UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From________ to __________
Commission File Number: 0-16454
CIMETRIX INCORPORATED
(Exact name of registrant as specified in its charter)
Nevada 87-0439107
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6979 South High Tech Drive, Salt Lake City, UT 84047-3757
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (801) 256-6500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.0001
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No[X]
As of March 28, 2003, the registrant had 24,089,833 shares of its common stock,
par value $.0001, issued and outstanding. The aggregate market value of the
common stock held by non-affiliates of the registrant as of that date was
approximately $2,760,622. The aggregate market value of the common stock held by
non-affiliates of the registrant as of June 28, 2002 was approximately
$6,306,577.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held May 10, 2003, are
incorporated by reference into Part III hereof.
FORM 10-K
For the Fiscal Year Ended December 31, 2002
TABLE OF CONTENTS
PART I
Item 1. Business............................................................3
Item 2. Properties.........................................................17
Item 3. Legal Proceedings..................................................18
Item 4. Submission of Matters to a Vote of Security Holders................19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................19
Item 6. Selected Financial Data............................................23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................23
Item 7A Quantitative and Qualitative Disclosures about Market Risk.........32
Item 8. Financial Statements and Supplementary Data........................32
Item 9. Changes and Disagreements with Accountants on Accounting
and Financial Disclosures..........................................32
PART III
Item 10. Directors and Executive Officers of the Registrant.................33
Item 11. Executive Compensation.............................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management.....33
Item 13. Certain Relationships and Related Transactions.....................33
PART IV
Item 14. Controls and Procedures............................................33
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....34
Signatures................................................................... 36
Certifications............................................................... 37
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The following Annual Report on Form 10-K contains various "forward-looking
statements" within the meaning of federal securities laws. These forward-looking
statements represent management's expectations or beliefs concerning future
events, including statements regarding anticipated product introductions,
changes in markets, customers and customer order rates, expenditures in research
and development, growth in revenue, taxation levels, the effects of pricing, and
the ability to continue to price foreign transactions in US currency. Investors
are cautioned that all forward-looking statements involve risks and
uncertainties and several factors could cause actual results to differ
materially from those in the forward-looking statements.
These, and other forward-looking statements made by the Company, must be
evaluated in the context of a number of factors that may affect the Company's
financial condition and results of operations, including, but not limited to,
those factors listed at the end of Part I, Item 1. Business, titled
FORWARD-LOOKING STATEMENTS AND CERTAIN RISK FACTORS.
PART I
ITEM 1. BUSINESS
==================
Business Overview
Cimetrix designs, develops and markets machine control software products
that are tailored to meet the needs of original equipment manufacturers (OEMs).
The Company has three primary machine control software product lines: advanced
motion control, general purpose equipment connectivity and specialized
connectivity for 300mm semiconductor wafer fabrication facilities. Revenues are
derived from the initial sale of software development tools, the ongoing runtime
licenses that OEM's purchase for each machine shipped with Cimetrix software,
annual software support contracts and professional services to assist customers
in deploying Cimetrix software products.
In the advanced motion control market, Cimetrix markets its Cimetrix Open
Development Environment version Six (CODE 6) with Core Motion. CODE 6 includes a
number of advanced features, such as enhanced calibration and simulation
features, specifically targeted for machines that use vision technology to guide
motion, such as machines used in the Surface Mount Technology (SMT) and
semiconductor industries. The Core Motion technology marked a significant
technical achievement by our engineers, because it moves the low-level motion
control functions from a specialized, intelligent motion card into Cimetrix
software on the PC. This allows the OEM customer to reduce proprietary hardware
costs, protect proprietary algorithms, and provides greater flexibility in the
overall system architecture. This is accomplished by using a simple I/O
interface card together with Core Motion software in place of a specialized
motion card.
The Company's CIMConnect connectivity product has been widely recognized as
the best technical solution by a wide range of customers in the SMT,
semiconductor wafer fab and semiconductor back-end markets, which enabled the
Company to obtain a number of significant design wins from OEM customers.
