, on our financial position and future cash flows, if any,
have not been considered in the preparation of the consolidated statements for the year ended
December 31, 2009.
As at December 31, 2009, cash and cash equivalents and short-term investments totaled $19.9
million, compared to $39.1 million as at December 31, 2008. The decrease in cash and cash
equivalents and short-term investments is primarily due to cash used in operations ($14.6 million)
and the purchase of property and equipment ($2.2 million). We have various credit facilities
through our subsidiaries located in Belgium and Hong Kong, of which $8.8 million were used at
December 31, 2009. As at year end, our cash and cash equivalents and short-term investments, net of
bank indebtedness were as follows:
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|
|
|
|
|
|
|
|
(U.S. dollars, in thousands)
|
|
2009
|
|
2008
|
Cash and cash equivalents
|
|
$
|
19,915
|
|
|
$
|
32,849
|
|
Short-term investments
|
|
|
|
|
|
|
6,296
|
|
|
|
|
|
|
|
19,915
|
|
|
|
39,145
|
|
Less:
|
|
|
|
|
|
|
|
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Bank indebtedness
|
|
|
(8,848
|
)
|
|
|
(11,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
11,067
|
|
|
$
|
27,598
|
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Our portfolio of liquid and investment grade short-term investments consists of U.S.
denominated discounted and undiscounted notes and bonds.
Working capital as at December 31, 2009 was $5.4 million, as compared to $33.2 million at
December 31, 2008. This decrease is due primarily to cash used in operations, the purchase of
property and equipment, as well as from the unfavorable economic conditions continuing throughout
2009. Our current working capital is not sufficient to fund our operations in 2010. See Critical
Accounting Policies and Estimates
Basis of Presentation and Going Concern
above.
Accounts receivable as at December 31, 2009 were $14.6 million, as compared to $24.2 million
at December 31, 2008. The decrease of $9.6 million resulted primarily from the unfavorable economic
conditions continuing throughout 2009, resulting in decreased revenues.
Inventories as at December 31, 2009 were $12.8 million, as compared to $19.4 million at
December 31, 2008. The decrease of $6.6 million resulted from reduced production due to the
expected decrease in revenue and the clearance of aged inventory, as well as from the unfavorable
economic conditions continuing throughout 2009, resulting in decreased revenues.
As at February 2, 2009, we had a net balance of sale receivable of $10.0 million due to the
sale of a portfolio of residual payments. In the fourth quarter of 2009, we concluded that this
asset was impaired and based on the present value of estimated future cash flows we have recorded a
provision of $6.5 million to write down this receivable to its estimated recoverable amount.
Intangible assets decreased by $26.0 million, from $44.8 million as at December 31, 2008 to
$18.8 million as at December 31, 2009. This decrease is due primarily to amortization during the
year of $9.6 million and impairment losses of $16.4 million.
33
Accounts payables decreased by $4.1 million due to a decrease in overall activity in the year
offset by a delay in payments to our suppliers in an effort to manage cash.
Net long-term assets and liabilities related to discontinued operations decreased by $20.1
million, mainly due to the forfeiture agreed to in the non-prosecution agreement made with the U.S.
Attorneys Office. See note 16(e) of the notes to our consolidated financial statements.
Shareholders equity as at December 31, 2009 was $21.7 million, as compared to $93.5 million
as at December 31, 2008. The decrease is attributable primarily to our net loss, which includes the
impairment of intangibles for the period.
Results of Operations
2009 Compared with 2008 (excluding amounts classified as discontinued operations)
Revenues decreased by $27.0 million from $93.4 million during the year ended December 31, 2008
to $66.4 million during the year ended December 31, 2009. The decrease is attributed primarily to
the continuing unfavorable economic conditions, as mentioned above, and the desire by retailers to
reduce inventories. In addition, a focus on monetizing our inventories resulted in lower margins on
some of our products.
Effective January 1, 2009, the results of operations from payment processing are presented on
a net basis as other revenues, whereas the results for the comparative period were reported on a
gross basis with $26.2 million of transaction processing costs reported separately. On a net basis,
other revenues was $3.1 million for the year ended December 31, 2009, compared to gross revenues of
$29.3 million for the same period in 2008.
Cost of sales decreased by $7.1 million, from $66.4 million during the year ended December 31,
2008 to $59.3 million during the year ended December 31, 2009. The decrease is due to lower
production volumes, as well as a focus on monetizing our inventories which resulted in lower
margins.
Selling, general and administrative expenses remained consistent at $38.9 million during the
year ended December 31, 2008 and 2009. The year-ended December 31, 2009 includes the selling,
general and administrative expenses related to Sablon, which we acquired on August 29, 2008 and the
acquisition of Think Wow Toys in July 2008, offset by a reduction in travel, sales sample expenses
and voluntary reduction of the salaries of certain executive officers subsequent to June 2009.
The stock-based compensation pertaining to selling, general and administrative expense
decreased by $1.7 million, from $3.3 million in the year ended December 31, 2008 to $1.6 million in
the year ended December 31, 2009. The decrease is due to the cancellation of 975,042 options,
which represented the majority of the remaining outstanding options.
Amortization of intangibles pertaining to transaction processing costs decreased by $0.6
million, from $2.6 million during the year ended December 31, 2008 to $2.0 million during the year
ended December 31, 2009. The decrease results from a lower unamortized carrying value due to the
impairment charge taken in 2008 and the impairment charge of $4.0 million in the second quarter of
2009.
Amortization of property and equipment pertaining to costs of sales decreased by $1.4 million,
from $3.6 million during the year ended December 31, 2008 to $2.2 million during the year ended
December 31, 2009. The decrease is due primarily to less tooling and moulds required for 2009
production.
Research and development expense remained consistent at approximately $3.0 million. Research
and development expenses are comprised primarily of personnel-related expenditures associated with
the development of new products in the WowWee business segment.
Due largely to a general deterioration of the economic environment, sales, operating profits
and cash flows in the consumer robotic, toy and entertainment products segment were lower than
expected in 2008. We tested the consumer robotic, toy and entertainment segment for impairment at
December 31, 2008. We revised our forecast to reflect lower growth expectations for this segment.
At December 31, 2008, a goodwill impairment loss of $41.4 million and an impairment loss of $2.4
million on amortizable intangibles were recognized for this segment. The fair value of the segment
was estimated using the expected present value of future cash flows.
34
During 2009, the cash flows for the consumer robotic, toy and entertainment segment were lower
than the revised forecast established at the end of 2008. As a result we recalculated a fair value
of the intangibles and concluded a further impairment charge was required in the amount of $12.4
million, which was recorded in the fourth quarter.
In the near term, should our operating performance deteriorate lower than currently forecasted
for 2010, it is reasonably possible, that these intangibles could be further impaired.
With respect to the continuing operations of the payment processing segment: During the year,
we tested for impairment of the customer relations and ISO/ISA intangible assets related to certain
merchant portfolios that are part of the payment processing business, and we determined that the
estimated attrition rate should be increased based on new information. As a result of this
analysis, we recorded a non-cash impairment charge of $4.0 million based on an estimated fair value
established using a discounted cash flow methodology.
During the year, the monthly residuals earned on the underlying portfolio, which are applied
to the balance of sale receivable, decreased significantly compared to amounts initially
forecasted. Furthermore, we will acquire treasury shares representing 1% of the outstanding shares
of the purchaser due to the purchase price not being settled by March 2, 2010. In the fourth
quarter, we have concluded that the asset is impaired and based on the present value of estimated
future cash flows and we have recorded a provision of $6.5 million to write down the receivable to
our estimated recoverable amount. If the monthly residuals earned on the underlying portfolio
decrease significantly compared to the revised forecast, this asset could become further impaired
in the near term.
The recovery for income taxes was $2.2 million for the year ended December 31, 2009 compared
to $3.5 million for the year ended December 31, 2008. Significant components of our 2009 tax
provision include the effect of the change in the valuation allowance of $11.9 million, which
reflects an increase in the benefit of losses not recorded, and an increase of $5.0 million caused
by differences in tax rates in the jurisdictions in which we operate. Other components include the
effect of the impairment loss on the balance of sale receivable in the amount of $2.3 million and
of stock-based compensation in the amount of $0.5 million, which are not deductible for tax.
Significant components of our 2008 tax provision include the effect of the goodwill impairment loss
in the amount of $7.5 million and of stock-based compensation in the amount of $1.0 million, which
are not deductible for tax. Other significant components include effect of the change in the
valuation allowance of $2.1 million, which reflects an increase in the benefit of losses not
recorded, and an increase of $7.3 million caused by differences in tax rates in the jurisdictions
in which we operate.
Our tax provision includes the effect of future taxes on unrealized foreign exchange gains and
losses, which arise upon the conversion into Canadian dollars of net monetary assets and
liabilities denominated in U.S. dollars for purposes of determining taxable income under Canadian
income tax regulations. Since 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. In 2009, our tax provision includes a future tax recovery of
$0.4 million related to unrealized foreign exchange compared to a charge of $0.5 million in 2008.
With respect to future income tax assets, as at December 31, 2009 we have recorded a valuation
allowance of approximately $58.7 million (2008 $44.8 million) related to assets that we
determined were not more likely than not to be realized. Our ability to ultimately realize these
future income tax assets is dependent upon our future profitability within the allowable
carry-forward period, thus creating sufficient taxable income to realize the benefit of these
assets.
Our net loss in 2009 was $73.3 million (or $(14.24) per share basic and diluted), compared
to net loss of $111.0 million (or $(21.46) per share basic and diluted) in 2008.
We previously used EBITDA to assess our operating performance, which was a non-GAAP financial
measure that excluded non-cash expenses, items that cannot be influenced by management in the
short-term or items that do not impact core operating performance. We believe that this measure no
longer provides any additional meaningful information at this time and therefore have discontinued
our use of this measure during the twelve-month period ended December 31, 2009.
Liquidity and Capital Resources
The downturn in the global economy had a significant negative effect on the toy industry and
us. Consumer confidence reached low levels in the latter part of 2008, resulting in retail sales
weakness in the fourth quarter as consumers, fearful of the economys direction, cut back their
discretionary spending. Toy retailers and manufacturers continue to be impacted by the economic
downturn, with a risk that a number of Chinese toy
35
manufacturers will close their operations and a significant number of toy sellers in the U.S.,
U.K., Mexico and other major markets may close or significantly reduce their operations or enter
bankruptcy.
The unfavourable economic conditions experienced in 2008 has continued throughout 2009.
Revenues were under pressure in 2009 as a result of a continued reluctance of consumers to spend
and desire of retailers to reduce inventories, weakening foreign exchange in international markets,
and the sale of fewer entertainment-related products.
We have incurred a net loss from continuing operations of $67.8 million and a net cash
outflows from operating activities excluding discontinued operations of $19.8 million. The recent
banking and financial crisis and the global economic recession have created an extremely
challenging retail and economic environment in the United States, Canada and Europe, which has
negatively impacted our operating performance and potentially that of our customers and suppliers.
Our ability to continue as a going concern depends on the success of managements plans to overcome
these conditions and ultimately achieve positive cash flows from operations and become profitable.
We currently fund the majority of our operations from our cash and cash equivalents and bank
indebtedness. The majority of our bank indebtedness is based on qualifying accounts receivable and
is otherwise not fully available to be drawn on during seasonal low sale periods due to the lack of
accounts receivable available at the time. We have been unable to secure any new sources of
financing not secured by accounts receivable which will be required during low seasonal sale
periods of the year. We balance of cash and cash equivalents generally decreases during the second
and third quarters of the year, as cash is used to fund product development and production, and
increases in the fourth and first quarters in connection with the shipping and collection periods.
If operating performance continues in its current trend, we will require financing in order to
meet our cash flow requirements and fund our operations especially during the second and third
quarters of 2010. However, additional financing may not be available in amounts or on terms that
are acceptable to us. Without financing, we may be unable to fund product development and the
production of inventory required for sales in the third and fourth quarters and therefore will not
be able to capitalize on potential future sales. Refer to note 27 of the notes to our consolidated
financial statements Subsequent events, for the details of a take-over which bid which we are
supporting. If we are unable to obtain additional financing in the near term, we may be required to
curtail operations in order to offset the lack of available funding, which could have a material
adverse impact on us, and consequently, there is a substantial doubt about our ability to continue
as a going concern.
Our consolidated financial statements do not reflect adjustments that would be necessary if
the going concern basis was not appropriate. If the going concern basis was not appropriate for
these consolidated financial statements, then significant adjustments would be necessary in the
carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet
classifications used. The appropriateness of the going concern basis is dependent upon, among other
things, future profitable operations, the ability to negotiate new sources of financing, if
necessary, and the ability to generate sufficient cash from operations and financing arrangements
to meet its obligations.
The results of certain payment processing portfolios which were sold in 2009, as well as the
card-not-present and the Canadian card-present payment processing businesses sold in 2008, are
presented separately under discontinued operations in the consolidated statements of operations and
comprehensive loss for the current and prior periods. The balance sheet also presents the assets
and liabilities related to the discontinued operations separately for current and prior years.
The effect of the take-over transaction described in note 27 of the notes to our consolidated
financial statements Subsequent events, on its financial position and future cash flows of ours,
if any, have not been considered in the preparation of our consolidated financial statements.
As at December 31, 2009, cash and cash equivalents and short-term investments totaled $19.9
million, compared to $39.1 million as at December 31, 2008. The decrease in cash and cash
equivalents and short-term investments is primarily due to cash used in operations ($14.6 million)
and the purchase of property and equipment and intangibles ($2.2 million), off-set by proceeds
received from the sale of card-not-present and Canadian card-present assets ($1.0 million) in the
payment processing business segment. We have various credit facilities through our subsidiaries
located in Belgium and Hong Kong, of which $8.8 million were used at December 31, 2009, as well as
$1.9 million in the form of export loans. See note 11 of the notes to our consolidated financial
statements. As at December 31, 2009, our cash and cash equivalents and short-term investments, net
of bank indebtedness, totaled $11.1 million.
36
Operating activities used $14.6 million of cash and cash equivalents in 2009, as compared to
using $23.2 million in 2008. This decrease in use is due mainly to the timing of the collection of
receivables and the reduction of inventory levels offset by a delay in the payments of payables.
Investing activities generated $4.5 million of cash in 2009, compared with generating $4.2
million in 2008. The decrease of approximately $0.3 million can be explained primarily by the
following:
Increases:
|
|
|
Business acquisition in 2008
|
|
|
|
Proceeds from disposition of payment processing business
|
|
|
|
|
Purchase of property and equipment
|
Financing activities used $3.2 million of cash in 2009, compared to generating $5.5 million.
The decrease in cash is primarily due to the repayment of bank indebtedness of $2.9 million in the
current period compared to the utilization of bank facilities of $6.2 million in 2008.
We do not have any significant off-balance sheet arrangements, other than long-term lease and
licensing commitments. These are summarized in note 16 (a) of the notes to our consolidated
financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are now a smaller reporting company, disclosure under this item is not required.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements of
OPTIMAL GROUP INC.
Two years ended December 31, 2009
(expressed in U.S. dollars)
38
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KPMG LLP
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Telephone
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(514) 840-2100
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Chartered Accountants
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Fax
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(514) 840-2187
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600 de Maisonneuve Blvd. West
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Internet
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www.kpmg.ca
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Suite 1500
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Tour KPMG
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Montréal, Quebec H3A 03A
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Optimal Group Inc.
We have audited the accompanying consolidated balance sheets of Optimal Group Inc. and subsidiaries
(the Company) as at December 31, 2009 and 2008 and the related consolidated statements of
operations and comprehensive loss, shareholders equity and cash flows for each of the years in the
two-year period ended December 31, 2009. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Accounting Oversight Board
(United States) and with Canadian generally accepted auditing standards. Those standards require
that we plan and perform an audit to obtain reasonable assurance about 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. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to the above present fairly, in all
material respects, the financial position of Optimal Group Inc. and subsidiaries as at December 31,
2009 and 2008 and the results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 2009 in conformity with U.S. generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in note 2 to the consolidated financial statements,
the Company has suffered recurring losses from operations and has negative operating cash flows
that raise substantial doubt about its ability to continue as a going concern. Managements plans
in regard to these matters are also described in note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this uncertainty.
Accounting principles generally accepted in the U.S. vary in certain significant respects from
Canadian generally accepted accounting principles. Information relating to the nature and effect of
such differences is presented in note 25 to the consolidated financial statements.
Chartered Accountants
Montréal, Canada
March 31, 2010
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*
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CA Auditor permit no 20408
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KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network
of independent member firms affiliated with KPMG International, a Swiss cooperative.
KPMG Canada provides services to KPMG LLP.
OPTIMAL GROUP INC.
Consolidated Financial Statements
Two years ended December 31, 2009
(expressed in U.S. dollars)
Financial Statements
40
OPTIMAL GROUP INC.
Consolidated Balance Sheets
December 31, 2009 and 2008
(expressed in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,915
|
|
|
$
|
32,849
|
|
Short-term investments (note 6)
|
|
|
|
|
|
|
6,296
|
|
Accounts and other receivables (note 7)
|
|
|
14,573
|
|
|
|
24,155
|
|
Inventories (note 8)
|
|
|
12,813
|
|
|
|
19,364
|
|
Prepaid expenses
|
|
|
1,802
|
|
|
|
1,817
|
|
Current assets related to discontinued operations
|
|
|
1,009
|
|
|
|
4,372
|
|
|
|
|
|
50,112
|
|
|
|
88,853
|
|
|
|
|
|
|
|
|
|
|
Balance of sale receivable (note 5 (b) (i))
|
|
|
3,500
|
|
|
|
|
|
Property and equipment (note 9)
|
|
|
3,512
|
|
|
|
4,219
|
|
Intangible assets (note 10)
|
|
|
18,821
|
|
|
|
44,834
|
|
Long-term assets related to discontinued operations
|
|
|
147
|
|
|
|
31,112
|
|
|
|
|
$
|
76,092
|
|
|
$
|
169,018
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Bank indebtedness (note 11)
|
|
$
|
8,848
|
|
|
$
|
11,547
|
|
Accounts payable and accrued liabilities (note 12)
|
|
|
30,396
|
|
|
|
34,497
|
|
Accounts payable and accrued liabilities related to discontinued operations
|
|
|
4,263
|
|
|
|
5,569
|
|
Current portion of long-term debt (note 13)
|
|
|
179
|
|
|
|
1,010
|
|
Income taxes payable
|
|
|
1,063
|
|
|
|
2,225
|
|
Deferred income taxes (note 18)
|
|
|
|
|
|
|
838
|
|
|
|
|
|
44,749
|
|
|
|
55,686
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes (note 18)
|
|
|
6,298
|
|
|
|
6,965
|
|
Long-term debt (note 13)
|
|
|
3,319
|
|
|
|
2,005
|
|
Long-term liabilities related to discontinued operations
|
|
|
|
|
|
|
10,871
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Share capital
|
|
|
252,488
|
|
|
|
252,488
|
|
Warrants
|
|
|
2,696
|
|
|
|
2,696
|
|
Additional paid-in capital
|
|
|
65,746
|
|
|
|
64,173
|
|
Deficit
|
|
|
(296,187
|
)
|
|
|
(222,849
|
)
|
Accumulated other comprehensive loss
|
|
|
(3,017
|
)
|
|
|
(3,017
|
)
|
|
|
|
|
21,726
|
|
|
|
93,491
|
|
|
|
|
|
|
|
|
|
|
Basis of presentation and going concern (note 2)
|
|
|
|
|
|
|
|
|
Commitments, contingencies and guarantees (note 16)
|
|
|
|
|
|
|
|
|
Subsequent events (note 27)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
76,092
|
|
|
$
|
169,018
|
|
|
See accompanying notes to consolidated financial statements.
Approved by the Board of Directors
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/s/ HOLDEN L. OSTRIN
|
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Director
|
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/s/ NEIL S. WECHSLER
|
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Director
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41
OPTIMAL GROUP INC.