Communications and connectivity between the tool on the factory floor and the
host system are becoming increasingly important as mission-critical applications
require these communications for operation.
-3-
CIMConnect is designed for general purpose equipment connectivity and
enables production equipment in the electronics industries to communicate data
to the factory's host computer through the semiconductor equipment communication
standard (SECS)/ generic equipment model (GEM) and extensible markup language
(XML) based communication standards. CIMConnect can also support other emerging
communications standards for maximum flexibility. CIMConnect is used primarily
in the SMT and semiconductor industries.
Typically used in conjunction with CIMConnect, the Company's CIM300 family
is a set of standards-based software products designed specifically for 300mm
semiconductor wafer fabrication facilities. CIM300 reduces total integration
time required to connect new 300mm semiconductor tools to each other and to the
host computer in a wafer fab. The semiconductor industry is migrating to the
300mm wafer size, and the Company expects the market for 300mm tools to continue
to grow.
The business relationships that Cimetrix establishes with its customers go
beyond sales of its products. The Company partners with its OEM customers to
provide them with solutions that include software tools, consulting, services,
and support. Company engineers are comprised of industry leading experts in
motion control, communications, connectivity, and associated technologies and
implementation processes. This experience and technical knowledge provides a
unique and invaluable benefit to our customers and is a core part of our
strategy to build long-term relationships with global electronics equipment
OEMs.
Key Markets
The Company serves customers in a wide variety of technology and
manufacturing industries, including SMT, semiconductor wafer fabrication,
semiconductor back-end, packaging, small parts assembly, and robotics. The
Company will continue to serve customers in all these industries and explore
opportunities for growth in industries that are challenged by the problems that
the Company's products solve.
The Company is now focused on OEM customers in two key industries: SMT and
semiconductor. Management believes that short-term revenue growth will stem
primarily from opportunities explored in these industries. Both the SMT and
semiconductor industries are a natural fit for the Company's solutions because
of the demand for high-speed, motion intensive applications with pinpoint
accuracy that can communicate with host computers throughout the process.
In general, the semiconductor and SMT industries represent some of the
fastest-growing and most dynamic industries. Rapid industry changes require
tools that are flexible and can adapt quickly to new requirements. The Company
is uniquely positioned to meet these challenges with PC-based motion control and
communications software that is based on open standards and uses the latest in
object-oriented design to provide end users with the necessary flexibility and
customization required to meet industry demands.
By focusing efforts on these two industries, the Company's goal is to
obtain a dominant position for its products in these segments. This would
provide the momentum and cash flow to penetrate other industries.
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Surface Mount Technology Industry
The SMT market includes all factory equipment to produce and test printed
circuit boards. Applications involve high-speed multi-axis motion control with
very tight vision system integration. The need to connect factory equipment to
host computer systems is growing in importance. SMT equipment can typically cost
$500,000. This industry has quickly adopted the use of PCs as equipment
controllers and uses very few proprietary controllers. With electronic
components changing very rapidly, OEMs are under pressure to create newer,
highly flexible machines in shorter time periods. The Company provides software
to several major suppliers in this industry and is actively involved in industry
organizations such as the Institute for Interconnecting and Packaging Electronic
Circuits (IPC). The IPC has released new connectivity standards called CAMX.
These XML based standards and our involvement in the committee were the primary
reason behind the development of the CIMConnect product.
Diagram of a modern SMT line:
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[GRAPHIC OMITTED]
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A modern SMT line can include: a loader, screen printer, post print
inspection, adhesive dispenser, several placement machines (mounters), odd form
placement, post placement inspection, reflow soldering, post reflow inspection,
unloader, and finally system test. The Company has targeted the mounter tool as
a desirable market for its CODE and CIMConnect products and has current
development contracts under way with several major mounter equipment
manufacturers.