Consolidated Statements of Operations and Comprehensive Loss
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
66,442
|
|
|
$
|
93,395
|
|
Other revenues (note 24 (e))
|
|
|
3,097
|
|
|
|
29,308
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
59,334
|
|
|
|
66,401
|
|
Selling, general and administrative, excluding amortization and stock-based compensation
|
|
|
38,896
|
|
|
|
38,889
|
|
Stock-based compensation pertaining to selling, general
and administrative (note 17)
|
|
|
1,573
|
|
|
|
3,339
|
|
Research and development
|
|
|
3,033
|
|
|
|
2,931
|
|
Operating leases
|
|
|
2,014
|
|
|
|
1,365
|
|
Amortization (note 24 (g))
|
|
|
12,893
|
|
|
|
14,498
|
|
Transaction processing costs
|
|
|
|
|
|
|
26,218
|
|
Impairment losses (note 10)
|
|
|
16,419
|
|
|
|
43,847
|
|
Impairment of balance of sale receivable (note 5 (b) (i))
|
|
|
6,504
|
|
|
|
|
|
|
|
|
|
140,666
|
|
|
|
197,488
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before undernoted items
|
|
|
(71,127
|
)
|
|
|
(74,785
|
)
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
1,197
|
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(69,930
|
)
|
|
|
(73,547
|
)
|
|
|
|
|
|
|
|
|
|
Income tax recovery (note 18)
|
|
|
2,180
|
|
|
|
3,500
|
|
|
Net loss from continuing operations
|
|
|
(67,750
|
)
|
|
|
(70,047
|
)
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations, net of income taxes
(note 5 (b))
|
|
|
(5,588
|
)
|
|
|
(40,956
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
|
$
|
(73,338
|
)
|
|
$
|
(111,003
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
5,148,735
|
|
|
|
5,172,026
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) per share:
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(13.16
|
)
|
|
$
|
(13.54
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(1.08
|
)
|
|
|
(7.92
|
)
|
Net:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(14.24
|
)
|
|
|
(21.46
|
)
|
|
See accompanying notes to consolidated financial statements.
42
OPTIMAL GROUP INC.
Consolidated Statements of Shareholders Equity
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accu-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addi-
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tional
|
|
|
|
|
|
|
compre-
|
|
|
|
|
|
|
Class A shares
|
|
|
|
|
|
|
paid-in
|
|
|
|
|
|
|
hensive
|
|
|
|
|
|
|
Number
|
|
|
Dollars
|
|
|
Warrants
|
|
|
capital
|
|
|
Deficit
|
|
|
loss
|
|
|
Total
|
|
|
Balance, December 31, 2007
|
|
|
5,196,630
|
|
|
$
|
254,454
|
|
|
|
2,696
|
|
|
$
|
59,418
|
|
|
$
|
(111,846
|
)
|
|
$
|
(3,017
|
)
|
|
$
|
201,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of shares pursuant
to stock buyback program (note
14)
|
|
|
(48,185
|
)
|
|
|
(1,966
|
)
|
|
|
|
|
|
|
1,416
|
|
|
|
|
|
|
|
|
|
|
|
(550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation (note 17)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,339
|
|
|
|
|
|
|
|
|
|
|
|
3,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(111,003
|
)
|
|
|
|
|
|
|
(111,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
5,148,445
|
|
|
|
252,488
|
|
|
|
2,696
|
|
|
|
64,173
|
|
|
|
(222,849
|
)
|
|
|
(3,017
|
)
|
|
|
93,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued pursuant to share
consolidation (note 14)
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation (note 17)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,573
|
|
|
|
|
|
|
|
|
|
|
|
1,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73,338
|
)
|
|
|
|
|
|
|
(73,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
5,148,735
|
|
|
$
|
252,488
|
|
|
|
2,696
|
|
|
$
|
65,746
|
|
|
$
|
(296,187
|
)
|
|
$
|
(3,017
|
)
|
|
$
|
21,726
|
|
|
See accompanying notes to consolidated financial statements.
43
OPTIMAL GROUP INC.
Consolidated Statements of Cash Flows
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows (used in) from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(73,338
|
)
|
|
$
|
(111,003
|
)
|
Add: loss from discontinued operations
|
|
|
(5,588
|
)
|
|
|
(40,956
|
)
|
|
Net loss from continuing operations
|
|
|
(67,750
|
)
|
|
|
(70,047
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments for items not affecting cash:
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
12,893
|
|
|
|
14,498
|
|
Deferred income taxes
|
|
|
(2,180
|
)
|
|
|
(3,526
|
)
|
Impairment losses
|
|
|
22,923
|
|
|
|
43,847
|
|
Stock-based compensation
|
|
|
1,573
|
|
|
|
3,339
|
|
Foreign exchange
|
|
|
(98
|
)
|
|
|
415
|
|
Net change in operating assets and liabilities (note 24 (a))
|
|
|
12,845
|
|
|
|
(17,518
|
)
|
Operating cash flows from discontinued operations
|
|
|
5,182
|
|
|
|
5,783
|
|
|
|
|
|
(14,612
|
)
|
|
|
(23,209
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) from financing activities:
|
|
|
|
|
|
|
|
|
(Decrease) increase in bank indebtedness
|
|
|
(2,921
|
)
|
|
|
6,156
|
|
Repayment of long-term debt
|
|
|
(322
|
)
|
|
|
(79
|
)
|
Repurchase of Class A shares
|
|
|
|
|
|
|
(550
|
)
|
|
|
|
|
(3,243
|
)
|
|
|
5,527
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,212
|
)
|
|
|
(4,780
|
)
|
Other business acquisitions
|
|
|
(944
|
)
|
|
|
(6,557
|
)
|
Net proceeds from maturity of short-term investments
|
|
|
6,296
|
|
|
|
6,181
|
|
Proceeds from sale of property and equipment
|
|
|
|
|
|
|
1,834
|
|
Proceeds from disposal of payment processing businesses (note 5 (b))
|
|
|
1,035
|
|
|
|
8,500
|
|
Proceeds from balance of sale receivable
|
|
|
469
|
|
|
|
|
|
Transaction costs related to business acquisitions and disposals
|
|
|
(126
|
)
|
|
|
(583
|
)
|
Investing cash flows used in discontinued operations
|
|
|
|
|
|
|
(361
|
)
|
|
|
|
|
4,518
|
|
|
|
4,234
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents during the year
|
|
|
403
|
|
|
|
(896
|
)
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(12,934
|
)
|
|
|
(14,344
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
32,849
|
|
|
|
47,193
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
19,915
|
|
|
$
|
32,849
|
|
|
Supplemental disclosure of cash flows and other information (note 24).
See accompanying notes to consolidated financial statements.
44
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
|
Optimal Group Inc. (the Company) is incorporated under the Canada Business Corporations Act.
The Companys principal activities are to design, develop, market and distribute innovative
high-tech consumer robotic, toy and entertainment products and to provide payment processing
services.
|
2.
|
|
Basis of presentation and going concern:
|
|
|
The accompanying consolidated financial statements have been prepared on a going concern basis
in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The
going-concern basis of presentation assumes that the Company will continue its operations for
the foreseeable future and be able to realize its assets and discharge its liabilities and
commitments in the normal course of business.
|
|
|
|
The Company incurred a net loss from continuing operations of $67,750 and a net cash outflows
from operating activities excluding discontinued operations of $19,794. The recent banking and
financial crisis and the global economic recession have created an extremely challenging retail
and economic environment in the United States, Canada and Europe, which has negatively impacted
the Companys operating performance and potentially that of our customers and suppliers. The
Companys ability to continue as a going concern depends on the success of managements plans to
overcome these conditions, ultimately achieve positive cash flows from operations and become
profitable.
|
|
|
|
The Company currently funds the majority of its operations from its cash and cash equivalents
and bank indebtedness. The majority of its bank indebtedness is based on qualifying accounts
receivable and is otherwise not fully available to be drawn on during seasonal low sale periods
due to the lack of accounts receivable available at the time. The Company has been unable to
secure any new sources of financing not secured by accounts receivable which will be required
during low seasonal sale periods of the year. The Companys balance of cash and cash equivalents
generally decreases during the second and third quarters of the year, as cash is used to fund
product development and production, and increases in the fourth and first quarters in connection
with the shipping and collection periods.
|
|
|
|
If operating performance continues its current trend, the Company will require financing in
order to meet its cash flow requirements and fund its operations especially during the second
and third quarters of 2010. However, additional financing may not be available in amounts or on
terms that are acceptable to the Company. Without financing, the Company may be unable to fund
product development and the production of inventory required for sales in the third and fourth
quarters and therefore will not be able to capitalize on potential future sales. Refer to note
27, Subsequent events, for the details of a take-over bid which is being supported by the
Company. If the Company is unable to obtain additional financing in the near term, it may be
required to curtail operations in order to offset the lack of available funding, which could
have a material adverse impact on the Company, and, consequently, there is a substantial doubt
about the Companys ability to continue as a going concern.
|
45
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
2.
|
|
Basis of presentation and going concern (continued):
|
|
|
The accompanying consolidated financial statements do not reflect adjustments that would be
necessary if the going concern basis was not appropriate. If the going concern basis was not
appropriate for these consolidated financial statements, then significant adjustments would be
necessary in the carrying value of assets and liabilities, the reported revenues and expenses,
and the balance sheet classifications used. The appropriateness of the going concern basis is
dependent upon, among other things, future profitable operations, the ability to negotiate new
sources of financing, and the ability to generate sufficient cash from operations and financing
arrangements to meet its obligations.
|
|
|
|
The results of certain payment processing portfolios which were sold in 2009, as well as the
card-not-present and the Canadian card-present payment processing businesses sold in 2008,
are presented separately under discontinued operations in the consolidated statements of
operations and comprehensive loss for the current and prior periods. The balance sheet also
presents the assets and liabilities related to the discontinued operations separately for
current and prior years.
|
|
|
|
The effect of the takeover transaction as described in note 27, Subsequent events, on the
Companys financial position and future cash flows was not considered in the preparation of the
consolidated financial statements for the year ended December 31, 2009.
|
3.
|
|
Changes in accounting policies:
|
|
(a)
|
|
Accounting framework:
|
|
|
|
|
Effective January 1, 2009, the Company prepares its consolidated financial statements in
accordance with U.S. GAAP with reconciliation to Canadian generally accepted accounting
principles (Canadian GAAP) as described in note 25. The comparative periods have also been
prepared and presented pursuant to U.S. GAAP. Previously, the Companys accounting
principles conformed to Canadian GAAP and reconciled differences with U.S. GAAP through its
financial statement disclosures. There was no effect on the Companys results for 2009 and
2008 as a consequence of this change.
|
|
|
(b)
|
|
New accounting policies:
|
|
|
|
|
SFAS No. 165 Subsequent events:
|
|
|
|
|
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 165,
Subsequent
Events
, which was primarily codified into the Financial Accounting Standards Board (FASB)
ASC Topic 855,
Subsequent Events
, which is effective for periods ended after June 15, 2009.
SFAS No. 165 establishes general standards for accounting for, and disclosure of, events
that occur after the balance sheet date but before financial statements are issued. SFAS No.
165 sets forth the period after the balance sheet date during which the management of a
reporting entity should evaluate events or transactions that may occur for potential
recognition in the financial statements, identifies the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that should be made about events or transactions
that occur after the balance sheet date.
|
46
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
3.
|
|
Changes in accounting policies (continued):
|
|
(b)
|
|
New accounting policies (continued):
|
|
|
|
|
SFAS No. 141R Business combinations:
|
|
|
|
|
Effective January 1, 2009, the Company adopted SFAS No. 141R,
Business Combinations,
which
was primarily codified into FASB ASC Topic 805,
Business Combinations
, on a prospective
basis. The major changes to accounting for business combinations include the following: all
business acquisitions would be measured at fair value; the existing definition of a business
would be expanded; pre-acquisition contingencies would be measured at fair value; most
acquisition-related costs would be recognized as expenses as incurred (they would no longer
be part of the purchase consideration); obligations for contingent consideration would be
measured and recognized at fair value at the acquisition date; non-controlling interests
would be measured at fair value at the date of acquisition (i.e., 100% of the assets and
liabilities would be measured at fair value even when an acquisition is for less than 100%);
goodwill, if any, arising on a business combination reflects the excess of the fair value of
the acquiree, as a whole, over the net amount of the recognized identifiable assets acquired
and liabilities assumed, and would be allocated to the acquirer and the non-controlling
interest. The adoption of this standard did not have an impact on the Companys results as
there were no business acquisitions in the year ended December 31, 2009.
|
|
|
|
|
SFAS No. 160 Non-controlling interest in consolidated financial statements:
|
|
|
|
|
Effective January 1, 2009, the Company adopted SFAS No. 160,
Non-controlling Interest in
Consolidated Financial Statements,
which was primarily codified into FASB ASC Topic 810,
Consolidations
. This statement specifies that non-controlling interests are to be treated as
a separate component of equity, not as a liability or other item outside of equity. Because
non-controlling interests are an element of equity, increases and decreases in the parents
ownership interest that leave control intact are accounted for as capital transactions
rather than as step acquisitions or generating dilution gains or losses. The carrying
amount of the non-controlling interests is adjusted to reflect the changes in ownership
interests, and any difference between the amount by which the non-controlling interests are
adjusted and the fair value of the consideration paid or received is recognized directly in
equity attributable to the controlling interests.
|
|
|
|
|
This standard requires net income and comprehensive income to be displayed for both the
controlling and the non-controlling interests. Additional required disclosures and
reconciliations include a separate schedule that shows the effects of any transactions with
the non-controlling interest on the equity attributable to the controlling interests.
|
|
|
|
|
This standard is applied prospectively to all non-controlling interests, including any that
arose before the effective date. The adoption of this standard did not have an impact on the
Companys results.
|
47
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
3.
|
|
Changes in accounting policies (continued):
|
(b)
|
|
New accounting policies (continued):
|
|
|
|
SFAS No. 161 Disclosures about derivative instruments and hedging activities, an
amendment to FASB Statement No. 133:
|
|
|
|
Effective January 1, 2009, the Company adopted SFAS No. 161,
Disclosures About Derivative
Instruments and Hedging Activities, an Amendment to FASB Statement No. 133,
which was
primarily codified into FASB ASC Topic 815
, Derivatives and Hedging
. This standard requires
qualitative disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative instruments, and
disclosures about credit-risk related contingent features on derivative agreements. The
adoption of this standard did not have an impact on the Companys disclosures.
|
|
|
|
SFAS No. 162 The Hierarchy of Generally Accepted Accounting Principles and SFAS 163 -
Accounting for Financial Guarantee Insurance Contracts:
|
|
|
|
Effective January 1, 2009, the Company adopted SFAS No. 162,
The Hierarchy of Generally
Accepted Accounting Principles
, which was primarily codified into FASB ASC Topic 105
,
Generally Accepted Accounting Principles
. The adoption of this standard did not have an
impact on the Companys results.
|
|
|
|
SFAS No. 168 The FASB Accounting Standards Codification and Hierarchy of Generally
Accepted Accounting Principles
:
|
|
|
|
In June 2009, the FASB issued SFAS No. 168,
The FASB Accounting Standards Codification and
Hierarchy of Generally Accepted Accounting Principles
, which was primarily codified into
FASB ASC Topic 105,
Generally Accepted Accounting Principles
. SFAS No. 168 replaces SFAS No.
162,
The Hierarchy of Generally Accepted Accounting Principles
, to establish the FASB
Accounting Standards Codification (Codification) as the source of authoritative accounting
principles recognized by the FASB to be applied by non-governmental entities in preparation
of financial statements in conformity with generally accepted accounting principles in the
United States of America. This standard is effective for interim and annual reporting
periods ended after September 15, 2009. The adoption of this standard did not have an impact
on the Companys results.
|
48
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
3.
|
|
Changes in accounting policies (continued):
|
|
(b)
|
|
New accounting policies (continued):
|
|
|
|
|
FSP No. SFAS 157-4 Determining Fair Value When the Volume and Level of Activity for
the Asset or the Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly
:
|
|
|
|
|
In April 2009, the FASB issued FSP No. SFAS 157-4,
Determining Fair Value When the Volume
and Level of Activity for the Asset or the Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly,
which was primarily codified into FASB ASC
Topic 820,
Fair Value Measurements and Disclosures
. FSP No. SFAS 157-4 amends SFAS No. 157
to provide additional guidance on (i) estimating fair value when the volume and level of
activity for an asset or liability have significantly decreased in relation to normal market
activity for the asset or liability, and (ii) circumstances that may indicate that a
transaction is not orderly. FSP No. SFAS 157-4 also requires additional disclosures about
fair value measurements in interim and annual reporting periods. FSP No. SFAS 157-4 is
effective for interim and annual reporting periods ending after June 15, 2009. The adoption
of FSP No. SFAS 157-4 did not have an impact on the Companys results.
|
|
|
|
|
SFAS 115-2 and SFAS 124-2 Recognition and Presentation of Other-Than-Temporary
Impairments
:
|
|
|
|
|
In April 2009, the FASB issued FSP No. SFAS 115-2 and SFAS 124-2,
Recognition and
Presentation of Other-Than-Temporary Impairments
(FSP No. SFAS 115-2), which were
primarily codified into FASB ASC Topic 320
,
Investments
. FSP No. SFAS 115-2 provides
additional guidance on the timing of impairment recognition and greater clarity about the
credit and non-credit components of impaired debt securities that are not expected to be
sold. FSP No. SFAS 115-2 also requires additional disclosures about impairments in interim
and annual reporting periods. FSP No. SFAS 115-2 is effective for interim and annual
reporting periods ended after June 15, 2009. The adoption of FSP No. SFAS 115-2 did not have
a material effect on the Companys results.
|
49
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
3.
|
|
Changes in accounting policies (continued):
|
|
(c)
|
|
Recent accounting pronouncements:
|
|
|
|
|
In September 2009, the FASB issued SFAS No. 166,
Accounting for Transfers of Financial
Assets
, which was primarily codified into FASB ASC Topic 860,
Transfers and Servicing
. SFAS
No. 166 amends SFAS No. 140,
Accounting for the Transfers and Servicing of Financial Assets
and the Extinguishments of Liabilities
, and seeks to improve the relevance and comparability
of the information that a reporting entity provides in its financial statements about
transfers of financial assets; the effects of the transfer on its financial position,
financial performance, and cash flows; and a transferors continuing involvement, if any, in
transferred financial assets. SFAS No. 166 eliminates the concept of a qualifying
special-purpose entity, creates more stringent conditions for reporting a transfer of a
portion of a financial asset as a sale, clarifies other sale-accounting criteria, and
changes the initial measurement of a transferors interest in transferred financial assets.
SFAS No. 166 is effective for interim and annual reporting periods beginning after November
15, 2009. The Company has not completed its evaluation, but does not expect the adoption of
SFAS No. 166 will have a material impact on its consolidated financial statements.
|
|
|
|
|
The Accounting Standards Board of the Canadian Institute of Chartered Accountants (CICA)
has announced its decision to require all publicly accountable enterprises to report under
International Financial Reporting Standards (IFRS) for the years beginning on or after
January 1, 2011. However, the Company is a domestic registrant in the U.S. and files its
financial statements in accordance with U.S. GAAP. As such, the Company will not report
under IFRS by 2011 and will continue to report under U.S. GAAP. The SEC staff released a
work plan to evaluate the impact that IFRS will have on the U.S. financial reporting system.
In 2011, after the SEC staffs fact gathering is completed, as outlined in the work plan,
and certain convergence projects are successfully completed, the SEC will consider whether
and, if so, how to incorporate IFRS into the U.S. financial reporting system.
|
4.
|
|
Significant accounting policies:
|
|
|
These consolidated financial statements have been prepared in accordance with U.S. GAAP. These
principles conform, in all material respects, with Canadian GAAP, except as described in note
25. The significant accounting policies of the Company are summarized as follows:
|
|
(a)
|
|
Principles of consolidation:
|
|
|
|
|
These consolidated financial statements include the accounts of the Companys wholly-owned
subsidiaries. All 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 financial institutions
and highly liquid debt instruments with original terms to maturity of three months or less.