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Semiconductor Industry
The semiconductor industry includes the manufacturing, packaging and
testing of semiconductor wafers. It is a cyclical industry that is currently
experiencing its largest downturn. Industry revenues were 30% below year 2000
levels during both 2001 and 2002. Due to the downturn in the economy,
semiconductor fab capital spending shrank by 25 % during 2002 according to
Electronic News. In 2000, the semiconductor industry began the migration from
building 8-inch (200 mm) wafers to building 12-inch (300 mm) wafers. Despite
reduced capital spending, the trend to 300mm fabs continued in 2002. Capital
spending for 300mm equipment now represents over 38% of the total for fab
equipment. The Company's CIMConnect and CIM300 products are well positioned to
take advantage of increased demand for 300mm semiconductor tools. In 2002,
Cimetrix gained 9 new major OEM customers in the semiconductor industry and is
recognized as an expert in 300mm automation. Cimetrix OEM customers have now
shipped fully automated tools to all major 300mm manufacturing facilities
throughout the world.
Additional Markets
While the SMT and semiconductor industries are the two key markets that the
Company is focused on for the short term, there are also opportunities in other
industries for the Company's products. The Company remains committed to
developing and strengthening relationships with current customers and prospects
in other industries, such as the following:
Small Parts Assembly Industry
This industry assembles small parts such as cell phones, engine control
modules and disk drives. Accuracy, integration with vision, time to market, and
open architecture are all needs of this diverse industry. Operations typically
involve a small Cartesian, SCARA or Delta style robot and require integration
with many other automation components. The CODE solution allows all these
components to be controlled with one PC instead of several different proprietary
controllers. In this market, the Company is currently working with SIG Pack, a
large European packaging robotics OEM and several companies in the area of disk
drive manufacturing and fiber optic assembly among other applications.
Robotics Industry
Industrial robots are used for tasks that are tedious, repetitive and
exhausting for humans and are employed to reduce the costs and improve the
quality of highly labor-intensive tasks. Industrial robots are typically
multi-axis manipulators used for welding, painting and material handling
applications. The automotive industry is currently the primary end-user of
robots. Other end-users include the aerospace, steel, heavy equipment, packaging
and electronics industries.
Nearly all robot controllers are proprietary devices manufactured by the
major industrial robot vendors, which are supplied with their own robot systems
as a complete, proprietary solution. These robot controllers are only compatible
with robots supplied by the same vendor, and in many cases, are only compatible
with specific robot models of that vendor. These systems represent an enormous
technology investment "legacy," and are difficult and time consuming to program,
configure, implement and modify. The Robotic Industries Association (RIA) has
started to address the use of open architecture controllers for robots, but is
meeting significant resistance from the traditional robot OEMs. The Company
targets progressive robot manufacturers who see the need for modern open
solutions.
-6-
Packaging Industry
The packaging industry supplies equipment that handles and prepares
products for shipment and display to customers. Packaging machines involve
high-speed motion control and cover a wide range in terms of complexity.
Currently, proprietary controllers are used extensively, but the Open Modular
Architecture Controls (OMAC) group has formed a working group to specifically
drive packaging toward open controllers. Cimetrix has a good opportunity to grow
in this industry depending on their adoption of open controllers.
Machine Tool Industry (Computer Numerical Control or CNC Controllers)
Machine tools consist of metal cutting machines such as milling machines,
lathes, machining centers, grinders, and lasers; and metal forming equipment
such as press brakes, turret punches and tube benders. These machine tools,
which are used by a wide variety of manufacturers, utilize a computer numerical
control (CNC) type controller. Despite the PC revolution that has taken place
over the past decade, the underlying technology and software for machine tool
controllers has changed very little during the same period. Most major machine
tool manufacturers purchase proprietary controllers from several CNC controller
vendors. The interest level of tool manufacturers in open architecture CNCs is
very high. The proprietary CNC manufacturers are developing ways to configure
the graphical user interface of the CNCs so they appear to be open.
General Automation Industry
(Programmable Logic Controller (PLC) general-purpose motion controllers)
This segment includes general-purpose machinery, automotive, textiles,
packaging, food & beverage, and pharmaceutical markets. These markets typically
require less sophisticated motion control and very little communications with
host computers. The transition from proprietary to PC-based controllers has been
slow, partly because they use older software technologies. Soon this segment
will recognize the cost savings possible with the open architecture approach.
Notable Achievements of 2002
The Company achieved major milestones in 2002 in the areas of product
improvements, broadening our customer base and assisting our OEM customers to
introduce new machines using Cimetrix software. However, see Forward Looking
Statements and Certain Risk Factors.
Product Improvements
Last year the Company continued to improve on the latest version of its
motion control software, CODE 6. CODE 6 features the breakthrough Core Motion
technology, which eliminates the need for a specialized, intelligent motion
card. Core Motion allows OEMs to control a wide range of intensive motion
control applications through software in the PC rather than with a proprietary
motion card.
Historically, machinery OEMs who had transitioned from proprietary
controllers to PC based motion control software were required to use an
intelligent motion card to augment the lack of PC performance. Now with the
increasing power of PCs, Cimetrix's engineers, utilizing Core Motion technology,
have moved the motion card functionality onto the PC, allowing for a direct
connection from the PC to amplifiers and feedback devices. This enables the PC
software to control trajectory generation, position loop, velocity loop,
input/output scanning, and event generation at the servo rate.
-7-
By taking advantage of CODE 6 with Core Motion, OEMs can reduce hardware
costs by up to 50 percent while achieving greater flexibility in hardware
selection, development environments, and system architecture.
The Company made many additions to the two other award winning Company
products, CIMConnect and CIM300. The Company released new semiconductor
standards updates and provided many specialty features for our customers
requiring fab specific integration. These efforts helped to harden our
best-in-class position in the semiconductor industry.
During 2002 Cimetrix continued its participation in the SEMI Standards
meetings and has helped revise some of the up and coming standards. Based on our
participation in the SEMI Standards meetings, the Company has initiated research
and development efforts towards two complementary product offerings. One
research and development effort is focused in the area of eDiagnostics and the
Company expects to introduce a new product in 2003. The second research and
development effort involves a new 300mm integration product in beta testing
today which will further reduce the time to implement the 300mm automation
standards on semiconductor equipment. Preliminary results indicate Cimetrix's
new product has the potential to reduce the implementation time by as much as 5
times, which could dramatically reduce the risk for Cimetrix's semiconductor
customers as they make the transition from 200mm to 300mm product lines.
Broadening our Customer Base
Despite a down economy in 2002 for the industries Cimetrix serves, the
Company achieved a high degree of success in signing new customers. Over 10 new
OEM customers signed development agreements with Cimetrix in 2002. The majority
of new customers are in the semiconductor industry, one of the Company's two key
industries.
Assisting our Customers Introduce New Machines
The process of introducing automated 300mm equipment into a wafer fab is
complex. The equipment must pass tests for compliance against the new 300mm
standards before the equipment manufacturer can recognize revenue. Cimetrix
software and support services are critical during this phase. During 2002,
Cimetrix OEM customers had equipment accepted at AMD, IBM, Infineon, Intel,
Micron, Powerchip, ProMos, TI, Samsung, TSMC and UMC.
Cimetrix Product Line
CODE
The Cimetrix Open Development Environment (CODE) is a suite of open
architecture machine modeling and motion control software products designed to
control the most challenging multi-axis machine control applications. CODE
contains both a powerful off-line simulation development environment known as
CIMulation, and a robust, real-time motion and I/O control system called
CIMControl.
Applications written and tested using CIMulation are fully compatible with
CIMControl and can be deployed with no conversion or programming changes
required. Applications can be developed using standard computer languages such
as C++, Visual Basic, or Delphi or with PLC languages such as ladder logic or
flow charts.