Cash and cash equivalents are recorded at fair value each period with changes recorded in
the statement of operations and comprehensive loss.
|
50
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
4.
|
|
Significant accounting policies (continued):
|
|
(c)
|
|
Short-term investments:
|
|
|
|
|
Short-term investments include investments with maturities of less than one year and are
recorded at fair value each period. Changes in fair value on these available-for-sale assets
are recorded in other comprehensive income until the assets are sold or there is an
impairment in fair value of these assets which is other-than-temporary. In such cases, the
amounts are recorded in the statement of operations and comprehensive loss.
|
|
|
(d)
|
|
Derivatives:
|
|
|
|
|
Derivatives are recorded as either assets or liabilities measured at their fair value unless
exempted from derivative treatment as a normal purchase and sale. Certain derivatives
embedded in other contracts must also be measured at fair value. All changes in the fair
value of derivatives are recognized in earnings unless specific hedge criteria are met,
which requires that a company must formally document, designate and assess the effectiveness
of transactions that receive hedge accounting. The Company has elected not to apply hedge
accounting.
|
|
|
(e)
|
|
Inventories:
|
|
|
|
|
Inventories are measured at the lower of cost (weighted average cost) and net realizable
value.
|
|
|
(f)
|
|
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:
|
|
|
|
|
|
Computer equipment and software
|
|
|
33% - 50
|
%
|
Equipment
|
|
|
10% - 33
|
%
|
Moulds
|
|
|
33% - 50
|
%
|
Leasehold improvements
|
Lower of lease term and economic life
|
51
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
4.
|
|
Significant accounting policies (continued):
|
|
(g)
|
|
Goodwill and other intangible assets:
|
|
|
|
|
Goodwill
:
|
|
|
|
|
Goodwill is the residual amount that results when the purchase price of an acquired business
exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed,
based on their fair values. Goodwill is allocated, as of the date of the business
combination, to the Companys reporting units that are expected to benefit from the
synergies of the business combination.
|
|
|
|
|
Goodwill is not amortized but is tested for impairment annually, or more frequently, if
events or changes in circumstances indicate that the asset may be impaired. The impairment
test is carried out in two steps. In the first step, the carrying amount of the reporting
unit is compared with its fair value. When the fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is considered not to be impaired, and the
second step of the impairment test is not required. The second step is performed when the
carrying amount of a reporting unit exceeds its fair value, in which case, the implied fair
value of the reporting units goodwill is compared with its carrying amount to measure the
impairment loss, if any. When the carrying amount of the reporting units goodwill exceeds
the implied fair value of goodwill, an impairment loss is recognized in an amount equal to
the excess and is presented as a separate line item on the consolidated statement of
operations. The Company currently has no intangible assets with infinite useful lives.
|
|
|
|
|
Other intangible assets
:
|
|
|
|
|
Intangible assets acquired either individually or with a group of other assets are initially
recognized and measured at cost. The cost of a group of intangible assets, including those
acquired in a business combination that meet the specified criteria for recognition apart
from goodwill, is allocated to the individual assets based on their fair values.
|
|
|
|
|
Intangible assets with finite useful lives are amortized using the straight-line method over
the following periods:
|
|
|
|
|
|
Customer relationships and service agreements
|
|
24 - 120 months
|
ISO/ISA relations
|
|
84 months
|
Intellectual property
|
|
36 months
|
Tradename
|
|
60 months
|
Other
|
|
36 months
|
52
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
4.
|
|
Significant accounting policies (continued):
|
|
(g)
|
|
Goodwill and other intangible assets (continued):
|
|
|
|
|
Other intangible assets
(continued):
|
|
|
|
|
As at December 31, 2009, estimated amortization expense for each of the next five years is
expected to be as follows:
|
|
|
|
|
|
2010
|
|
$
|
4,435
|
|
2011
|
|
|
4,435
|
|
2012
|
|
|
3,793
|
|
2013
|
|
|
1,274
|
|
2014
|
|
|
1,274
|
|
|
|
|
Estimated future amortization expense is based on the amount of other intangible assets
recorded as of December 31, 2009. Actual amounts will increase or decrease if additional
amortizable intangible assets are acquired or disposed of, or become impaired.
|
|
|
(h)
|
|
Impairment of long-lived assets:
|
|
|
|
|
Long-lived assets, consisting of property and equipment and intangible assets with finite
useful lives, are reviewed whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment is recognized for
long-lived assets when the carrying amount of an asset to be held and used exceeds the sum
of the undiscounted cash flows expected from its use and disposal; the impairment recognized
is measured as the amount by which the carrying amount of the asset exceeds its fair value.
|
|
|
(i)
|
|
Income taxes:
|
|
|
|
|
The Company provides for income taxes using the asset and liability method of tax
allocation. Under this method, deferred income tax assets and liabilities are determined
based on deductible or taxable temporary differences between financial statement values and
tax values of assets and liabilities using enacted income tax rates expected to be in effect
for the year in which the differences are expected to reverse.
|
|
|
|
|
The Company establishes a valuation allowance against future income tax assets if, based on
available information, it is more-likely-than-not that some or all of the future income tax
assets will not be realized.
|
|
|
(j)
|
|
Revenue recognition:
|
|
|
|
|
Revenue from the sale of consumer robotic, toy and entertainment products is recognized when
(i) persuasive evidence of an arrangement exists; (ii) products are shipped to a customer
who assumes risk of loss; (iii) collection of the respective receivable is probable; and
(iv) the sales price is fixed or determinable. Accruals for customer discounts, rebates,
incentives and allowances are recorded as the related revenues are recognized as a reduction
of revenues.
|
53
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
4.
|
|
Significant accounting policies (continued):
|
|
(j)
|
|
Revenue recognition (continued):
|
|
|
|
|
Payment service revenues are generated primarily from fees charged to merchants for payment
processing services. Merchants are charged a discount fee or rate, which is based upon the
merchants monthly charge volume and risk profile, and this fee is calculated as a
percentage of the dollar amount of each transaction. Other payment service revenues are
derived from a variety of fixed transaction or service fees, including fees for monthly
minimum charge volume requirements, statement fees, annual fees and fees for other
miscellaneous services. Discount and other fees related to payment transactions are
recognized at the time the merchants transactions are processed. Revenues derived from
service fees are recognized at the time the service is performed.
|
|
|
|
|
Where the Company is the primary party responsible for providing payment processing
services, revenue is recorded on a gross basis and amounts paid to the acquiring processing
suppliers are recorded as part of transaction processing expenses. Where the Company is not
the primary party in providing a merchant with payment processing services, the Company
records revenue net of amounts paid to the acquiring processing supplier.
|
|
|
(k)
|
|
Foreign currency translation:
|
|
|
|
|
The functional currency and reporting currency of the Company is the U.S. dollar. Monetary
assets and liabilities denominated in currencies other than the U.S. dollar are translated
into U.S. dollars at the rates of exchange prevailing at the balance sheet dates. Other
assets and liabilities denominated in currencies other than the U.S. dollar are translated
into U.S. dollars at the rate of exchange prevailing when the assets were acquired or the
liabilities incurred. Revenue and expense transactions denominated in currencies other than
the U.S. dollar are translated into U.S. dollars at the average rate of exchange in effect
for the period during which the transaction occurred, except for amortization which is
translated into U.S. dollars at the rate of exchange in effect when the related transaction
occurred. Foreign exchange gains and losses are included in the determination of net loss.
|
|
|
(l)
|
|
Stock-based compensation:
|
|
|
|
|
The fair value-based method is used to account for all transactions whereby goods and
services are received in exchange for stock-based compensation and other stock-based
payments. Under the fair value-based method, compensation cost is measured at fair value at
the date of grant and is expensed over the awards vesting periods, with a credit to
additional paid-in capital.
|
|
|
(m)
|
|
Research and development expenses:
|
|
|
|
|
Research costs, which include all costs incurred to establish technological feasibility, are
charged to operations in the period in which they are incurred. Once technological
feasibility has been established, development costs are evaluated for deferral and
subsequent amortization over the estimated period of benefit. As at December 31, 2009 and
2008, the Company had no deferred development costs.
|
54
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
4.
|
|
Significant accounting policies (continued):
|
|
(n)
|
|
Other costs of operations:
|
|
|
|
|
The costs of advertising, promotion and marketing programs are charged to operations in the
period incurred.
|
|
|
|
|
Costs related to shipment and handling of goods to customers are included in cost of sales
and are expensed as incurred.
|
|
|
|
|
Products design and development costs are charged to operations as incurred.
|
|
|
(o)
|
|
Earnings per share:
|
|
|
|
|
Basic earnings per share are determined using the weighted average number of Class A
shares outstanding during the period. Diluted earnings per share are computed in a
manner consistent with basic earnings per share, except that the weighted average shares
outstanding are increased to include additional shares from the assumed exercise of options
and warrants, if dilutive, using the treasury stock method. The number of additional shares
is calculated by assuming that outstanding options and warrants were exercised, and that the
proceeds from such exercises, including unrecognized compensation costs of stock-based
option grants attributed to future services, are used to repurchase Class A shares at the
average market price during the reporting period.
|
|
|
(p)
|
|
Use of estimates:
|
|
|
|
|
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions based on existing knowledge that affect the reported amounts
of assets and liabilities and disclosures at the date of the financial statements and
revenues and expenses during the reporting periods. Significant areas requiring the use of
management estimates and assumptions include: determining the allowance for doubtful
accounts and reserves for obsolescence and sales allowances; determining the recoverability
of the balance of sale receivable; estimating the useful lives of long-lived assets,
including property and equipment and intangible assets; estimating the fair value of
identifiable intangibles acquired in a business acquisition; estimating stock-based
compensation costs; assessing goodwill, as well as the recoverability of long-lived assets,
research and development tax credits receivable and deferred tax assets; and the resolution
of contingent liabilities. The reported amounts and note disclosures are determined to
reflect the most probable set of economic conditions and planned courses of action. It is
reasonably possible that managements reassessments of these and other estimates and
assumptions in the near term as well as actual results could require a material change in
reported amounts and disclosures in the consolidated financial statements of future periods.
|
55
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
5.
|
|
Business acquisitions and disposals:
|
|
(i)
|
|
2008 acquisitions:
|
|
|
|
|
On August 29, 2008, the Company acquired all the outstanding shares of Sablon
Distribution S.A. (Sablon), a Belgium-based toy distributor operating in the Benelux
countries, France and Germany. In July 2008, the Company purchased certain assets and
liabilities of a toy operation based in New York, USA.
|
|
|
|
|
The total purchase price for both acquisitions was $8,502, consisting of cash
consideration paid of $6,557 and transaction costs of $271 and, in connection with the
Sablon acquisition, additional consideration payable of approximately $1,674 (EUR
1,200), of which approximately $944 (EUR 715) was paid in 2009 and $694 (EUR 485) in
long-term debt. Additional contingent consideration is also payable in each of 2009 and
2010 based on the consolidated net revenues of Sablon in these years. No additional
consideration is payable as at December 31, 2009 as the contingent consideration
criteria were not met. In connection with the toy operation acquisition, the agreement
provides for an additional payment payable upon the achievement of defined financial
milestones. No additional consideration has been paid in the period for this
acquisition. Any additional contingent consideration paid for these acquisitions will be
accounted for as goodwill which will be subject to impairment testing at the time it is
recorded.
|
56
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
5.
|
|
Business acquisitions and disposals (continued):
|
|
(a)
|
|
Acquisitions (continued):
|
|
(i)
|
|
2008 acquisitions (continued):
|
|
|
|
|
The acquisitions were accounted for using the purchase method, and the results were
consolidated with those of the Company from the date of acquisition. The following table
presents the estimated fair value of the assets purchased and liabilities assumed at the
date of acquisition in connection with these acquisitions:
|
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23
|
|
Accounts receivable
|
|
|
4,099
|
|
Inventories
|
|
|
7,491
|
|
Income tax receivable
|
|
|
322
|
|
Property and equipment
|
|
|
2,447
|
|
Customer relationships
|
|
|
2,600
|
|
Non-compete agreement
|
|
|
1,892
|
|
Future income taxes
|
|
|
993
|
|
Goodwill
|
|
|
3,965
|
|
|
|
|
|
23,832
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Bank indebtedness
|
|
|
5,703
|
|
Accounts payable and accrued liabilities
|
|
|
5,242
|
|
Customer deposits
|
|
|
313
|
|
Long-term debt
|
|
|
3,254
|
|
Future income taxes
|
|
|
818
|
|
|
|
|
|
15,330
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
8,502
|
|
|
Consideration:
|
|
|
|
|
Cash
|
|
$
|
6,557
|
|
Additional consideration payable in cash
|
|
|
1,674
|
|
Transaction costs
|
|
|
271
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
8,502
|
|
|
|
|
|
Goodwill recorded in connection with these transactions is not expected to be
deductible for tax purposes and was fully impaired and expensed during the year ended
December 31, 2008.
|
57
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
5.
|
|
Business acquisitions and disposals (continued):
|
|
(i)
|
|
2009 disposals:
|
|
|
|
|
Sale of Payment Processing Portfolios:
|
|
|
|
|
On February 2, 2009, the Company entered into an agreement with a buyer, giving the
Company the right to cause the buyer to purchase, and giving the buyer the right to
cause the Company to sell, a portfolio of residual payments from merchants processing
credit card-present transactions. In substance, the transaction represented the sale of
a portfolio of residual payments from merchants processing credit card-present
transactions for proceeds of approximately $11,000.
|
|
|
|
|
The aggregate amount of monthly residuals earned on the portfolio, net of a service fee,
will be set off against and will reduce the balance of sale receivable. The agreement
established that the calculation be based on the results of this portfolio from November
2008 onwards. The adjustment of $1,077 for the amount earned between November 2008 to
the transaction date is reflected as a reduction to the proceeds. The discounted balance
of sale receivable is increased monthly by a rate of interest of 1% per month. The
interest income earned on the balance of sale receivable is included in other income in
the consolidated statement of operations and comprehensive loss. The Companys right to
cause the buyer to purchase (to effectively settle the balance of sale) may be exercised
any time on or after February 2, 2011. The buyers right to cause the Company to sell
the portfolio (to effectively settle the balance of sale) may be exercised at any time
up to December 31, 2014. Under the terms of this agreement, the Company has also
received a warrant, exercisable for a nominal consideration, giving the Company the
right to acquire treasury shares, representing up to 3.5% of the outstanding shares of
the purchaser, if the purchase price is not settled prior to specified dates.
|
|
|
|
|
During the year, the monthly residuals earned on the underlying portfolio, which are
applied to the balance of sale receivable, decreased significantly compared to amounts
initially forecasted. Furthermore, the Company will exercise its warrants to acquire
treasury shares representing 1% of the outstanding shares of the purchaser due to the
purchase price not being settled by March 2, 2010. In the fourth quarter, the Company
has concluded that the asset is impaired and, based on the present value of estimated
future cash flows, has recorded a provision of $6,504 to write down the receivable to
its estimated recoverable amount of $3,500. If the monthly residuals earned on the
underlying portfolio decrease significantly compared to the revised forecast, this asset
could become further impaired in the near term.
|
|
|
|
|
Effective February 4, 2009, the Company sold a portfolio of merchant processing
contracts and associated sales channel contracts for a cash consideration of
approximately $1,035.
|
|
|
|
|
On October 31, 2009, the Company entered into an agreement to dispose of the contractual
rights relating to a U.S. card-present portfolio of merchants forming part of its
remaining payment processing business. Proceeds on sale comprised a total cash
consideration of up to $300 payable on an earn-out basis over the two-year period
following closing of the transaction, and the assumption of certain liabilities.
|
58
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
5.
|
|
Business acquisitions and disposals (continued):
|
|
(b)
|
|
Disposals (continued):
|
|
(i)
|
|
2009 disposals (continued):
|
|
|
|
|
Sale of Payment Processing Portfolios (continued):
|
|
|
|
|
At December 31, 2009, the Company continues to operate one merchant portfolio that
previously formed part of the payment processing segment.
|
|
|
(ii)
|
|
2008 disposals:
Sale of Canadian Card-Present and Card-Not-Present businesses:
|
|
|
|
|
Effective October 1, 2008, the Company sold substantially all of the payment processing
assets that were used exclusively in the business of processing payments for
card-not-present transactions for a cash consideration of $7,000 and, effective August
5, 2008, sold substantially all of the payment processing assets that were used
exclusively in the business of processing payments for Canadian card-present business
for a cash consideration of $1,500. In connection with the second transaction,
additional proceeds of $500 may be received by the Company based on the achievement of
certain earnings goals by the purchaser. As at December 31, 2009, the earnings goals
were not achieved and no additional payments were received.
|
|
|
|
The following table summarizes the book value of the assets and liabilities relating to the
businesses sold by the Company in 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and short-term investments held in reserve
|
|
$
|
|
|
|
$
|
6,010
|
|
Settlement assets
|
|
|
|
|
|
|
1,679
|
|
Accounts receivable
|
|
|
168
|
|
|
|
3,622
|
|
Inventories
|
|
|
74
|
|
|
|
12
|
|
Prepaid expenses and deposits
|
|
|
|
|
|
|
215
|
|
|
|
|
|
242
|
|
|
|
11,538
|
|
|
|
|
|
|
|
|
|
|
Long-term assets:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
72
|
|
|
|
738
|
|
Intangible assets
|
|
|
11,286
|
|
|
|
811
|
|
|
|
|
|
11,358
|
|
|
|
1,549
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
4,169
|
|
Customer reserves and security deposits
|
|
|
|
|
|
|
7,868
|
|
|
|
|
|
|
|
|
|
12,037
|
|
|
|
|
|
|
|
|
|
|
|
Net assets sold
|
|
|
11,600
|
|
|
|
1,050
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale, net of transaction cost of
$126 and adjustments of $1,019 (2008 - $312)
|
|
|
10,890
|
|
|
|
8,188
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on sale of net assets
|
|
$
|
(710
|
)
|
|
$
|
7,138
|
|
|
59
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
5.
|
|
Business acquisitions and disposals (continued):
|
|
(b)
|
|
Disposals (continued):
|
|
(ii)
|
|
2008 disposals (continued):
|
|
|
|
|
The remaining assets and liabilities of these segments are classified separately as
assets and liabilities of discontinued operations in the consolidated balance sheet.
|
|
|
|
|
The results of operations of the businesses disposed of for the years ended December 31,
2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
5,098
|
|
|
$
|
61,799
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Transaction processing, service costs and cost of sales
|
|
|
3,648
|
|
|
|
33,459
|
|
Selling, general and administrative
|
|
|
1,481
|
|
|
|
15,525
|
|
Research and development
|
|
|
|
|
|
|
2,073
|
|
Amortization of property, equipment and intangibles
|
|
|
423
|
|
|
|
9,815
|
|
Operating leases
|
|
|
|
|
|
|
847
|
|
Impairment losses
|
|
|
|
|
|
|
41,342
|
|
Loss on settlement of litigation
|
|
|
9,541
|
|
|
|
|
|
|
|
|
|
15,093
|
|
|
|
103,061
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(9,995
|
)
|
|
|
(41,262
|
)
|
|
|
|
|
|
|
|
|
|
Income tax recovery (provision)
|
|
|
5,117
|
|
|
|
(6,832
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations before undernoted items
|
|
|
(4,878
|
)
|
|
|
(48,094
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on disposal of assets
|
|
|
(710
|
)
|
|
|
7,138
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
$
|
(5,588
|
)
|
|
$
|
(40,956
|
)
|
|
60
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
5.
|
|
Business acquisitions and disposals (continued):
|
|
(b)
|
|
Disposals (continued):
|
|
(ii)
|
|
2008 disposals (continued):
|
|
|
|
|
The results of operations include management assumptions and adjustments related to cost
allocations, which are inherently subjective. The Loss on settlement of litigation
includes the write-off of long-term assets of $19,183 as well as the reversal of
long-term liabilities of $9,642 from the previously discontinued payment processing
business related to online gambling.
|
|
|
|
|
At June 30, 2008, the Company tested goodwill for impairment in the payment processing
segment as the Company determined that there was a more likely than not expectation that
a significant portion, or this entire segment, would be sold over the course of the
following 12 months. As a result of this analysis, the goodwill in the segment was
determined to be impaired since the estimated fair value to be realized as proceeds from
transactions would be less than the carrying value of the segment including goodwill.