-8-
Core Motion
Core Motion is an integral part of CODE 6. Core Motion allows customers to
eliminate the cost and complexity of a specialized motion card. With Core
Motion, these expensive specialized motion cards are replaced through software.
Using the proven real-time extensions for Windows 2000 and NT, PC processing
power is used to move these specialized software functions from the motion card
to the PC. A network or low-cost interface card is used to interface the PC
controller to the servo hardware.
Connect Family
CIMConnect - CIMConnect is an object-oriented service and toolkit for equipment
suppliers to quickly develop communication interfaces for their manufacturing
equipment. CIMConnect supports all major communication protocols, including
SECS/GEM, XML, and others. It also supports multiple host interfaces
simultaneously, which allows customers to support any legacy, custom, and GEM
interfaces.
GEM Host Manager - GEM Host Manager allows a host computer to receive data from
GEM enabled equipment and format the data for use by host computer applications
to monitor and control factories. GEM Host Manager has been designed
specifically for use in printed circuit board facilities.
TESTConnect - TESTConnect is a SECS/GEM host emulator used to test equipment to
ensure it complies with the SECS standards. TESTConnect simplifies the process
of testing SECS implementations through the use of an intuitive, graphical user
interface and menu-driven property screens that allow customers to construct
message sets and test them without any programming.
CIM300 Family
CIM300 is a family of software tools for manufacturers of 300mm semiconductor
equipment that allow for quick implementation of the new required Semiconductor
Equipment and Materials International (SEMI) standards, including E4, E5, E30,
E37, E39, E40, E41, E58, E87, E90, and E94. Components of CIM300 include:
CIMFoundation - Provides an abstraction layer for SECS/GEM products and an
implementation of SEMI E39 Object Services. Object services are provided for the
CIM300 functional modules and user-written modules. The abstraction layer allows
the CIM300 family to work with either the state-of-the-art Cimetrix CIMConnect
product or older legacy products.
CIM87-Carrier Management - Provides carrier management functionality as defined
in SEMI E87. The CIM87 interface provides methods that logically correspond to
carrier management system (CMS) functions. The package has two component object
model (COM) objects, representing the carrier and CMS package, and a callback
interface used to notify the client application of CMS services requested by the
host.
CIM40-Process Job - Provides process job functionality as defined in SEMI E40.
This module provides two COM objects representing the E39 OSS process job object
and process job package. A callback interface is provided to notify the client
application of process job creation and a process job queue is provided with the
application program interface (API) functions necessary for process job
management.
CIM90-Substrate Tracking - Provides substrate tracking functionality as defined
in SEMI E90. This module provides COM objects for the E39 OSS substrate and
substrate location objects as well as the E90 package object. It is possible to
connect CIM90 to CIM87 for automatic substrate lifetime control.
-9-
CIM94-Control Job - Provides control job functionality as defined in SEMI E90.
This module provides COM objects for the E39 OSS control job object as well as
the E94 package object. All control job services are supported. A callback
interface is provided to notify the client application of requested control job
services. A control job queue is provided with API functions for queue
management.
Competition
The Company's main product lines face competition from other companies,
technologies, and products. These competitive threats are summarized below:
The manufacture and sale of automation technology is a highly competitive
industry. The largest segment of the market for industrial controls is comprised
of proprietary systems from large companies including FANUC Ltd., Rockwell
Automation and Siemens. Cimetrix has targeted the emerging market of open,
standards based industrial controls, in which competition in this area is
primarily divided between in-house developed controllers and open controller
suppliers.
In-house developed controllers are potentially competition, but they are
also potential customers. Certain robot manufacturers, CNC suppliers, and
electronics equipment suppliers develop their own controllers, some on PC
platforms and some on proprietary hardware. They have problems hiring top
software talent that have experience with the latest Microsoft technologies.
Cimetrix offers a distinct advantage to them by increasing software quality
through its software re-use techniques, decreasing the time to market for a new
open architecture controller, and assisting the transition of their engineering
staff to the latest technologies such as COM, unified modeling language (UML)
and object oriented analysis and design techniques. The Company's CODE and
equipment communications software products offer these advantages.
Open controller suppliers are currently a small segment of the overall
controls market. They are mostly small undercapitalized companies. Larger
proprietary controller companies have recently purchased several of them. They
typically do not have robust motion solutions and target different markets than
Cimetrix. Management expects to see additional competitors emerge in this group.
None of these proprietary controller suppliers are major competitors to
Cimetrix' communications software products.
With Core Motion technology in CODE 6, manufacturers of intelligent motion
cards can be considered competitors for part of the CODE product, although CODE
6 continues to also support a number of popular motion cards.
In the 300mm connectivity market, Cimetrix has several competitors that
include Asyst Technologies, Inc., Brooks-PRI Automation, Inc., and Yokogawa
Electric Corporation. All competitors have varying levels of expertise in
semiconductor fabs.
Management believes that most, if not all, of the Company's major
competitors currently have greater financial resources and market presence than
Cimetrix. Accordingly, these competitors may be able to compete very effectively
on pricing and to develop technology to increase the flexibility of their
products. Further, each of these competitors has already established a share of
the market for their products, and may find it easier to limit market
penetration by the Company because of the natural tie-in of their controllers
and software to their mechanisms. Management is uninformed as to whether any of
these competitors are presently developing additional technology that will
directly compete with the Company's product offerings. By focusing on the SMT
and Semiconductor markets for the short term, management believes the Company
can earn a dominant position in the face of other competitors.
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Sales and Marketing
The sales and marketing staff are responsible for identifying key end-user
customers and the top-tier OEM machine suppliers in each primary market. Sales
and marketing efforts are combined into one unified force, supporting both
communications and motion control products under Dave Faulkner, executive vice
president. The Company's sales offices are located in Salt Lake City, Utah,
Boston, Massachusetts, and Archamps, France. In addition, the Company has
distributors or resellers located in Vancouver, Washington, and Kanagawa, Japan.
Operations
The Company's software operations are conducted under the direction of the
Company's vice president of software development, Michael D. Feaster. His group,
which includes Software Development, Quality Assurance, Customer Services and
Applications, is responsible for developing new products, testing such products,
and performing initial product integration with key OEMs. The Company's strategy
is to develop standard software products that have been thoroughly tested and
deliver/support these products using major OEMs as the key channel to market. A
comprehensive software quality program and rigid coding standards are keys to
the development process. Expenditures for Research and Development are discussed
in Part II. Item 7. Management's Discussion and Analysis of Financial Conditions
and results of Operations.
Intellectual Property Rights
The open architecture controller technology upon which the Company's CODE
software is based was developed from 1984 to 1989 by a team of Brigham Young
University engineers led by Dr. W. Edward Red. Effective July 5, 1995, Cimetrix
purchased from Brigham Young University all the rights, title, interest and
benefit from this intellectual property.
In December of 1999, the Company purchased the software products of
Systematic Designs International, Inc. (SDI), of Vancouver, Washington. These
newly acquired products have broadened the Company's communication product line
and provided valuable inputs to the CIMConnect and CIM300 products designed by
Cimetrix.
The technology purchased from Brigham Young University and SDI, along with
other technology developed internally, is proprietary in nature. The Company has
obtained a US patent on certain aspects of its technology. This patent was
issued in March 1994 and will expire in March of 2011. In addition, the Company
has registered its CODE software system with the US Copyright Office, and will
continue to timely register any updates to current products or any new products
acquired through acquisitions. For the most part, other than the one patent and
the copyright registrations, the Company relies on confidentiality and
non-disclosure agreements with its employees and customers, appropriate security
measures, and the encoding of its software to protect the proprietary nature of
its technology. No cost has been capitalized with respect to the patent.