Consequently, the Company recorded a non-cash goodwill impairment loss of $29,097 in the
second quarter of 2008 related to the Canadian Card-Present and Card-Not-Present
businesses.
|
|
|
|
|
In addition, the Company tested the remaining intangibles held in the payment processing
segment at December 31, 2008 for impairment as the Company determined that there was a
more likely than not expectation that a significant portion of these intangibles would
be sold over the course of the next twelve months. As a result of this analysis, the
Company recorded a non-cash impairment charge of $12,245 at December 31, 2008 based on
the estimated fair value to be realized as proceeds from these transactions.
|
6.
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Notes denominated in U.S. dollars with a weighted average
effective yield of 1.70% and matured on March 9, 2009
|
|
$
|
|
|
|
$
|
6,296
|
|
|
7.
|
|
Accounts and other receivables:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Trade accounts receivable, net of provision for doubtful accounts
of $369 (2008 - $758)
|
|
$
|
14,302
|
|
|
$
|
22,780
|
|
Other
|
|
|
271
|
|
|
|
1,375
|
|
|
|
|
|
$
|
14,573
|
|
|
$
|
24,155
|
|
|
61
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Raw materials
|
|
$
|
2,763
|
|
|
$
|
7,286
|
|
Finished goods
|
|
|
10,050
|
|
|
|
12,078
|
|
|
|
|
|
$
|
12,813
|
|
|
$
|
19,364
|
|
|
9.
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
443
|
|
|
$
|
437
|
|
Computer equipment and software
|
|
|
1,841
|
|
|
|
1,615
|
|
Leasehold improvements
|
|
|
1,280
|
|
|
|
1,353
|
|
Moulds
|
|
|
5,068
|
|
|
|
6,781
|
|
|
|
|
|
8,632
|
|
|
|
10,186
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
216
|
|
|
|
151
|
|
Computer equipment and software
|
|
|
1,050
|
|
|
|
750
|
|
Leasehold improvements
|
|
|
542
|
|
|
|
334
|
|
Moulds
|
|
|
3,312
|
|
|
|
4,732
|
|
|
|
|
5,120
|
|
|
|
5,967
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
3,512
|
|
|
$
|
4,219
|
|
|
10.
|
|
Goodwill and intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
amount
|
|
|
amortization
|
|
|
value
|
|
|
Customer relationships and service agreements
|
|
$
|
23,228
|
|
|
$
|
10,944
|
|
|
$
|
12,284
|
|
ISO/ISA relations
|
|
|
5,608
|
|
|
|
4,118
|
|
|
|
1,490
|
|
Tradename
|
|
|
11,459
|
|
|
|
6,412
|
|
|
|
5,047
|
|
Other
|
|
|
299
|
|
|
|
299
|
|
|
|
|
|
|
|
|
|
$
|
40,594
|
|
|
$
|
21,773
|
|
|
$
|
18,821
|
|
|
62
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
10. Goodwill and intangible assets (continued):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
amount
|
|
|
amortization
|
|
|
value
|
|
|
Customer relationships and service agreements
|
|
$
|
34,857
|
|
|
$
|
10,210
|
|
|
$
|
24,647
|
|
ISO/ISA relations
|
|
|
7,180
|
|
|
|
3,334
|
|
|
|
3,846
|
|
Intellectual property
|
|
|
5,520
|
|
|
|
2,147
|
|
|
|
3,373
|
|
Tradename
|
|
|
14,797
|
|
|
|
3,453
|
|
|
|
11,344
|
|
Other
|
|
|
2,179
|
|
|
|
555
|
|
|
|
1,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64,533
|
|
|
$
|
19,699
|
|
|
$
|
44,834
|
|
|
63
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
10.
|
|
Goodwill and intangible assets (continued):
|
|
|
Excluding amounts included in discontinued operations, changes in goodwill and intangible assets
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and service
|
|
|
ISO/ISA
|
|
|
Intellectual
|
|
|
Trade-
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
agreements
|
|
|
relations
|
|
|
property
|
|
|
name
|
|
|
Other
|
|
|
Total
|
|
|
Balance,
December 31, 2007
|
|
$
|
37,113
|
|
|
$
|
28,342
|
|
|
$
|
4,872
|
|
|
$
|
5,213
|
|
|
$
|
14,305
|
|
|
$
|
|
|
|
$
|
89,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WowWee
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
342
|
|
Sablon (note 5)
|
|
|
3,965
|
|
|
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,565
|
|
Other (note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,892
|
|
|
|
1,892
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
293
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WowWee
|
|
|
(37,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,455
|
)
|
Sablon
|
|
|
(3,965
|
)
|
|
|
(2,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
(3,868
|
)
|
|
|
(1,026
|
)
|
|
|
(1,840
|
)
|
|
|
(2,961
|
)
|
|
|
(561
|
)
|
|
|
(10,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2008
|
|
|
|
|
|
|
24,647
|
|
|
|
3,846
|
|
|
|
3,373
|
|
|
|
11,344
|
|
|
|
1,624
|
|
|
|
44,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WowWee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
processing
business
|
|
|
|
|
|
|
(2,428
|
)
|
|
|
(1,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,000
|
)
|
WowWee
|
|
|
|
|
|
|
(6,602
|
)
|
|
|
|
|
|
|
(1,533
|
)
|
|
|
(3,338
|
)
|
|
|
|
|
|
|
(11,473
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(946
|
)
|
|
|
(946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
(3,333
|
)
|
|
|
(784
|
)
|
|
|
(1,840
|
)
|
|
|
(2,959
|
)
|
|
|
(690
|
)
|
|
|
(9,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2009
|
|
$
|
|
|
|
$
|
12,284
|
|
|
$
|
1,490
|
|
|
$
|
|
|
|
$
|
5,047
|
|
|
$
|
|
|
|
$
|
18,821
|
|
|
64
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
10. Goodwill and intangible assets (continued):
Due largely to a general deterioration of the economic environment, sales, operating profits and
cash flows in the consumer robotic, toy and entertainment products segment were lower than
expected in 2008 and 2009. The Company tested the consumer robotic, toy and entertainment
segment for impairment at December 31, 2008. The Company revised its forecast to reflect lower
growth expectations for this segment. At December 31, 2008, a goodwill impairment loss of
$41,420 and an impairment loss of $2,427 on amortizable intangibles were recognized for this
segment. The fair value of the segment was estimated using the expected present value of future
cash flows.
During 2009, the cash flows for the consumer robotic, toy and entertainment segment were lower
than the revised forecast established at the end of 2008. As a result, the Company recalculated
a fair value of the intangibles and concluded a further impairment charge was required in the
amount of $12,419, which was recorded in the fourth quarter.
In the near term, should the Companys operating performance deteriorate lower than currently
forecasted for 2010, it is reasonably possible that these intangibles could become further
impaired.
With respect to the continuing operations of the payment processing segment, during the year,
the Company tested for impairment the customer relations and ISO/ISA intangible assets related
to certain merchant portfolios that are part of the payment processing business, as the Company
determined that the estimated attrition rate should be increased based on new information. As a
result of this analysis, the Company recorded a non-cash impairment charge of $4,000 based on an
estimated fair value established using a discounted cash flow methodology.
11. Bank indebtedness:
In 2009, the Company had credit facilities available through its subsidiaries as follows:
Through its European subsidiaries, the Company has entered into various credit facilities for up
to approximately $6,441 (EUR 4,500) [2008 $9,300 (EUR 6,650)], which could be utilized in the
form of loans and letters of guarantee. At December 31, 2009, the Company utilized $5,584 (EUR
3,900 [2008 $6,577 (EUR 4,714)] of the facilities. The borrowings are due on demand, bear
interest at the banks prime rate plus a premium of 1%, and are secured by a first ranking
hypothec on certain assets of the subsidiaries. Under this agreement, the subsidiary is subject
to financial covenants, based on a minimum equity to total asset ratio of 25%, which was met on
December 31, 2009.
In Europe, the Companys subsidiaries also have additional facilities based on qualifying
accounts receivable, of which $2,689 (EUR 1,878) [2008 $1,698 (EUR 1,217)] was utilized as at
December 31, 2009. These facilities are due on demand and bear interest at the banks prime rate
plus a premium of 1%.
65
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
11. Bank indebtedness (continued):
Through its Hong Kong subsidiary, the Company has entered into credit facilities for up to
approximately $5,128 (40,000 HKD) [2008 $5,128 (40,000 HKD)], based on qualifying accounts
receivable, which can be utilized in the form of loans and letters of guarantee. At December
31, 2009, the Company utilized $575 (4,485 HKD) [2008 $3,272 (25,522 HKD)] of the facilities
in the form of revolving credit, and used $1,935 in the form of export loans. The borrowings
are due on demand and bear interest at the interbank rate in Hong Kong plus a premium ranging
between 0.5% and 2%. Under this agreement, the Company must maintain a term deposit in the
amount of $5,000 as security, and the Company is subject to financial covenants which were met
at December 31, 2009.
12. Accounts payable and accrued liabilities:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Trade accounts payable
|
|
$
|
20,524
|
|
|
$
|
19,330
|
|
Accrued trade liabilities
|
|
|
2,825
|
|
|
|
5,207
|
|
Accrued salaries and benefits
|
|
|
1,963
|
|
|
|
2,769
|
|
Reserve for sales returns and allowances
|
|
|
3,201
|
|
|
|
3,879
|
|
Other
|
|
|
1,883
|
|
|
|
3,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,396
|
|
|
$
|
34,497
|
|
|
13. Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Long-term loan payable to a selling shareholder,
repayable in installments of $716 (EUR 500) per year
beginning in 2011, maturing in 2014, bearing interest
at 7% (EUR 2,000 [2008 - EUR 1,600])
|
|
$
|
2,863
|
|
|
$
|
2,231
|
|
|
|
|
|
|
|
|
|
|
Other loans, bearing interest at rates ranging from 5%
to 7.9% (2008 - 5% to 8.85%) (EUR 443) [2008 - EUR
562])
|
|
|
635
|
|
|
|
784
|
|
|
|
|
|
3,498
|
|
|
|
3,015
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
179
|
|
|
|
1,010
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
3,319
|
|
|
$
|
2,005
|
|
|
The long-term portion of a loan payable to a selling shareholder was increased during the year
by $716 (EUR 500) due to an agreement which extended the required payment terms of amounts
previously included in accounts payable and accrued liabilities.
66
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
13. Long-term debt (continued):
Principal repayments over the next four years are as follows: 2010 $179; 2011 $903; 2012 -
$895; 2013 $787 and 2014 $734.
14. Share capital:
The Companys authorized share capital consists of an unlimited number of Class A shares, and
Class B and Class C preference shares.
|
|
|
The Class A shares are designated as common shares.
|
|
|
|
|
The Class B preference shares are voting, non-participating and redeemable at the
option of the Company for the amount paid up thereon. In the event of the liquidation,
dissolution or wind-up of the Company, the Class B preference shares rank in priority to
all other classes.
|
|
|
|
|
The Class C preference shares are issuable in series with rights, privileges,
restrictions and conditions designated by the directors. In the event of the liquidation,
dissolution or wind-up of the Company, the Class C preference shares rank in priority to
the common shares.
|
No Class B or Class C shares have been issued.
On August 7, 2009, the shareholders of the Company approved an amendment to the Articles of
Continuance of the Company to consolidate all issued and outstanding Class A shares on the
basis that each holder of a Class A share shall receive one (1) Class A share for every
five (5) Class A shares so consolidated. The share consolidation became effective on August
26, 2009 upon the filing of the Articles of Amendment and the issuance of a Certificate of
Amendment in respect thereof. As a result, the issued and outstanding Class A shares decreased
from 25,742,223 Class A shares to 5,148,735 Class A shares, which include 290 shares
required to satisfy the fractional share requirements. All share, stock option, EPS and warrant
amounts have been retroactively adjusted for all periods presented.
On November 5, 2008, the Board of Directors renewed its stock buyback program authorizing the
Company to purchase up to 5% of its outstanding Class A shares on the open market through the
facilities of the Nasdaq Stock Market. The 2008 program expired on November 20, 2009 and has
not been renewed.
All shares purchased under the stock buyback program have been cancelled. In 2008, the purchase
of 48,185 such shares, having a book value of $1,966, was settled for a total consideration of
$550. The excess of the book value of the shares over the purchase price, in the amount of
$1,416, was credited to contributed surplus. In 2009, there were no share purchases under the
program.
67
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
15. Stock options and warrants:
|
(a)
|
|
Optimal Group Inc.:
|
|
|
|
|
The Company has a stock option plan that provides for the granting of options to employees
and directors for the purchase of the Companys Class A shares to be issued from treasury.
Options may be granted by the Board of Directors for terms of up to ten years. The Board
of Directors establishes the exercise period, vesting terms and other conditions for each
grant at the grant date. The maximum number of options that may be granted under the plan
is 1,800,000. Options may be granted with exercise prices at the then current market price.
|
|
|
|
|
During 2009, the Company cancelled 975,042 options under the plan. This cancellation
resulted in an expense of $1,486, representing the remaining unrecognized stock-based
compensation cost related to the cancelled options. All approvals required for these
cancellations were obtained during the year.
|
|
|
|
|
Details of outstanding stock options are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
|
exercise
|
|
|
|
Number of
|
|
|
price
|
|
|
|
options
|
|
|
per share
|
|
|
Options outstanding, December 31, 2007
|
|
|
1,107,708
|
|
|
$
|
31.30
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(13,333
|
)
|
|
|
38.65
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2008
|
|
|
1,094,375
|
|
|
|
31.20
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(91,933
|
)
|
|
|
32.20
|
|
Cancelled
|
|
|
(975,042
|
)
|
|
|
31.45
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2009
|
|
|
27,400
|
|
|
$
|
21.05
|
|
|
|
|
|
For the years ended December 31, 2009 and 2008, no options were granted.
|
|
|
|
|
At December 31, 2009, 27,400 (2008 1,094,375) stock options were excluded from the
calculation of diluted earnings per share because they were anti-dilutive.
|
|
|
|
|
The remaining options have a weighted average remaining contract life of 4.88 years, and all
of these options were exercisable as at December 31, 2009.
|
68
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
15. Stock options and warrants (continued):
|
(a)
|
|
Optimal Group Inc. (continued):
|
|
|
|
|
At December 31, 2009, there are 164,000 warrants outstanding, exercisable at an exercise
price of $27.80. These warrants expire in November 2014. All of these warrants could
potentially dilute basic earnings per share in the future. All of these warrants were
excluded from the calculation of diluted earnings per share because they were anti-dilutive
for the years ended December 31, 2009 and 2008.
|
|
|
|
|
The intrinsic value of all options and warrants was nil as at December 31, 2009 and 2008.
|
|
|
(b)
|
|
Terra Payments Inc.:
|
|
|
|
|
Under the terms of the 2004 Combination Agreement with Terra Payments Inc. (Terra), the
Company assumed Terras stock option plan, whereby stock options governed by this plan would
be exercisable for the Companys Class A shares. The exercise price and number of options
outstanding on April 6, 2004, the effective date of the acquisition of Terra, were adjusted
based on the exchange ratio of 0.0906 of the Companys Class A shares for each share of
Terra.
|
|
|
|
|
Details of the stock options outstanding under the Terra plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar exercise price
|
|
|
Canadian dollar exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
|
Exercise price
|
|
|
|
|
|
|
exercise price
|
|
|
|
Number
|
|
|
per share
|
|
|
Number
|
|
|
per share
|
|
|
Balance, December 31, 2007
|
|
|
26,823
|
|
|
$
|
37.15
|
|
|
|
28,142
|
|
|
$
|
41.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/cancelled
|
|
|
|
|
|
|
|
|
|
|
(17,265
|
)
|
|
|
32.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
26,823
|
|
|
|
37.15
|
|
|
|
10,877
|
|
|
|
54.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/cancelled
|
|
|
(26,823
|
)
|
|
|
37.15
|
|
|
|
(10,877
|
)
|
|
|
54.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
During 2008, the outstanding 4,396 warrants, with a weighted average exercise price of
CA$0.05, expired in March 2008.
|
|
|
|
|
As at December 31, 2008, 37,699 stock options were excluded from the calculation of diluted
earnings per share because they were anti-dilutive.
|
69
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
16. Commitments, contingencies and guarantees:
|
(a)
|
|
Operating leases and other commitments:
|
|
|
|
|
The Company has entered into operating leases for its premises and certain office equipment.
Minimum lease payments for the next four years and thereafter are approximately as follows:
|
|
|
|
|
|
2010
|
|
$
|
1,610
|
|
2011
|
|
|
709
|
|
2012
|
|
|
577
|
|
2013
|
|
|
242
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,138
|
|
|
|
|
|
In addition, the Company is also responsible for operating costs and taxes under the
operating leases.
|
|
|
|
|
The Company also has licensing commitments with the following minimum payments for the next
three years: 2010 $841, 2011 $134 and 2012 $134.
|
|
|
(b)
|
|
The Company has granted letters of guarantee, issued by highly rated financial
institutions to indemnify third parties in the event the Company does not perform its
contractual obligations. As at December 31, 2009, the maximum potential liabilities under
these letters of guarantee were $110 [2008 $110 and $1,232 (CA$1,500)].
|
|
|
|
|
The Company recorded no liability with respect to these guarantees, as the Company does not
expect to make any payment for the aforementioned items. Management believes that the fair
value of the non-contingent obligations, to stand ready to perform in the event that
specified triggering events or conditions occur, approximates the cost of obtaining the
letter of guarantee.
|
|
|
(c)
|
|
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 material adverse effect on
its financial position or results of operations. However, the results of legal proceedings
cannot be predicted with certainty. Should the Company fail to prevail in any of these
legal matters or should several legal matters be resolved against the Company in the same
reporting period, the consolidated operating results of a particular reporting period could
be materially adversely affected.
|
|
|
(d)
|
|
In the sale or other disposition of assets out of the ordinary course of business, in
addition to possible indemnification relating to failure to perform covenants and breach of
representations and warranties, the Company might agree to indemnify the buyer against
claims from its past conduct of its business. Typically, the term and amount of such
indemnification will be limited by agreement. No provision has been made in these
financial statements with respect to this item as the Company does not expect to make any
payments for these items and the standby liability is nominal.
|
70
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
16. Commitments, contingencies and guarantees (continued):
|
(e)
|
|
As previously announced, immediately following the enactment of the Unlawful Internet
Gambling Enforcement Act of 2006 (the Act) on October 13, 2006, the Companys then
majority-owned subsidiary, OPIL, ceased to process settlement transactions originating from
United States consumers. This represented a substantial portion of its revenues derived
from processing transactions from online gambling. The Company is exposed to adverse
consequences as a result of possible enforcement proceedings, governmental investigations
or lawsuits initiated against it in jurisdictions where online gambling is restricted or
prohibited.
|
|
|
|
|
Following announcements by the U.S. Attorneys Office in the Southern District of New York
relating to its investigation of the U.S. Internet gambling industry, the Company announced
on May 8, 2007 that it had initiated discussions with the U.S. Attorneys Office in the
Southern District of New York and it was in the process of responding to a voluntary request
for information issued by the U.S. Attorneys Office. In connection with such ongoing
investigation, the Company announced on May 11, 2007 that it had received a copy of warrants
of seizure issued by the U.S. Attorneys Office against funds of certain payment processors
that were on deposit with two U.S. banks. These funds included $19,183 on deposit to the
credit of the Companys affiliates. The total amount seized of $19,183 was presented as
long-term asset related to discontinued operations on the consolidated balance sheets. On
October 30, 2009, the Company announced that it has entered into a non-prosecution agreement
with the Office of the United States Attorney for the Southern District of New York. Under
the terms of the non-prosecution agreement, a total of $19,183 was forfeited to the United
States by the Company and its subsidiaries, as disgorgement of property involved in and
proceeds received from the payment processing services that were provided by the Companys
subsidiaries to Internet gambling merchants in relation to U.S. customers of such merchants.