-11-
Major Customers and Foreign Sales
In 2002, one customer accounted for 14% of the Company's revenues. No other
customer accounted for more than 10% of revenues in 2002. In 2001, no single
customer accounted for more than 10% of the Company's revenues. In 2000, three
customers accounted for 18%, 16% and 15% of the Company's revenues respectively.
No other single customer accounted for more than 10% of Company revenues in
2000.
The Company's affiliate, Aries, Inc., is a private Japanese corporation of
which the Company currently holds approximately 11% of its outstanding shares of
stock. Aries, Inc. is one of the Company's distributors in Japan. Sales to Aries
represented 6%, 9% and 5% of the Company's total sales in 2002, 2001 and 2000,
respectively.
For the year ended December 31, 2002, revenues from export sales were 36%,
of which 6% were to an affiliate. Thus far, all the Company's export sales have
been payable in United States dollars.
The following table summarizes domestic and export sales, as a percent of
total sales, for the three years ended 2002, 2001 and 2000:
Year Ended December 31,
----------------------------------------
2002 2001 2000
---- ---- ----
Domestic sales 64% 59% 60%
Export sales 36% 41% 40%
In 2002, sales to customers in Japan accounted for 14% of the Company's
total revenues. In 2001, sales to customers in Japan and Germany accounted for
19% and 10% of total revenues, respectively. In 2000, sales to Japan and
Switzerland accounted for 13% and 17% of total revenues, respectively. No other
country accounted for more than 10% of the Company's revenues in each of the
fiscal periods ended 2002, 2001 and 2000.
Personnel
As of March 28, 2003, the Company had 25 employees, 15 of whom are involved
in software development and providing software engineering services, 6 of whom
are involved in sales, marketing, and customer support, and 4 of whom who are in
finance and administrative positions. None of the employees of the Company are
represented by a union or subject to a collective bargaining agreement, and the
Company considers its relations with its employees to be favorable.
-12-
Executive Officers
Robert H. Reback, President and Chief Executive Officer, age 43, joined
Cimetrix as Vice President of Sales in January 1996, was promoted to Executive
Vice President of Sales in January, 1997 and was promoted to President on June
25, 2001. Mr. Reback was the District Manager of Fanuc Robotics' West Coast
business unit from 1994 to 1995. From 1985 to 1993, he was Director of
Sales/Account Executives for Thesis, Inc., a privately-owned supplier of factory
automation software and was previously a Senior Automation Engineer for Texas
Instruments. Mr. Reback has a B.S. degree in Mechanical Engineering and a M.S.
degree in Industrial Engineering from Purdue University.
David P. Faulkner, Executive Vice President of Sales and Marketing, age 47,
joined the Company in August 1996. Mr. Faulkner was previously employed as the
Manager of PLC Marketing, Manager of Automotive Operations and District Sales
Manager for GE Fanuc Automation, a global supplier of factory automation
computer equipment specializing in programmable logic controllers, factory
software and computer numerical controls from 1986 to 1996. Mr. Faulkner has a
B.S. degree in Electrical Engineering and an MBA degree from Rensselaer
Polytechnic Institute.
Michael D. Feaster, Vice President of Software Development, age 32, joined
the Company in April 1998, as Director of Customer Services. In December 1998,
Mr. Feaster was promoted to Vice President of Software Development. From 1994 to
1998, Mr. Feaster was employed at Century Software, Inc., as the Vice President
of Software Development. During that time, Century Software, Inc., was a global
supplier of PC to UNIX connectivity software, specializing in internet access of
Windows to legacy mission critical applications. From 1988 to 1994, he served as
a software engineer contractor/subcontractor for such companies as Fidelity
Investments, IAT, Inc., NASA, and Mexican Border Inspection Division. Mr.
Feaster attended Southwest Missouri University from 1987 to 1990.