The Company and the U.S. Attorneys Office have agreed that the $19,183 previously seized be
applied to satisfy the forfeiture obligation. Accordingly, the long-term asset of $19,183
was considered fully impaired with the expense included in the net loss from discontinued
operations.
|
|
|
|
|
Furthermore, the Company had long-term liabilities related to discontinued operations of
$9,642, which represented payment processing reserve account balances payable to Internet
gambling merchants of its former payments processing business, which liabilities resulted
from the payment processing services that the Companys subsidiaries provided to such
merchants in relation to their U.S. customers. Pursuant to the non-prosecution agreement
that the Company entered into with the U.S. Attorneys Office, it recognized that the
services provided by these merchants violated certain United States laws; on the basis of
advice received by management that a court would not enforce the Companys obligation to pay
these merchants their respective processing reserve account balances, should they attempt to
enforce payment, these liabilities in the amount of $9,642 were derecognized (reversed)
during the year ended December 31, 2009. Certain of these merchants may nevertheless
initiate legal proceedings against the Company in an attempt to enforce payment of the
liabilities that have been derecognized (reversed), which the Company would be forced to
defend. The Company has not recorded any provision in relation to these potential
proceedings because the amount of loss, if any, is not determinable.
|
71
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
16. Commitments, contingencies and guarantees (continued):
|
(f)
|
|
On March 20, 2008, the Company entered into a settlement agreement with Fujitsu, which
resolved all potential claims by Fujitsu and brought arbitration proceedings to an end. The
amount that the Company paid to settle Fujitsus claims is not considered to be material to
the Company.
|
|
|
(g)
|
|
OGOP Payments Inc. (formerly Optimal Payments Inc.) has received a request for
information from the U.S. Attorneys Office in the Eastern District of New York pertaining
to its former involvement in processing transactions for internet pharmacies. OGOP
Payments Inc. has had discussions with that Office relating to those processing activities.
No provision has been recorded by OGOP Payments Inc. for this matter because the outcome
of these discussions and the amount of any loss, if any, are not determinable.
|
17. Stock-based compensation:
Stock-based compensation expense in the consolidated statements of operations was comprised of:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Expense related to cancellation of options in 2009
|
|
$
|
1,486
|
|
|
$
|
|
|
Expense related to options granted in 2004 and amended in 2008
(i)
|
|
|
|
|
|
|
1,356
|
|
Expense related to options granted in 2007
|
|
|
87
|
|
|
|
1,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,573
|
|
|
$
|
3,339
|
|
|
|
(i)
|
|
In June 2008, the shareholders approved a modification to the expiry date of 768,008
options exercisable at $35.50 per share from April 29, 2009 to April 2014. Since these
options were vested at the date of modification, the incremental value of $1,356 of the
fair value of the modified option over the value of the old option immediately before its
terms were modified was expensed in the second quarter of 2008.
|
72
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
18. Income taxes:
The income tax recovery differs from the amount computed by applying the combined Canadian
federal and Québec provincial tax rates to earnings before income taxes. The reasons for the
difference and the related tax effects are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Loss from continuing operations before income taxes
|
|
$
|
(69,930
|
)
|
|
$
|
(73,547
|
)
|
|
|
|
|
|
|
|
|
|
|
Combined Canadian federal and provincial
income taxes at 31% (2008 - 31%)
|
|
$
|
21,608
|
|
|
$
|
22,726
|
|
Foreign exchange
(1)
|
|
|
438
|
|
|
|
(459
|
)
|
Change in valuation allowance
|
|
|
(11,925
|
)
|
|
|
(2,133
|
)
|
Difference in tax rates in foreign jurisdictions
|
|
|
(5,038
|
)
|
|
|
(7,267
|
)
|
Non-deductible stock-based compensation
|
|
|
(486
|
)
|
|
|
(1,006
|
)
|
Non-deductible goodwill impairment loss
|
|
|
|
|
|
|
(7,528
|
)
|
Non-deductible Impairment of balance of sale receivable
|
|
|
(2,342
|
)
|
|
|
|
|
Permanent differences and other
|
|
|
(75
|
)
|
|
|
(833
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax recovery related to continuing operations
|
|
$
|
2,180
|
|
|
$
|
3,500
|
|
|
|
(1)
|
|
For purposes of calculating the income tax provision of the Company, a tax
recovery is recognized on foreign exchange gains or losses which arise on the conversion
into Canadian dollars of the net monetary assets denominated in U.S. dollars; such
conversion is required for tax purposes. As these financial statements are presented in
U.S. dollars, these foreign exchange gains or losses do not impact loss before income
taxes, even though the income tax provision would include a tax effect 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 or losses and, thus, the provision for
income or recovery taxes thereon.
|
The recovery of income taxes from continuing operations is composed of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Current income taxes
|
|
$
|
|
|
|
$
|
(26
|
)
|
Deferred income taxes
|
|
|
2,180
|
|
|
|
3,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,180
|
|
|
$
|
3,500
|
|
|
73
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
18. Income taxes (continued):
Income tax expense has been based on the following components of loss before income taxes from
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Domestic
|
|
$
|
(11,030
|
)
|
|
$
|
(6,743
|
)
|
Foreign
|
|
|
(58,900
|
)
|
|
|
(66,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(69,930
|
)
|
|
$
|
(73,547
|
)
|
|
The deferred income tax balances are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred income tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
15,454
|
|
|
$
|
14,792
|
|
Non-capital losses
|
|
|
28,829
|
|
|
|
19,016
|
|
Capital losses
|
|
|
12,799
|
|
|
|
10,237
|
|
Reserves
|
|
|
729
|
|
|
|
786
|
|
Foreign exchange and other
|
|
|
3,333
|
|
|
|
|
|
|
|
|
|
61,144
|
|
|
|
44,831
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(58,664
|
)
|
|
|
(44,831
|
)
|
|
|
|
|
2,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets and other
|
|
|
(8,778
|
)
|
|
|
(7,803
|
)
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
$
|
(6,298
|
)
|
|
$
|
(7,803
|
)
|
|
|
|
|
|
|
|
|
|
|
Presented as:
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
|
|
|
$
|
(838
|
)
|
Long-term liabilities
|
|
|
(6,298
|
)
|
|
|
(6,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6,298
|
)
|
|
$
|
(7,803
|
)
|
|
In assessing the realizability of deferred tax assets, management considers whether it is
more-likely-than-not that some portion or all of the deferred income tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income, the reversal of taxable temporary differences, and/or tax planning
strategies.
74
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
18. Income taxes (continued):
The Company has losses carryforward available to reduce Canadian federal and foreign taxable
income. These approximate losses expire as follows:
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Canada
|
|
|
Loss carryforwards:
|
|
|
|
|
|
|
|
|
Expiry between 2010 and 2018
|
|
$
|
20
|
|
|
$
|
18,000
|
|
Expiry between 2019 and 2029
|
|
|
64,800
|
|
|
|
45,000
|
|
|
|
|
$
|
64,820
|
|
|
$
|
63,000
|
|
|
FIN 48 Accounting for tax uncertainties:
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax
expense. At December 31, 2009 and December 31, 2008, the total liability for unrecognized tax
benefits was approximately $9,100 and $8,500, respectively, which would impact the annual
effective rate if realized. The increase in the liability is principally due to additional
interest and foreign exchange fluctuations.
The Company and its subsidiaries file income tax returns with federal and provincial tax
authorities within Canada. The Companys foreign affiliates file income tax returns in various
jurisdictions, the most significant of which are the United States and Hong Kong and certain
Western European countries. In general, the Company is subject to examination by taxing
authorities for years after 2002. The Canadian tax authorities have commenced examinations of
tax returns for certain Canadian subsidiaries for the taxation years 2005 to 2006.
19. Segmented information:
|
(a)
|
|
Operating segments:
|
|
|
|
|
During the year ended December 31, 2009, the Company operated in the consumer robotic, toy
and entertainment products segment. In 2008, the Company also operated in the payment
processing segment, which is now considered a discontinued operation with the exception of
one residual portfolio (refer to note 24 (e)).
|
75
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
19. Segmented information (continued):
|
(b)
|
|
Geographic information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and
|
|
|
|
|
|
|
|
|
|
|
|
equipment, and
|
|
|
|
Revenues
|
|
|
intangibles
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
United States
|
|
$
|
36,932
|
|
|
$
|
52,613
|
|
|
$
|
4,015
|
|
|
$
|
11,655
|
|
Europe
|
|
|
26,877
|
|
|
|
31,499
|
|
|
|
662
|
|
|
|
657
|
|
Central America
|
|
|
240
|
|
|
|
2,202
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
309
|
|
|
|
2,333
|
|
|
|
524
|
|
|
|
638
|
|
Hong Kong
|
|
|
104
|
|
|
|
128
|
|
|
|
17,132
|
|
|
|
36,103
|
|
Other
|
|
|
1,980
|
|
|
|
4,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
66,442
|
|
|
$
|
93,395
|
|
|
$
|
22,333
|
|
|
$
|
49,053
|
|
|
|
|
|
Revenues are attributed to countries based on the location of the customers. The Other
caption includes countries in Africa, Australia and Asia (excluding Hong Kong).
|
|
|
(c)
|
|
Major customers:
|
|
|
|
|
The Company has two major customers in the current period from which 10% or more of total
revenue is derived:
|
|
|
|
|
|
|
|
2009
|
|
|
Customer 1
|
|
$
|
13,471
|
|
Customer 2
|
|
|
7,016
|
|
|
|
|
|
In 2008, the Company had one major customer, from which 10% or more of total revenues were
derived. The revenue from this customer was approximately $12,216.
|
20. Related party transactions:
The Company paid consulting fees of $200 during the year ended 2008, to a corporation controlled
by a former director of the Company. No such fees were paid in 2009.
In addition to the loan payable (note 13), the Company was party to two transactions with
companies controlled by an officer of a subsidiary of the Company: (a) for the purchase of
advertising and media in Belgium for the year ended December 31, 2009, $98 (EURO 69) (2008 -
nil); and (b) the rental of the Companys premises in Belgium, $185 (EURO 133) (2008 nil).
76
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
20. Related party transactions (continued):
The transactions have been recorded at the exchange amount, which is the amount of consideration
agreed to by the parties.
21. Capital disclosures:
Management defines capital as the Companys shareholders equity, excluding accumulated other
comprehensive income, plus long-term debt.
To maintain or adjust the capital structure, the Company may repurchase existing shares, issue
new shares or long-term debt, or sell assets to adjust to changes in economic conditions and the
risk characteristic of the underlying assets (refer to note 14 to the Companys stock buyback
program.). The Company does not currently pay a dividend.
Neither the Company nor any of its subsidiaries is subject to externally imposed capital
requirements except as disclosed in note 11. The Companys current objective in managing capital
is to secure stable sources of financing (refer to note 2).
22. Financial risk management:
This note provides disclosures relating to the nature and extent of the Companys exposure
arising from financial instruments, including interest rate risk, foreign currency risk, credit
risk and liquidity risk and how the Company currently manages these risks. Risk management
strategies are likely to evolve in response to future conditions and circumstances, including
the effects and consequences resulting from the current economic downturn. These future
strategies may not fully insulate the Company in the near term from adverse effects, the more
significant of which relate to liquidity and capital resources as well as exposure to credit
losses.
|
(a)
|
|
Interest rate risk:
|
|
|
|
|
Interest rate risk is the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market interest rates.
|
|
|
|
|
Short-term investments consist of short-term notes invested at fixed interest rates. The
risk that the Company will realize a loss as a result of a decline in the fair value of
these investments is limited because, although available for sale, these investments are
short-term and are generally held to maturity. The balance of sale receivable and long-term
debt are subject to fixed interest rates. Any change in market rates for similar long-term
receivables and debt will impact the fair value of these instruments but will have no impact
on results from operations as these instruments are carried at amortized cost.
|
|
|
|
|
The Company is exposed primarily to interest rate fluctuations as a result of cash and bank
indebtedness which bears interest at variable interest rates. A 0.5% increase or decrease
would have a nominal effect to the results from operations during 2009 and 2008.
|
77
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
22. Financial risk management (continued):
|
(b)
|
|
Foreign currency risk:
|
|
|
|
|
A significant portion of the Companys cash flows and financial assets and liabilities are
denominated in U.S. dollars, which is the Companys functional and reporting currency.
Foreign currency risk is limited to the portion of the Companys business transactions
denominated in currencies other than U.S. dollars, primarily for head office expenses in
Canada and European operations. For the Companys foreign currency transactions,
fluctuations in the respective exchange rates relative to the U.S. dollar will create
volatility in the Companys cash flows and the reported amounts for revenues and selling,
general and administrative expenses in its consolidated statement of operations on a
period-to-period basis. Additional earnings variability arises from the translation of
monetary assets and liabilities denominated in currencies other than the U.S. dollar at the
rates of exchange at each balance sheet date, the impact of which is reported as a foreign
exchange gain and loss which is included as part of selling, general and administrative
expenses in the statement of operations and comprehensive loss.
|
|
|
|
|
The Companys objective in managing its foreign currency risk is to minimize its net
exposures to foreign currency cash flows, by transacting with third parties in U.S. dollars
to the maximum extent possible and practical and holding cash and cash equivalents in U.S.
dollars. The Company monitors and forecasts the values of net foreign currency cash flow and
balance sheet exposures and manages its cash flow to hold on hand sufficient levels of
foreign currencies to meet its obligations. From time to time, the Company engages in the
use of derivative financial instruments to manage its currency exposure.
|
|
|
|
|
The following table provides an indication of the Companys significant foreign currency
exposures expressed in U.S. dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
CAD
|
|
|
GBP
|
|
|
EURO
|
|
|
Cash and cash equivalents
|
|
|
962
|
|
|
|
128
|
|
|
|
797
|
|
Bank indebtedness
|
|
|
|
|
|
|
|
|
|
|
(8,272
|
)
|
Accounts payable and accrued liabilities
|
|
|
(2,422
|
)
|
|
|
|
|
|
|
(1,833
|
)
|
Current liabilities related to
discontinued operations
|
|
|
(2,114
|
)
|
|
|
(135
|
)
|
|
|
(167
|
)
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
(3,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet exposure
|
|
|
(3,574
|
)
|
|
|
(7
|
)
|
|
|
(12,973
|
)
|
|
|
|
|
In addition to the foreign currency exposures noted above, the Company also incurs a portion
of its operating costs in its consumer robotic, toy and entertainment products segment, in
Hong Kong dollars. However, the Company does not view its exposure to the Hong Kong dollar
as a significant foreign exchange risk since the Hong Kong dollar is pegged to the U.S.
dollar and historically has not fluctuated significantly.
|
78
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
22. Financial risk management (continued):
|
(b)
|
|
Foreign currency risk (continued):
|
|
|
|
|
The following are the exchange rates applied during the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
Average rate
|
|
|
Rate as at
|
|
|
|
during 2009
|
|
|
December 31, 2009
|
|
|
CAD to USD
|
|
|
0.8757
|
|
|
|
0.9515
|
|
GBP to USD
|
|
|
1.5590
|
|
|
|
1.6162
|
|
EUR to USD
|
|
|
1.3884
|
|
|
|
1.4316
|
|
|
|
|
Based on the Companys foreign currency exposures noted above, varying the above exchange
rates to reflect a 5% weakening of the U.S. dollar would affect earnings and comprehensive
earnings as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAD
|
|
|
GBP
|
|
|
EURO
|
|
|
|
Year ended
|
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31, 2009
|
|
|
December 31, 2009
|
|
|
December 31, 2009
|
|
|
Increase in net loss
|
|
$
|
(179
|
)
|
|
$
|
|
|
|
$
|
(649
|
)
|
|
|
|
|
An assumed 5% strengthening of the U.S. dollar would have an equal but opposite effect on
the above currencies to the amounts shown above.
|
79
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
22. Financial risk management (continued):
|
(c)
|
|
Credit risk:
|
|
|
|
|
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial
instrument fails to meet its contractual obligations. Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash and cash
equivalents, short-term investments and accounts receivable, including the balance of sale
receivable.
|
|
(i)
|
|
Cash and cash equivalents and short-term investments:
|
|
|
|
|
The credit risk relating to cash and cash equivalents is limited because the
counterparties are highly-rated American and European financial institutions. The credit
risk related to short-term investments is limited because they consist of discounted
notes issued by high-credit, quality corporations. The Company has investment policies
to provide guidance on investing available cash resources. In general, these policies
stress the preservation of capital with investments allowed in notes issued by
corporations with credit rankings of not less than R-1 mid.
|
|
|
(ii)
|
|
Accounts receivable:
|
|
|
|
|
Credit risk in the consumer robotic, toy and entertainment business arises primarily
from trade receivables. Allowances are provided for potential losses. The amounts
disclosed in the balance sheet are net of these allowances for bad debts. Accounts
receivable are assessed for impairment on a case-by-case basis when they are past due or
when objective evidence is received that a customer will default. The Company takes into
consideration the customers payment history, its creditworthiness and the current
economic environment in which the customer operates to assess impairments. All bad debts
are charged to selling, general and administrative expenses in the statement of
operations and comprehensive loss.
|
|
|
|
|
The credit risk for trade receivables is concentrated as the majority of sales are to a
relatively small group of wholesale distributors and mass market retailers. However, the
majority of these wholesale distributors and mass market retailers are large companies
which have been customers of the acquired business for a number of years. Customers
generally do not provide collateral in exchange for credit, but some customers provide
letters of credit for purchase orders.
|
80
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
22. Financial risk management (continued):
|
(c)
|
|
Credit risk (continued):
|
|
(ii)
|
|
Accounts receivable (continued):
|
|
|
|
|
Included in accounts and other receivables are trade receivables in the consumer
robotic, toy and entertainment segment of $14,302. The aging of the trade receivables
at the reporting date was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Not past due
|
|
$
|
8,554
|
|
|
$
|
9,665
|
|
Past due 0-30 days
|
|
|
4,363
|
|
|
|
5,763
|
|
Past due 31-60 days
|
|
|
968
|
|
|
|
5,970
|
|
Past due 61-120 days
|
|
|
417
|
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
$
|
14,302
|
|
|
$
|
22,780
|
|
|
|
|
|
A breakdown of trade receivables by type of customer is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Distributors
|
|
$
|
1,097
|
|
|
$
|
3,225
|
|
Mass-market retailers
|
|
|
13,205
|
|
|
|
19,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,302
|
|
|
$
|
22,780
|
|
|
|
|
|
The Company is exposed to credit risk on a balance of sale receivable. Refer to note 5
(b) (i) for a description of the terms of repayment and impairment provisions recorded
during the year. The credit risk of the buyer has been considered in calculating the net
estimated recoverable amount at December 31, 2009. Changes in the financial condition of
the buyer and the revenues of the underlying portfolio will affect the credit risk
associated with this receivable and the need for further impairment provisions in the
future.
|
81
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
22. Financial risk management (continued):
|
(d)
|
|
Liquidity risk:
|
|
|
|
|
Liquidity risk is the risk that the Company will not be able to meet its financial
obligations as they fall due. The Company manages liquidity risk through the management of
its capital structure and by continuously monitoring actual and projected cash flows. During
2009, the Company has delayed payments to its suppliers in order to manage cash. In the
prior years, the Company has financed its acquisitions through mainly internally-generated
funds as well as credit facilities entered into by its Belgium and Hong Kong operations.
|
|
|
|
|
As at December 31, 2009, the Company has $19,915 of cash, cash equivalents, and has an
outstanding balance of $8,848 on its credit facilities.
|
|
|
|
|
The following are the contractual maturities of financial liabilities at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
0 to 12
|
|
|
1 to 3
|
|
|
4 to 5
|
|
|
|
amount
|
|
|
months
|
|
|
years
|
|
|
years
|
|
|
Bank indebtedness
|
|
$
|
8,848
|
|
|
$
|
8,848
|
|
|
$
|
|
|
|
$
|
|
|
Accounts
payable and accrued
liabilities
|
|
|
30,396
|
|
|
|
30,396
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
3,498
|
|
|
|
179
|
|
|
|
2,585
|
|
|
|
734
|
|
Current liabilities
related to
discontinued
operations
|
|
|
4,263
|
|
|
|
4,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,005
|
|
|
$
|
43,686
|
|
|
$
|
2,585
|
|
|
$
|
734
|
|
|
|
|
|
The Company has incurred operating cash flow deficiencies in 2009 and its current financial
position requires additional sources of financing to support operations in 2010 as further
discussed in note 2.
|
82
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
23. Financial instruments:
|
(a)
|
|
Fair values:
|
|
|
|
|
The Company has determined that the fair value of its short-term financial assets and
liabilities approximates their respective fair values as at the balance sheet dates because
of the short-term maturity of those instruments. The fair value of long-term loan payable
to a selling shareholder is not determinable as the terms were agreed to by related parties.
|
|
|
(b)
|
|
SFAS No. 157 Fair value measurements:
|
|
|
|
|
On January 1, 2008, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 157,
Fair Value Measurements
, which was primarily codified into
FASB ASC Topic 820,
Fair Value Measurements and Disclosures
, for all financial assets
and liabilities and non-financial assets and non-financial liabilities that are
recognized or disclosed at fair value in the financial statements on a recurring basis.
Effective January 1, 2009, the Company adopted SFAS No. 157 for all non-financial
assets and liabilities that are measured at fair value on a non-recurring basis, such
as goodwill and intangible assets. SFAS No. 157 clarifies the principle that fair value
should be based on the assumptions market participants would use when pricing an asset
or liability and establishes a fair value hierarchy that prioritizes the information
used to develop those assumptions. Under the standard, fair value measurements would
be separately disclosed by level within the fair value hierarchy.
|
|
|
|
|
The fair value of intangibles of $18,821, determined in connection with the
impairments (note 10), was based in part on significant unobservable inputs (level 3).
|
83
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
23. Financial instruments (continued):
|
(c)
|
|
Financial income:
|
|
|
|
|
The following components of income and expense relating to financial instruments are
included in the statement of operations and comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Interest income on available-for-sale
financial assets
|
|
$
|
85
|
|
|
$
|
1,238
|
|
|
|
|
|
|
|
|
|
|
Balance of sale receivable
|
|
|
1,112
|
|
|
|
|
|
|
|
|
|
Interest income on available-for-sale financial assets consists of interest earned from
cash and cash equivalents and short-term investments in short-term deposits.
|
|
|
(ii)
|
|
Impairment losses recognized on trade receivables in consumer robotic, toy and
entertainment products:
|
|
|
|
|
The Company recorded a bad debt expense of $102 for the year ended December 31, 2009
(2008 $1,046) in Selling, general and administrative expenses in the statement of
operations and comprehensive loss.
|
|
(d)
|
|
Other:
|
|
|
|
|
At December 31, 2009, the Company had entered into forward and future contracts to buy US
dollars with a notional amount of $5,010 (2008 $3,350) at rates ranging from 1.4555 to
1.4560 US/EUR (2008 1.281 to 1.4386). The contracts mature at various dates to February
16, 2010 (2008 matured in March 2009). The Company has also entered into an interest rate
swap contract (from variable rate receive to fixed rate pay) on a notional amount of EUR
1,000. This contract matures in March 2013. This same interest rate swap contract was also
outstanding as at December 31, 2008. At December 31, 2009 and 2008, the fair value of these
contracts was not significant.
|
84
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
24. Supplemental disclosure of cash flows and other information:
|
(a)
|
|
Net change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Accounts receivable
|
|
$
|
9,582
|
|
|
$
|
52
|
|
Inventories
|
|
|
6,551
|
|
|
|
(9,145
|
)
|
Prepaid expenses
|
|
|
15
|
|
|
|
703
|
|
Accounts payable and accrued liabilities
|
|
|
(2,815
|
)
|
|
|
(6,869
|
)
|
Income taxes payable
|
|
|
(488
|
)
|
|
|
(2,259
|
)
|
|
|
|
|
|
|
|
|
|
|
Net change in operating assets and liabilities
|
|
$
|
12,845
|
|
|
$
|
(17,518
|
)
|
|
|
(b)
|
|
Cash paid for interest and income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Interest
|
|
$
|
507
|
|
|
$
|
439
|
|
Income taxes
|
|
|
18
|
|
|
|
450
|
|
|
|
(c)
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Additional consideration payable on Sablon acquisition
|
|
$
|
|
|
|
$
|
1,674
|
|
Addition of property, equipment and intangibles included
in accounts payable and accrued liabilities
|
|
|
374
|
|
|
|
199
|
|
Adjustments to WowWee purchase price equation to goodwill
|
|
|
|
|
|
|
342
|
|
|
|
(d)
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash and cash equivalents consist of:
|
|
|
|
|
|
|
|
|
Cash balances with banks
|
|
$
|
14,745
|
|
|
$
|
26,925
|
|
Short-term investments, bearing nominal interest (2008 - 2.57%)
|
|
|
5,170
|
|
|
|
5,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,915
|
|
|
$
|
32,849
|
|
|
85
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
24. Supplemental disclosure of cash flow and other information (continued):
|
(e)
|
|
Other revenues:
|
|
|
|
|
At December 31, 2009, the Company continues to operate a merchant portfolio that formed part
of the payment processing segment. Effective January 1, 2009, the results of operations of
this remaining merchant portfolio are presented on a net basis and as part of Other
Revenues in the consolidated statement of operations and comprehensive loss.
|
|
|
|
|
Included in other revenues for the year ended December 31, 2009 are gross revenues of
$24,966, net of transaction processing costs and commissions of $21,869. Other expenses
related to the merchant portfolio and not included in Other Revenues are amortization of
intangibles of $1,994 (2008 $2,609), an impairment loss on intangibles of $4,000 (2008 -
nil) and selling, general and administrative expenses of $586 (2008 $5,398). For the year
ended December 31, 2008, the results of this portfolio are presented on a gross basis and
$2,526 of selling costs are included in transaction processing costs.
|
|
|
|
|
Included in intangible assets in the consolidated balance sheets are $3,791 (2008 $9,786)
of customer and ISO/ISA relations, related to the remaining portfolio. Total assets related
to this portfolio are comprised mainly of intangible assets.
|
|
|
(f)
|
|
Foreign exchange:
|
|
|
|
|
Included in Selling, general and administrative expenses in the consolidated statement of
operations is a foreign exchange loss of $1,638 in 2009 (2008 a loss of $98).
|
|
|
(g)
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Amortization of intangibles pertaining to cost of sales
|
|
$
|
7,612
|
|
|
$
|
7,647
|
|
Amortization of intangibles pertaining to transaction processing
|
|
|
1,994
|
|
|
|
2,609
|
|
Amortization of equipment pertaining to cost of sales
|
|
|
2,232
|
|
|
|
3,622
|
|
Amortization of equipment pertaining to selling, general and
administrative
|
|
|
1,055
|
|
|
|
620
|
|
|
|
|
$
|
12,893
|
|
|
$
|
14,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Advertising expense
|
|
$
|
5,072
|
|
|
$
|
8,397
|
|
|
86
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
24. Supplemental disclosure of cash flow and other information (continued):
|
(i)
|
|
Provisions:
|
|
|
|
|
The rollforward of valuation and qualifying accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
|
|
|
Net
|
|
|
Balance,
|
|
|
|
December 31,
|
|
|
increase
|
|
|
December 31,
|
|
|
|
2008
|
|
|
(decrease)
|
|
|
2009
|
|
|
Allowance for doubtful accounts
|
|
$
|
758
|
|
|
$
|
(389
|
)
|
|
$
|
369
|
|
Inventory obsolescence
|
|
|
5,429
|
|
|
|
3,005
|
|
|
|
8,434
|
|
Reserve for sales returns and allowances
|
|
|
3,879
|
|
|
|
1,451
|
|
|
|
5,330
|
|
|
25. Canadian/U.S. reporting differences:
|
|
The consolidated financial statements of the Company are prepared in accordance with U.S. GAAP,
which conform, in all material respects, with Canadian GAAP, except as described below:
|
|
(a)
|
|
Consolidated balance sheets:
|
|
|
|
|
Differences between U.S. and Canadian GAAP in the presentation of share capital, additional
paid-in capital and deficit are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Share capital in accordance with U.S. GAAP
|
|
$
|
252,488
|
|
|
$
|
252,488
|
|
Stock-based compensation costs on options exercised:
(1)
|
|
|
|
|
|
|
|
|
Cumulative effect of prior years
|
|
|
(39,868
|
)
|
|
|
(39,868
|
)
|
Change in reporting currency
(2)
|
|
|
(2,588
|
)
|
|
|
(2,588
|
)
|
|
|
Share capital in accordance with Canadian GAAP
|
|
$
|
210,032
|
|
|
$
|
210,032
|
|
|
|
(ii)
|
|
Additional paid-in capital:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Additional paid-in capital in accordance with U.S. GAAP
|
|
$
|
65,746
|
|
|
$
|
64,173
|
|
Stock-based compensation costs:
(1)
|
|
|
|
|
|
|
|
|
Cumulative effect of prior years
|
|
|
(68,757
|
)
|
|
|
(68,757
|
)
|
Stock-based compensation costs on options exercised:
(1)
|
|
|
|
|
|
|
|
|
Cumulative effect of prior years
|
|
|
39,868
|
|
|
|
39,868
|
|
Change in reporting currency
(2)
|
|
|
(968
|
)
|
|
|
(968
|
)
|
|
|
Additional paid-in capital in accordance with Canadian GAAP
|
|
$
|
35,889
|
|
|
$
|
34,316
|
|
|
87
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
25.
|
|
Canadian/U.S. reporting differences (continued):
|
|
(a)
|
|
Consolidated balance sheets (continued):
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deficit in accordance with U.S. GAAP
|
|
$
|
(296,187
|
)
|
|
$
|
(222,849
|
)
|
Stock-based compensation costs:
(1)
|
|
|
|
|
|
|
|
|
Cumulative effect of prior years
|
|
|
68,757
|
|
|
|
68,757
|
|
Stock-based compensation to non-employees
(1)
|
|
|
834
|
|
|
|
834
|
|
Change in reporting currency
(2)
|
|
|
1,189
|
|
|
|
1,189
|
|
|
Deficit in accordance with Canadian GAAP
|
|
$
|
(225,407
|
)
|
|
$
|
(152,069
|
)
|
|
|
|
|
(1)
|
|
Stock-based compensation:
|
|
|
|
The Company accounted for its stock-based compensation plans using the recognition
and measurement provisions of APB No. 25,
Accounting for Stock Issued to Employees,
and Related Interpretations
, versus a settlement accounting basis followed for
Canadian GAAP up to January 1, 2003. Effective January 1, 2003, the Company adopted
the fair value recognition provisions of SFAS No. 123,
Share-based Payments
, which
was primarily codified into FASB ASC Topic 718,
Compensation Stock Compensation
,
and CICA Handbook 3870,
Stock-based Compensation and Other Stock-based Payments
, and
therefore there were no further differences between Canadian GAAP and U.S. GAAP.
|
|
|
|
A description of the Companys stock option plans is presented in note 15.
|
|
(2)
|
|
Change in reporting currency:
|
|
|
|
In 1998, the Company adopted the U.S. dollar as its reporting currency. Under
Canadian GAAP, at the time of change in reporting currency, the historical financial
statements were presented using a translation of convenience. Under U.S. GAAP, the
financial statements, including prior years, are translated using the current rate
method. Accordingly, the cumulative translation account included as part of
accumulated other comprehensive income in shareholders equity under Canadian GAAP
does not exist for U.S. GAAP purposes.
|
88
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
25.
|
|
Canadian/U.S. reporting differences (continued):
|
|
(b)
|
|
Accumulated other comprehensive loss:
|
|
|
|
|
Accumulated other comprehensive loss under Canadian GAAP is $(1,484) as at December 31, 2009
and December 31, 2008, which resulted solely from the translation of the financial
statements up to September 30, 2000, the date on which the Company adopted the United States
dollar as its functional currency, in accordance with the current rate method. Prior to the
change in functional currency which occurred as of September 30, 2000, the Company adopted
the United States dollar as its reporting currency during 1998, and used the current rate
method under US GAAP compared to a translation of convenience method under Canadian GAAP.
|
|
|
(c)
|
|
New accounting policies:
|
|
|
|
|
Effective January 1, 2009, the Company adopted the Canadian Institute of Chartered
Accountants (CICA) Handbook Section 3064,
Goodwill and Intangible Assets
, which replaces
Section 3062,
Goodwill and Other Intangible Assets
, and Section 3450,
Research and
Development Costs
. The standard provides guidance on the recognition of intangible assets in
accordance with the definition of an asset and the criteria for asset recognition, as well
as clarifying the application of the concept of matching revenues and expenses, whether
these assets are separately acquired or internally developed. The adoption of this standard
did not have a significant impact on the Companys financial results.
|
|
|
|
|
Effective January 1, 2009, the Company adopted CICA EIC-173,
Credit Risk and the Fair Value
of Financial Assets and Financial Liabilities
, which clarifies that the credit risk of
counterparties should be taken into account in determining the fair value of derivative
financial instruments. The adoption of this standard did not have a significant impact on
the Companys financial results.
|
26. Comparative figures:
|
|
Certain of the comparative figures have been reclassified in order to conform with the current
years presentation.
|
89
OPTIMAL GROUP INC.
Notes to Consolidated Financial Statements, Continued
Two-year period ended December 31, 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
27. Subsequent events:
|
|
On March 16, 2010, the Company entered into a Support Agreement with a corporation (the
Offeror) established by two directors of the Companys wholly-owned subsidiaries. Under the
terms of the Support Agreement, the Offeror has agreed to make an offer by way of a takeover bid
for all of the outstanding shares of the Company at an offer price of $2.40 per share, paid in
cash and the Company has agreed to support the Offer. As a result of the directors involvement
with the Offeror, the offer will be an insider bid and a going private transaction for
purposes of applicable securities laws. Under the terms of the Support Agreement, the Company
has agreed to pay a termination fee of approximately $500 to the Offeror if the Support
Agreement is terminated in certain circumstances. The takeover bid circular containing the full
terms of the offer is expected to be mailed to shareholders on or before March 31, 2010. The
offer will remain open for acceptance for a period of not less than 35 days following the
mailing of the offer. There were 5,148,735 shares outstanding as of March 16, 2010.
|
|
|
In connection with the offer, certain senior officers of the Company have entered into an
agreement with the Offeror whereby they will receive certain assets of the Company in partial
satisfaction of the severance payments that will be owing to them upon the closing of the
transaction. Included in the assets to be transferred to the senior officers are the balance of
sale receivable and other intangible assets related to the discontinued payment processing
business with a carrying value of $7,291 at December 31, 2009.
|
90
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
We have nothing to report under this item.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief
executive officer and chief financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our chief
executive officer and our chief accounting officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this annual report.
Managements Report on Internal Control Over Financial Reporting
Internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and preparation of financial statements prepared
for external purposes in accordance with generally accepted accounting principles. Because of its
inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision
and with the participation of our management, including our chief executive officer and chief
accounting officer, we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the
framework in Internal Control Integrated Framework, our management concluded that our internal
control over financial reporting was effective as of December 31, 2009.
No changes in our internal control over financial reporting occurred during this year that
have materially affected, or are likely to materially affect, our internal control over financial
reporting.
This annual report does not include an attestation report of our registered public accounting
firm regarding internal controls over financial reporting. Managements report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only managements report in this annual report.
ITEM 9B. OTHER INFORMATION
We have nothing to report under this item.
91
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The names, ages and positions of our directors and executive officers are as follows:
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
Neil S. Wechsler
|
|
43
|
|
Co-Chairman, Chief Executive Officer and Director
|
Holden L. Ostrin
|
|
50
|
|
Co-Chairman and Director
|
Gary S. Wechsler, C.A
.
|
|
52
|
|
Treasurer and Chief Financial Officer
|
O. Bradley McKenna, C.A
|
|
60
|
|
Vice-President, Administration and Human Resources
|
Tommy Boman
(1)(2)(4)
|
|
71
|
|
Director
|
James S. Gertler
(1)(2)(3)(4)
|
|
43
|
|
Director
|
Henry M. Karp
|
|
55
|
|
Director
|
Thomas D. Murphy
(1)(2)(3)(4)
|
|
56
|
|
Director
|
Jonathan J. Ginns
(2)(3)(4)
|
|
45
|
|
Director
|
|
|
|
(1)
|
|
Member of Compensation Committee
|
|
(2)
|
|
Member of the Nominating Committee
|
|
(3)
|
|
Member of Audit Committee
|
|
(4)
|
|
Independent Director
|
The number of directors of our company is currently set at seven, divided into three
classes. Messrs. Karp and Ginns, as members of a single class of directors, have been elected to
hold office until the close of our 2010 annual meeting of shareholders; and Messrs. Ostrin and
Boman, as members of a single class of directors, have been elected to hold office until the close
of our 2011 annual meeting of shareholders; and Messrs. N. Wechsler, Gertler and Murphy, as members
of a single class of directors, have been elected to hold office until the close of our 2012 annual
meeting of shareholders.
Executive officers of our company are appointed annually and serve until their successors are
duly appointed and qualified.
There are no family relationships between any of our directors or executive officers, except
for Neil S. Wechsler and Gary S. Wechsler, who are brothers.
The business experience of our directors and executives officers for the past five years is as
follows:
Neil S. Wechsler
has been a director and executive officer of our company since June 1995, and
held other positions within the Company since 1994
Holden L. Ostrin
has been a director and executive officer of our company since June 1996.
Gary S. Wechsler,
C.A. has been the Treasurer and Chief Financial Officer of our company since
May 1994.
O. Bradley McKenna,
C.A. has been the Vice-President, Administration and Human Resources of
our company since June 1999, and held other positions within the Company since 1994
Tommy Boman
has been a director of our company since April 2004. Mr. Boman served as a
director of Terra Payments Inc. from March 2003 until April 2004. Prior to 1998, Mr. Boman was
Vice-Chairman of IMS International and President and Chief Executive Officer of IMS America, a
market research company for the pharmaceutical and healthcare industries.
James S. Gertler
has been a director of our company since November 1997. He is a managing
member of Independent Outdoor Advertising, LLC, an outdoor media company in the United States and
is a principal of the general partner of Signal International, an offshore rig repair, maintenance,
upgrade and conversion company in the Gulf of Mexico.
Henry M. Karp
has been a director of our company since June 1996. From June 1999 through
December 2005, Mr. Karp was our President and Chief Operating Officer.
92
Thomas D. Murphy
has been a director of our company since July 2000. Mr. Murphy is the
President of Peak Tech Consulting, a firm that specializes in information technology management and
related benefit realization.
Jonathan J. Ginns
has been a director of our company since October 2001. Since 1996, Mr. Ginns
has been Managing Partner of ACON Investments, a Washington, D.C.-based private equity investment
firm. He is also a director of Mariner Energy Inc., an independent oil and gas exploration,
development and production company listed on the New York Stock Exchange.
Audit Committee Report
The following Audit Committee Report does not constitute soliciting material and should not be
deemed filed or incorporated by reference into any other filing of ours under the 1933 Act or the
Exchange Act, except to the extent we specifically incorporate this Report by reference therein.
In accordance with its written charter, the Audit Committee oversees our financial reporting
process on behalf of our Board of Directors. Management has the primary responsibility for our
consolidated financial statements and the overall reporting process, including our system of
financial controls. In fulfilling its oversight responsibilities during fiscal 2009, the Audit
Committee:
|
|
|
discussed the quarterly and year-to-date financial information contained in each
quarterly earnings announcement with senior members of our financial management and
KPMG, independent auditors, prior to public release;
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reviewed our audited consolidated financial statements as of and for the year ended
December 31, 2009, as well as the quarterly unaudited consolidated financial statements
and earnings release with senior members of our financial management and KPMG;
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reviewed with our financial management and KPMG their judgments as to the quality,
not just the acceptability, of our accounting principles;
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discussed with KPMG the overall scope and plan for their audit;
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reviewed our financial controls and financial reporting process;
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reviewed our litigation matters;
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reviewed significant financial reporting issues and practices, including judgmental
items, change in accounting principles and disclosure practice;
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pre-approve all services performed by KPMG;
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met with KPMG, without management present, to discuss the results of their audit;
and
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met with our financial management, without KPMG present, to discuss the quality of
services provided by KPMG.
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In addition, the Audit Committee has discussed with KPMG their independence from management
and our company, including the matters in the written disclosures required by PCAOB rules regarding
communications with audit committees regarding independence and other required communications, and
considered whether the provision of all other non-audit services provided to us by KPMG during
fiscal 2009 was compatible with the auditors independence.
In reliance on the reviews and discussions referred to above and representations by management
that the consolidated financial statements were prepared in accordance with U.S. generally accepted
accounting principles, the Audit Committee recommended to our Board of Directors that our
consolidated financial statements be included in this annual report on Form 10-K for the fiscal
year ended December 31, 2009 for filing with the Commission. The Audit Committee recommended KPMG
as our independent auditors for the fiscal year ending December 31, 2010.
THE AUDIT COMMITTEE
James S. Gertler, Chairman
Jonathan J. Ginns
Thomas D. Murphy
For more specific information concerning the role, independence and responsibilities of our
Audit Committee, pleaser refer to our Audit Committee Charter included as Exhibit 99.1 to this Form
10-K.
93
Audit Committee Financial Expert
Our Board of Directors has determined that each of James S. Gertler, Chairman of the Audit
Committee, and Audit Committee member Jonathan J. Ginns is an audit committee financial expert as
defined by Item 407(d)(5) of Regulation S-K of the Exchange Act, is financially sophisticated for
the purpose of Nasdaq Rule 4350(d)(2) and is independent within the meaning of Item 7(d)(3)(iv) of
Schedule 14A of the Exchange Act.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers and directors, and persons
who own more than 10% of a registered class of our equity securities, to file reports of ownership
and changes in ownership with the Commission. Executive officers, directors and greater than 10%
stockholders are required by the Exchange Act to furnish us with copies of all Section 16(a) forms
they file. Based solely upon a review of the forms furnished to us, we believe that during 2009 our
executive officers and directors complied with all applicable Section 16(a) filing requirements.
Complaint procedures for accounting and auditing matters
In accordance with Section 301 of the Sarbanes-Oxley Act of 2002 and Rule 10A-3 under the
Exchange Act, the Nasdaq Rules prohibit the listing of any company whose audit committee does not,
among other things, establish procedures for (a) the receipt, retention, and treatment of
complaints received by the company regarding accounting, internal accounting controls, or auditing
matters, and (b) the submission by employees of the company on a confidential and anonymous basis,
of concerns regarding questionable accounting or auditing matters. Accordingly, our Audit Committee
has adopted complaint procedures that are in compliance with the Nasdaq Rules.
Code of Ethics
We have adopted a code of business conduct and ethics for all directors and employees
(including officers) within the meaning of the regulations adopted by the Commission under section
406 of the Sarbanes Oxley Act of 2002. The code has been designed to deter wrongdoing and
promote: honest and ethical conduct, including the ethical handling of actual or apparent conflicts
of interest between personal and professional relationships; full, fair, accurate, timely, and
understandable disclosure in reports and documents that we file with, or submit to, the Commission
and in other public communications made by us; compliance with applicable governmental laws, rules
and regulations; the prompt internal reporting of violations of the code to an appropriate person
or persons; and accountability for adherence to the code. The application of the code to the
persons it applies to may only be waived by our Board of Directors in accordance with Commission
regulations and the Sarbanes Oxley Act of 2002. A copy of the code is available to the general
public at our website at http://www.optimalgrp.com. In addition, we will disclose on our website
any amendment to the code and any waiver of the code that applies to our principal executive
officer, principal financial officer, principal accounting officer or controller, or any person
performing similar functions.
94
ITEM 11. EXECUTIVE COMPENSATION
2009 SUMMARY COMPENSATION TABLE
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Non-
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Change in
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equity
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pension value
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incentive
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and non-
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plan
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qualified
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Option
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compen
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deferred
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All other
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Name and Principal
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Salary ($)
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Bonus
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Stock
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Awards
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-sation
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compensation
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compen-
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Position
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Year
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(1)
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($)
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Awards ($)
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($)
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($)
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earnings ($)
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sation ($)
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Total ($)
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Neil S. Wechsler
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2009
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1,155,867
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0
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0
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0
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0
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0
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13,127
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(4)(6)
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1,168,994
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Co-Chairman and Chief
Executive Officer
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2008
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1,407,129
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0
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0
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782,973
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(2)
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0
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0
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13,176
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2,203,279
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Holden L. Ostrin
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2009
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1,155,867
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0
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0
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0
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0
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0
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45,565
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(4)(5)
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1,201,432
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Co-Chairman
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2008
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1,407,129
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0
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0
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782,973
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(2)
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0
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0
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50,691
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2,240,793
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Gary S. Wechsler
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2009
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563,485
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0
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0
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0
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0
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0
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0
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563,485
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Treasurer and Chief
Financial Officer
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2008
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685,976
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0
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0
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370,329
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(2)
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0
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0
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0
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(3)
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1,056,305
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Peter Yanofsky
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2009
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750,000
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0
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0
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0
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0
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0
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0
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750,000
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President, WowWee
USA, Inc.
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2008
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750,000
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0
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0
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0
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0
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0
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0
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(3)
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750,000
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Richard Yanofsky
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2009
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750,000
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0
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0
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0
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0
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0
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0
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750,000
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President, WowWee
Canada Inc.
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2008
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750,000
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0
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0
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0
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0
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0
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0
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(3)
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750,000
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(1)
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We pay salary in Canadian dollars. The average exchange rate used for 2008 and 2009 used to
convert these salaries into dollars were: US$1.00=Cdn$1.0600 (2008) and US$1.00=Cdn$1.1420
(2009).
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(2)
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Amounts shown in this column represent the value of stock options deemed granted in 2008 as a
result of the extension of the expiration date for previously issued options, based on the
grant date fair value computed in accordance with FASB ASC Topic 718. Please see Note 27(c)
to the Consolidated Financial Statements included in the companys Annual Report on Form 10-K
for the year ended December 31, 2008 for more information on how amounts in this column were
calculated.
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(3)
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The dollar value of all perquisites and other personal benefits or property was less than
$10,000.
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(4)
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Perquisites for both the Co-Chairman and Chief Executive Officer and the Co-Chairman include
the payment of life insurance premiums. See Executive Employment and Separation Agreements.
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(5)
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The perquisites include the interest free benefit of a home loan granted in 1996 amounting to
$740 and life insurance premiums amounting to $43,545.
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(6)
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The perquisites include life insurance premiums amounting to $11,855.
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END DECEMBER 31, 2009
(1)
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Option awards
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Stock awards
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Equity
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Equity
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incentive
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incentive
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plan
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Number of
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plan
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awards:
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securities
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Number
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Market
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awards:
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Market or
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under-
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of shares
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value of
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Number of
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payout value
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Number of
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lying
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or units
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shares or
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unearned
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of unearned
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securities
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unexer-
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of stock
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units
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shares, units
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shares, units
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underlying
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cised
|
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Option
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that have
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that have
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or other
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or other
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unexercised
|
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options (#)
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exercise
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not
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not
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rights that
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rights that
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options (#)
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Unexerci-
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price ($)
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vested
|
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vested
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have not
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have not
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Name
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Exercisable
|
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sable
|
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USD
|
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Option expiration date
|
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(#)
|
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(#)
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vested (#)
|
|
vested ($)
|
Neil S. Wechsler
Co-Chairman and
Chief Executive Officer
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0
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0
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0
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0
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0
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0
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0
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Holden L. Ostrin
Co-Chairman
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0
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0
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0
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0
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0
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|
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0
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|
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0
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|
Gary S. Wechsler
Treasurer and Chief
Financial Officer
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|
0
|
|
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|
0
|
|
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0
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0
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0
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0
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0
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|
Peter Yanofsky
President
WowWee USA, Inc.
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0
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0
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0
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0
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0
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|
|
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0
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|
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|
0
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|
Richard Yanofsky
President
WowWee Canada Inc.
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0
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|
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0
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0
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|
|
|
|
|
|
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0
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|
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|
0
|
|
|
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0
|
|
|
|
0
|
|
|
|
|
(1)
|
|
During 2009, we cancelled all options for these Named Executive Officers.
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95
Executive Employment and Separation Agreements
We have entered into employment agreements summarized below with each of the Named Executive
Officers. We have also entered into an agreement with certain of these Named Executive Officers as
described above under Matters Arising Subsequent to December 31, 2009.
Neil S. Wechsler
Our agreement with Mr. Wechsler was entered into on March 5, 2004. Under the terms of his
agreement, Mr. Wechsler receives a minimum annual salary and is entitled to participate in any
bonus plan for senior executives that might be established by our Board of Directors, and we have
agreed to pay or reimburse him for the premiums for a life and disability term or whole life
insurance policy with a minimum coverage of $5.0 million, in addition to any other coverage
previously paid for or provided for by the company.
If we terminate Mr. Wechslers employment other than for cause or death or disability, or for
any reason following the announcement of a change of control, or if he terminates his employment
for good reason (as defined in his agreement) or for any reason following a change of control, (i)
we will pay to him a lump sum amount equal to two times the sum of the highest salary and bonus
paid to him during the term of his employment as at December 31, 2009, this amount would have
totaled $3,856,042, (ii) the term insurance, for which we have been reimbursing premiums, will be
converted to a level deposit premium insurance policy to age 80, for which we will pay the premiums
as at December 31, 2009, the total premium for such a policy would have amounted to $1,251,137,
and (iii) we will acquire medical insurance coverage for Mr. Wechsler and his family for a period
of five years, equivalent to the coverage already enjoyed by him as a senior officer of our company
as at December 31, 2009, the cost of such coverage would have been $32,221. Mr. Wechslers
agreement also provides for the forgiveness of any indebtedness of his to the company if he leaves
the employment of our company for any reason as at December 31, 2009, Mr. Wechsler was not
indebted to our company.
Mr. Wechslers agreement also contains a covenant on the part of Mr. Wechsler not to compete
with our company for a period of 24 months following the date upon which he ceases to be an
employee of our company.
In July 2009, Mr. Wechsler voluntarily agreed to temporarily reduce his annual salary by
approximately 24%. Under the terms of this agreement, the aggregate amount by which his salary was
reduced will be repaid to him in the event of a change of control of our company occurring prior to
the first anniversary of the entering of that agreement.
Holden L. Ostrin
Our agreement with Mr. Ostrin was entered into on March 5, 2004. Under the terms of his
agreement, Mr. Ostrin receives a minimum annual salary and is entitled to participate in any bonus
plan for senior executives that might be established by our Board of Directors, and we have agreed
to pay or reimburse him for the premiums for a life and disability term or whole life insurance
policy with a minimum coverage of $5.0 million, in addition to any other coverage previously paid
for or provided for by the company.
If we terminate Mr. Ostrins employment other than for cause or death or disability, or for
any reason following the announcement of a change of control, or if he terminates his employment
for good reason (as defined in his agreement) or for any reason following a change of control, (i)
we will pay to him a lump sum amount equal to two times the sum of the highest salary and bonus
paid to him during the term of his employment as at December 31, 2009, this amount would have
totaled $3,856,042, (ii) the term insurance, for which we have been reimbursing premiums, will be
converted to a level deposit premium insurance policy to age 80, for which we will pay the premiums
as at December 31, 2009, the total premium for such a policy would have amounted to $1,541,934,
and (iii) we will acquire medical insurance coverage for Mr. Ostrin and his family for a period of
five years, equivalent to the coverage already enjoyed by him as a senior officer of our company
as at December 31, 2009, the cost of such coverage would have been $32,221. Mr. Ostrins agreement
also provides for the forgiveness of any indebtedness of his to the company if he leaves the
employment of our company for any reason as at December 31, 2009, Mr. Ostrin was indebted to our
company in the amount of $48,335, on account of a home loan granted to him in 1996.
96
Mr. Ostrins agreement also contains a covenant on the part of Mr. Ostrin not to compete with
our company for a period of 24 months following the date upon which he ceases to be an employee of
our company.
In July 2009, Mr. Ostrin voluntarily agreed to temporarily reduce his annual salary by
approximately 24%. Under the terms of this agreement, the aggregate amount by which his salary was
reduced will be repaid to him in the event of a change of control of our company occurring prior to
the first anniversary of the entering of that agreement.
Gary S. Wechsler
Our agreement with Mr. Wechsler was entered into on March 5, 2004. Under the terms of his
agreement, Mr. Wechsler receives a minimum annual salary and is entitled to participate in any
bonus plan for senior executives that might be established by our Board of Directors, and we have
agreed to pay or reimburse him for the premiums for a life and disability term or whole life
insurance policy with a minimum coverage of $3.0 million, in addition to any other coverage
previously paid for or provided for by the company.
If we terminate Mr. Wechslers employment other than for cause or death or disability, or for
any reason following the announcement of a change of control, or if he terminates his employment
for good reason (as defined in his agreement) or for any reason following a change of control, (i)
we will pay to him a lump sum amount equal to two times the sum of the highest salary and bonus
paid to him during the term of his employment as at December 31, 2009, this amount would have
totaled $2,093,816, and (ii) the term insurance, for which we have been reimbursing premiums, will
be converted to a level deposit premium insurance policy to age 80, for which we will pay the
premiums as at December 31, 2009, the total premium for such a policy would have amounted to
$1,000,917. Mr. Wechslers agreement also provides for the forgiveness of any indebtedness of his
to the company if he leaves the employment of our company for any reason as at December 31, 2009,
Mr. Wechsler was not indebted to our company.
Mr. Wechslers agreement also contains a covenant on the part of Mr. Wechsler not to compete
with our company for a period of 24 months following the date upon which he ceases to be an
employee of our company.
In July 2009, Mr. Wechsler voluntarily agreed to temporarily reduce his annual salary by
approximately 24%. Under the terms of this agreement, the aggregate amount by which his salary was
reduced will be repaid to him in the event of a change of control of our company occurring prior to
the first anniversary of the entering of that agreement.
Peter Yanofsky
Our agreement with Mr. Yanofsky was entered into on November 7, 2007. Under the terms of his
agreement, Mr. Yanofsky receives a minimum annual salary and shall be entitled to participate in
any bonus plan for senior executives that might be established by our Board of Directors.
If we terminate Mr. Yanofskys employment other than for cause or death or disability, or for
any reason following the announcement of a change of control, or if he terminates his employment
for good reason (as defined in his agreement) or for any reason following a change of control, we
will pay to him a lump sum amount equal to his then current annual salary as at December 31,
2009, this amount would have totaled $750,000.
Mr. Yanofskys agreement also contains a covenant on the part of Mr. Yanofsky not to compete
with our company for a period of 12 months following the date upon which he ceases to be an
employee of our company.
Richard Yanofsky
Our agreement with Mr. Yanofsky was entered into on November 7, 2007. Under the terms of his
agreement, Mr. Yanofsky receives a minimum annual salary and shall be entitled to participate in
any bonus plan for senior executives that might be established by our Board of Directors.
If we terminate Mr. Yanofskys employment other than for cause or death or disability, or for
any reason following the announcement of a change of control, or if he terminates his employment
for good reason (as defined
97
in his agreement) or for any reason following a change of control, we will pay to him a lump sum
amount equal to his then current annual salary as at December 31, 2009, this amount would have
totaled $750,000.
Mr. Yanofskys agreement also contains a covenant on the part of Mr. Yanofsky not to compete
with our company for a period of 12 months following the date upon which he ceases to be an
employee of our company.
Compensation of Directors
For 2009 each of our non-executive directors receives an annual Board retainer of $40,000 and
$1,000 for each Board meeting attended. Those of our non-executive directors who serve as members
of a committee of our Board of Directors receive additional compensation as follows: for service as
member of either the audit committee or the compensation committee, an annual retainer of $3,000
per committee plus $1,000 for each committee meeting attended. In addition to their annual
committee retainers, the chairmen of the audit and compensation committees each receive an annual
retainer of $4,000. Starting in 2009, a non-executive director who fails to attend in person at
least 50% of the quarterly Board meetings shall receive a reduced annual Board retainer of $20,000.
DIRECTOR COMPENSATION
|
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|
|
|
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|
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|
|
|
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|
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
Pension Value
|
|
|
|
|
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|
|
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|
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|
|
|
|
|
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|
|
|
|
|
Incentive
|
|
& Nonqualified
|
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|
|
|
|
|
|
|
|
|
Fees Earned
|
|
Stock
|
|
Option
|
|
Plan
|
|
Deferred
|
|
All Other
|
|
|
|
|
|
|
|
|
or
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Compensation
|
|
Compen-
|
|
|
Name
|
|
Year
|
|
Paid in Cash
|
|
($)
|
|
($)
|
|
($)
|
|
Earnings
|
|
sation ($)
|
|
Total ($)
|
Tommy Boman
|
|
|
2009
|
|
|
|
59,000
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
59,000
|
|
James S. Gertler
|
|
|
2009
|
|
|
|
72,000
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
72,000
|
|
Jonathan J. Ginns
|
|
|
2009
|
|
|
|
57,000
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
57,000
|
|
Henry M. Karp
|
|
|
2009
|
|
|
|
48,000
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
48,000
|
|
Thomas D. Murphy
|
|
|
2009
|
|
|
|
71,000
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
71,000
|
|
Options to Purchase Securities
On February 7, 1997, our Board of Directors adopted a share option plan known as the 1997
Stock Option Plan (as amended, the 1997 Plan).
Pursuant to the provisions of the 1997 Plan, we may grant options to purchase common shares to
our full-time employees or directors. Options may be granted for a term of up to 10 years and the
term during which such options may be exercised will be determined by our Board of Directors at the
time of each grant of options. The conditions of vesting and exercise of the options and the option
price will be established by our Board of Directors when such options are granted and the option
price shall not involve a discount greater than that permitted by law and by the regulations, rules
and policies of the securities regulatory authorities to which we may then be subject.
Options granted under the 1997 Plan cannot be assigned or transferred, except by will or by
the laws of descent and distribution of the domicile of the deceased optionee. Upon an optionees
employment with our company being terminated for cause or upon an optionee being removed from
office as a director or becoming disqualified from being a director by law, any option or the
unexercised portion thereof shall terminate forthwith. If an optionees employment with our company
is terminated otherwise than by reason of death or termination for cause, or if any optionee ceases
to be a director other than by reason of death, removal or disqualification by law, any option or
the unexercised portion thereof may be exercised by the optionee for that number of shares only
which he was entitled to acquire under the option at the time of such termination or cessation,
provided that such option shall only be exercisable within 90 days after such termination or
cessation or prior to the expiration of the term of the option, whichever occurs earlier. If an
optionee dies while employed by our company or while serving as a director, any option or the
unexercised portion thereof may be exercised by the person to whom the option is transferred by
will or the laws of descent and distribution for that number of shares only which the optionee was
entitled to acquire under the option at the time of death, provided that such option shall only be
exercisable within 180 days following the date of death or prior to the expiration of the term of
the option, whichever occurs earlier.
98
Upon its establishment, 600,000 common shares were authorized for issuance pursuant to options
granted under the 1997 Plan. In each of 2000 and 2001, shareholders approved an additional 600,000
shares for issuance under the 1997 Plan. As at March 17, 2010, 649,206 common shares had been
issued under the 1997 Plan and 27,200 options were outstanding under the 1997 Plan, leaving
1,123,594 common shares available for issuance pursuant to future option grants under the 1997
Plan.
Equity Compensation Plan Information
The following table sets forth the number of common shares to be issued upon exercise of
outstanding options, rights and warrants issued pursuant to our equity compensation plans, the
weighted average exercise price of such options, rights and warrants and the number of common
shares remaining available for future issuance under our equity compensation plans, all as at
December 31, 2009.
Our Board of Directors has approved the cancellation of all options outstanding under our
stock option plan. The cancellation of any outstanding options and the forfeiture of the option
holders rights there under are subject to, and will become effective only once the option holder
has consented to the cancellation.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
Number of
|
|
Weighted-
|
|
remaining
|
|
|
securities to be
|
|
average exercise
|
|
available for
|
|
|
issued upon
|
|
price of
|
|
future issuance
|
|
|
exercise of
|
|
outstanding
|
|
under equity
|
|
|
outstanding
|
|
options,
|
|
compensation
|
|
|
options,
|
|
warrants and
|
|
plans (excluding
|
|
|
warrants and
|
|
rights
|
|
securities reflected
|
Plan Category
|
|
rights
|
|
($/Share)
|
|
in first column)
(1)
|
Equity compensation plans approved by security holders
(1)
|
|
|
27,400
|
|
|
|
21.05
|
|
|
|
1,123,394
|
|
Total
|
|
|
27,400
|
|
|
|
21.05
|
|
|
|
1,123,394
|
|
|
|
|
(1)
|
|
The 1997 Plan (referred to under Executive Compensation Options to Purchase
Securities, above), is our only equity compensation plan that has been approved by
shareholders.
|
|
|
|
ITEM 12.
|
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The following table sets forth, as of March 17, 2010, certain information regarding the
beneficial ownership of our common shares by (i) each person known to us to be a beneficial owner
of more than 5% of the common shares of our company, (ii) each director and Named Executive Officer
of our company and (iii) all directors and executive officers of our company as a group.
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|
|
|
|
Amount and Nature of
|
|
Percent of
|
|
|
Beneficial Ownership
|
|
Ownership in
|
Name and Address of Beneficial Owner
|
|
in Optimal Group
|
|
Optimal Group
|
Renaissance Technologies LLC
800 Third Avenue
New York, NY 10022
|
|
|
316,779
|
(1)
|
|
|
6.15
|
%
|
Paul J. Solit
825 Third Avenue, 33
rd
Floor
New York, NY 10022
|
|
|
288,203
|
(2)
|
|
|
5.60
|
%
|
Neil S. Wechsler
3500 de Maisonneuve Blvd West, 8th Floor,
Westmount, PQ, H3Z 3C1
|
|
|
36,121
|
|
|
|
*
|
*
|
Holden L. Ostrin
3500 de Maisonneuve Blvd West, 8th Floor,
Westmount, PQ, H3Z 3C1
|
|
|
28,571
|
|
|
|
*
|
*
|
99
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of
|
|
Percent of
|
|
|
Beneficial Ownership
|
|
Ownership in
|
Name and Address of Beneficial Owner
|
|
in Optimal Group
|
|
Optimal Group
|
Henry M. Karp
3500 de Maisonneuve Blvd West, 8th Floor,
Westmount, PQ, H3Z 3C1
|
|
|
28,571
|
|
|
|
|
**
|
Gary S. Wechsler
3500 de Maisonneuve Blvd West, 8th Floor,
Westmount, PQ, H3Z 3C1
|
|
|
38,571
|
|
|
|
|
**
|
Peter Yanofsky
875 Prospect Street, 2
nd
Floor,
La Jolla, CA 92037
|
|
|
135,318
|
(3)
|
|
|
2.61
|
%
|
Richard Yanofsky
3500 de Maisonneuve Blvd West, 8th Floor,
Westmount, PQ, H3Z 3C1
|
|
|
142,318
|
(3)
|
|
|
2.74
|
%
|
James S. Gertler
62 West 62
nd
Street
New York, NY, 10023
|
|
|
60
|
|
|
|
|
**
|
Jonathan J. Ginns
1133 Connecticut Avenue, NW Suite 700,
Washington, DC, 200036
|
|
|
0
|
|
|
|
|
**
|
Thomas D. Murphy
1208 Highcrest Lane,
Colorado Springs, CO, 80921
|
|
|
11,000
|
|
|
|
|
**
|
Tommy Boman
30 Oyster Landing Road,
Hilton Head, SC, 29928
|
|
|
634
|
|
|
|
|
**
|
All directors and executive officers as a group
(9 persons)
|
|
|
730,650
|
|
|
|
2.84
|
%
|
|
|
|
**
|
|
Does not exceed one percent (1%)
|
|
(1)
|
|
The address of this beneficial owner is 800 Third Avenue, New York,
NY, 10022. According to the Schedule 13G/A, dated February 12, 2010, filed with the
United States Securities and Exchange Commission by Renaissance Technologies LLC and
James H. Simons, Renaissance Technologies LLC is an investment advisor and James H.
Simons is a control person of Renaissance Technologies LLC. Each of Renaissance
Technologies LLC and James H. Simons has sole voting power and sole dispositive
power over 316,779 shares. The information in this table is based exclusively on the
most recent Schedule 13G/A filed by this beneficial owners with the United States
Securities and Exchange Commission. We make no representation as to the accuracy or
completeness of the information reported.
|
|
(2)
|
|
The address of this beneficial owner is 825 Third Avenue. According to the
Schedule 13G/A, dated March 27, 2009, filed with the United States Securities and
Exchange Commission by this beneficial owner, Potomac Capital Management, LLC,
Potomac Capital Management II, LLC and Potomac Capital Management, Inc., Paul J.
Solit holds sole voting power over and dispositive power over 50,420 shares and
shared voting power over 237,783 shares. The information in this table is based
exclusively on the most recent Schedule 13G/A filed by this beneficial owner with the
United States Securities and Exchange Commission. We make no representation as to the
accuracy or completeness of the information reported.
|
|
(3)
|
|
Includes 37,392 common shares underlying vested warrants.
|
On March 22, 2010, a group comprised of Richard Yanofsky, Peter Yanofsky, Francois Choi,
Eric Lau and 7293411 Canada Inc. (together, the Reporting Persons) filed an ownership report on
Schedule 13D with the Securities and Exchange Commission indicating that they have formed a group
for purposes of considering an acquisition of our issued and outstanding shares. According to the
Schedule 13D filing, the Reporting Persons beneficially own a total of 405,576 shares and warrants
to purchase an additional 152,192 shares, which in the aggregate represent approximately 10.8% of
our shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Mr. Stephen Shaper a former member of the Board provided us with consulting services through
an affiliated company and, as a result, in 2008 we incurred approximately $199,521. Effective
September 30, 2008, we no longer used his consulting services.
100
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Upon the recommendation of our Audit Committee, our shareholders appointed KPMG as our
independent auditors for the fiscal year ended December 31, 2009.
Fees Incurred by our Company for KPMG
The following table shows the fees paid or accrued by our company for the audit and other
services provided by KPMG for fiscal 2009 and 2008
(1)
.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Audit Fees
(2)
|
|
$
|
845,324
|
|
|
$
|
814,151
|
|
Audit-Related Fees
(3)
|
|
|
17,513
|
|
|
|
23,964
|
|
Tax Fees
(4)
|
|
|
102.635
|
|
|
|
121,266
|
|
All Other Fees
(5)
|
|
|
19,212
|
|
|
|
65,608
|
|
|
|
|
|
Total
|
|
$
|
984,684
|
|
|
$
|
1,024,990
|
|
|
|
|
|
|
|
(1)
|
|
We pay fees to KPMG in Canadian dollars. The respective average exchange rates for
2009 and 2008 used to convert these fees into dollars were: US$1.00=Cdn$1.142 (2009)
and US$1.00=Cdn$1.060 (2008).
|
|
(2)
|
|
Audit fees represent fees for professional services provided in connection
with the audit of our consolidated financial statements, the review of our quarterly
financial statements and the statutory audit of various foreign subsidiaries.
|
|
(3)
|
|
Audit-related fees represent primarily fees for sundry accounting
consultations.
|
|
(4)
|
|
Tax fees related to assistance in preparing corporate tax returns, claiming
research and development tax credits and sundry tax consultations.
|
|
(5)
|
|
All other fees relates primarily to financial due diligence in connection
with acquisitions.
|
The Audit Committee has delegated to the Chairman of the Audit Committee the authority to
pre-approve audit-related and non-audit services not prohibited by law to be performed by our
independent auditors and associated fees up to a maximum for any one non-audit service of $50,000,
provided that the Chairman shall report any decisions to pre-approve such audit-related or
non-audit services and fees to the full Audit Committee at its next regular meeting. The Audit
Committee pre-approved the following non-audit services to be performed by our independent
auditors, provided that the Chief Financial Officer shall report any decisions to authorize such
non-audit services and fees to the full Audit Committee at its next regular meeting: tax advisory
services of up to Cdn$60,000 during each fiscal year, provided that no individual mandate is
estimated by our independent auditors to cost in excess of Cdn$20,000; acquisition-related
financial due diligence services of up to Cdn$150,000 during each fiscal year, provided that no
individual mandate is estimated by our independent auditors to cost in excess of Cdn$25,000; and,
other, general services of up to Cdn$60,000 during each fiscal year, provided that no individual
mandate is estimated by our independent auditors to cost in excess of Cdn$10,000. Approximately 77%
of the audit-related and non-audit services performed by our independent auditors in 2009 were
approved by the Chairman of the Audit Committee or our Chief Financial Officer through the
pre-approval policies.
101
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit
|
|
|
|
|
|
|
3.1
|
|
|
Certificate and Articles of Continuance as amended.
|
|
|
|
|
|
|
3.2
|
|
|
By-laws as amended (incorporated by reference to Exhibit 3.2 to the
Companys Quarterly Report on Form 10-Q, for the quarterly period ended
September 30, 2009, filed with the Commission on November 13, 2009)
|
|
|
|
|
|
|
4
|
|
|
Specimen certificate of the common shares (incorporated by reference to
Exhibit 1.1 to the Companys Registration Statement on Form 8, File No.
0-28572, filed with the Commission on July 17, 1996)
|
|
|
|
|
|
|
10.1
|
|
|
Employment Agreement with Leon P. Garfinkle (incorporated by reference to
Exhibit 10.13 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2002, filed with the Commission on March 31, 2003)
|
|
|
|
|
|
|
10.2
|
|
|
Employment Agreement with Neil S. Wechsler (incorporated by reference to
Exhibit 10.14 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2003, filed with the Commission on March 10, 2004)
|
|
|
|
|
|
|
10.3
|
|
|
Employment Agreement with Henry M. Karp (incorporated by reference to
Exhibit 10.15 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2003, filed with the Commission on March 10, 2004)
|
|
|
|
|
|
|
10.4
|
|
|
Employment Agreement with Holden L. Ostrin (incorporated by reference to
Exhibit 10.16 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2003, filed with the Commission on March 10, 2004)
|
|
|
|
|
|
|
10.5
|
|
|
Employment Agreement with Gary S. Wechsler (incorporated by reference to
Exhibit 10.17 to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2004, filed with the Commission on April
30, 2004)
|
|
|
|
|
|
|
10.6
|
|
|
Combination Agreement between Optimal Robotics Corp. and Terra Payments
Inc. (incorporated by reference to Exhibit 10.18 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2004, filed with the Commission on April 30, 2004)
|
|
|
|
|
|
|
10.7
|
|
|
Asset Purchase Agreement among NCR Corporation, and certain of its
affiliates, and Optimal Robotics Corp. and certain of its affiliates
(incorporated by reference to Exhibit 10.19 to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004, filed
with the Commission on April 30, 2004)
|
|
|
|
|
|
|
10.8
|
|
|
Asset Purchase Agreement among Fujitsu Transaction Solutions Inc., Optimal
Robotics Corp. and Optimal Robotics Inc. (incorporated by reference to
Exhibit 10.20 to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2004, filed with the Commission on August
9, 2004)
|
|
|
|
|
|
|
10.9
|
|
|
Amendment to Asset Purchase Agreement among Fujitsu Transaction Solutions
Inc., Optimal Robotics Corp. and Optimal Robotics Inc. (incorporated by
reference to Exhibit 10.21 to the Companys Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2004, filed with the Commission on
August 9, 2004)
|
|
|
|
|
|
|
10.10
|
|
|
Asset Purchase Agreement among Optimal Payments Corp. and NPS Holdings
LLC, NPS Manager, Inc. and The Members of NPS Holdings LLC (incorporated
by reference to Exhibit 10.22 to the Companys Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2004, filed with the
Commission on November 4, 2004)
|
|
|
|
|
|
|
10.11
|
|
|
Purchase Agreement dated May 6, 2005 among United Bank Card, Inc. and
Optimal Payments Corp. (incorporated by reference to Exhibit 2.1 to the
Companys Form 8-K, filed with the Commission on May 11, 2005)
|
|
|
|
|
|
|
10.12
|
|
|
Placing Agreement relating to placing of ordinary shares of FireOne Group
plc dated May 27, 2005 (incorporated by reference to Exhibit 99.1 to the
Companys Form 8-K, filed with the Commission on June 2, 2005)
|
|
|
|
|
|
|
10.13
|
|
|
Tax Deed relating to placing of ordinary shares of FireOne Group plc dated
May 27, 2005 (incorporated by reference to Exhibit 99.2 to the Companys
Form 8-K, filed with the Commission on June 2, 2005)
|
|
|
|
|
|
|
10.14
|
|
|
Purchase Agreement dated October 5, 2005 among Moneris Solutions, Inc. and
Optimal Payments Corp. (incorporated by reference to Exhibit 2.1 to the
Companys Form 8-K, filed with the Commission on October 11, 2005)
|
102
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit
|
|
|
|
|
|
|
10.15
|
|
|
Recommended cash offer by Optimal Acquisition Inc. for FireOne Group plc
(incorporated by reference to Exhibit 99 to the Companys Form 8-K, filed
with the Commission on December 18, 2006)
|
|
|
|
|
|
|
10.16
|
|
|
Employment Agreement with Douglas P. Lewin (incorporated by reference to
Exhibit 10.16 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2006, filed with the Commission on March 15, 2007)
|
|
|
|
|
|
|
10.17
|
|
|
Amendment to Employment Agreement with Douglas P. Lewin (incorporated by
reference to Exhibit 10.17 to the Companys Annual Report on Form 10-K for
the year ended December 31, 2006, filed with the Commission on March 15,
2007)
|
|
|
|
|
|
|
10.18
|
|
|
Employment Agreement with Benjamin A. Dalfen (incorporated by reference to
Exhibit 10.18 to the Companys Annual Report on Form 10-K for the year
ended December 31, 2006, filed with the Commission on March 15, 2007)
|
|
|
|
|
|
|
10.19
|
|
|
Asset Purchase Agreement dated September 26, 2007 among Optimal Group
Inc., Wow Wee Limited, Wow Wee Group Company, WowWee Marketing, Inc.,
Power Assets Pacific Ltd., Richard Yanofsky, Peter Yanofsky, David
Goldhar, and Eric Lau Tung Ching (incorporated by reference to Exhibit 2.1
to the Companys Form 8-K, filed with the Commission on October 2, 2007)
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10.20
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Amendment dated as of November 7, 2007 to Asset Purchase Agreement dated
September 26, 2007 among Optimal Group Inc., Wow Wee Limited, Wow Wee
Group Company, WowWee Marketing, Inc., Power Assets Pacific Ltd., Richard
Yanofsky, Peter Yanofsky, David Goldhar, and Eric Lau Tung Ching
(incorporated by reference to Exhibit 2.1 to the Companys Form 8-K, filed
with the Commission on November 13, 2007)
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10.21
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Asset Purchase Agreement among Optimal Payments Inc., Optimal Payments
Limited, Optimal Payments (Ireland) Limited, Optimal Payments Corp. and
7012985 Canada Inc., on its behalf and/or that of a designee, with the
interventions of Card One Plus Ltd. and Optimal Group Inc., dated August
5, 2008 (incorporated by reference to Exhibit 2.1 to the Companys Form
8-K, filed with the Commission on August 11, 2008)
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10.22
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Amendment dated as of September 30, 2008 to Asset Purchase Agreement among
Optimal Payments Inc., Optimal Payments Limited, Optimal Payments
(Ireland) Limited, Optimal Payments Corp. and 7012985 Canada Inc., on its
behalf and/or that of a designee, with the interventions of Card One Plus
Ltd. and Optimal Group Inc., dated August 5, 2008 (incorporated by
reference to Exhibit 2.2 to the Companys Form 8-K, filed with the
Commission on October 7, 2008)
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10.23
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Purchase and Sale Option Agreement among Optimal Payments Corp., United
Bank Card, Inc. and Jared Isaacman, dated as of February 2, 2009
(incorporated by reference to Exhibit 2.1 to the Companys Form 8-K, filed
with the Commission on February 6, 2009)
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10.24
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Warrant issued by United Bank Card, Inc. to Optimal Payments Corp. dated
February 2, 2009 (incorporated by reference to Exhibit 2.2 to the
Companys Form 8-K, filed with the Commission on February 6, 2009)
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10.25
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Base salary reduction agreement with Neil S. Wechsler (incorporated by
reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2009, filed with the
Commission on November 13, 2009)
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10.26
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Base salary reduction agreement with Holden L. Ostrin (incorporated by
reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2009, filed with the
Commission on November 13, 2009)
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10.27
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Base salary reduction agreement with Gary S. Wechsler (incorporated by
reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2009, filed with the
Commission on November 13, 2009)
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21
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List of Subsidiaries
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23.1
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Consent of KPMG LLP
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31.1
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Certification required under Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification required under Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification pursuant to Section 1350, Chapter 63 of Title 18, United
States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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103
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Exhibit
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Number
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Exhibit
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32.2
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Certification pursuant to Section 1350, Chapter 63 of Title 18, United
States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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99.1
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Audit Committee Charter (incorporated by reference to Exhibit 99.1 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2003,
filed with the Commission on March 10, 2004)
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104
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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March 31, 2010
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Optimal Group Inc.
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By:
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/s/ NEIL S. WECHSLER
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Neil S. Wechsler,
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Co-Chairman and Chief Executive Officer
(Principal Executive Officer)
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By:
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/s/ GARY S. WECHSLER
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Gary S. Wechsler,
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Chief Financial Officer
(Principal Accounting Officer)
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Pursuant to the Exchange Act, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
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March 31, 2010
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By:
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/s/ NEIL S. WECHSLER
Neil S. Wechsler, Director
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March 31, 2010
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By:
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/s/ HOLDEN L. OSTRIN
Holden L. Ostrin, Director
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March 31, 2010
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By:
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/s/ TOMMY BOMAN
Tommy Boman, Director
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March 31, 2010
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By:
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/s/ JAMES S. GERTLER
James S. Gertler, Director
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March 31, 2010
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By:
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/s/ JONATHAN J. GINNS
Jonathan J. Ginns, Director
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March 31, 2010
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By:
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/s/ HENRY M. KARP
Henry M. Karp, Director
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March 31, 2010
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By:
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/s/ THOMAS D. MURPHY
Thomas D. Murphy, Director
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105
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