Dr. Steven K. Sorensen, Vice President and Chief Engineer, age 44, joined
the Company in 1990. Prior to joining Cimetrix, Dr. Sorensen was an Associate
Professor at Brigham Young University, where he received his Ph.D. in Mechanical
Engineering. Dr. Sorensen has been working to develop the Cimetrix technology
for the past thirteen years and is one of the principal architects of many of
the Company's most important products.
Joe K. Johnson, age 45, was appointed Interim Chief Financial Officer
effective November 18, 2002. Mr. Johnson has served as a director of the Company
since April 2001. Since 1988, Mr. Johnson has been the manager of Aspen Capital
Resources, LLC, an investment company that provides bridge financing to public
companies. Aspen Capital Resources, LLC has financed 12 companies since 1998,
and is currently a major shareholder in several firms. From 1983 to 1998, Mr.
Johnson was President of Aspen Finance, a Salt Lake City insurance agency. Mr.
Johnson attended the University of Utah, majoring in Finance. He left the
University of Utah in 1983 to pursue a career in the insurance industry. Mr.
Johnson served as a director of Covol Technologies, Inc. from 1998 to 1999 and
has served as a director of First Scientific, Inc. since April 2001.
-13-
FORWARD LOOKING STATEMENTS AND CERTAIN RISK FACTORS
Statements regarding the future prospects of the Company must be evaluated
in the context of a number of factors that may materially affect its financial
condition and results of operations. Disclosure of these factors is intended to
permit the Company to take advantage of the safe harbor provisions of the
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Most of these factors have
been discussed in prior filings by the Company with the Securities and Exchange
Commission. Although the Company has attempted to list the factors that it is
currently aware may have an impact on its operations, other factors may in the
future prove to be important and the following list should not necessarily be
considered comprehensive.
1. EMPHASIS OF MATTER IN FINANCIAL STATEMENTS. The financial statements of
the Company as of December 31, 2002 reflect a net loss of approximately
$4,055,000, and an accumulated deficit of approximately $28,163,000.
2. LIMITED WORKING CAPITAL; LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT;
ANTICIPATED LOSSES. As of December 31, 2002, the Company had a working capital
deficit of $122,000. Part of this deficit is attributable to two significant
current liabilities. The first liability is a $500,000 note payable to Tsunami
Network Partners Corporation which automatically converted to common stock on
March 31, 2003 thus freeing up additional working capital to fund operations.The
second liability is $482,000 of 1997 Senior Notes presently under the
jurisdiction of a Receivership established by the United States District Court
for the District of Columbia. The Company is currently waiting for a judges
approval to convert $241,000 of the 1997 Senior Notes to Senior Notes due 2005.
For a complete explanation of these two current liabilities see Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Liquidity and Capital Resources. The Company also has an accumulated
deficit of $28,163,000. These losses have resulted principally from costs
incurred in connection with research and development and the selling and
marketing of the Company's software products. CODE motion control software was
introduced commercially in October 1995. The Company's communications products,
GEM, CIMConnect and CIM300 were introduced during 1997, 2000, and 2000
respectively. The likelihood of success of the Company must be considered in
light of the problems, expenses, difficulties, complications and delays
frequently encountered in connection with the development of new products and
the competitive environments in the industry in which the Company operates.
There can be no assurance that the Company will not encounter substantial delays
and unexpected expenses related to research, development, production, marketing
or other unforeseen difficulties. While the Company expects to break even on an
operating basis every quarter going forward, this is dependent upon economic
conditions and cannot be assured.
3. LACK OF LIQUIDITY. The Company's liquidity is uncertain due to $982,000
of Senior Notes that are presently due but unpaid as well as the Company's
inability to generate cash flows from operating activities.See Item 3,Legal
Proceedings, of this document. In 2002 the Company's operating activities used
cash of approximately $1,269,000. Liquidity and capital resources are discussed
below in this document in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations. Since its inception, the Company
has generated an operating deficit, making its liquidity dependent on obtaining
external financing through debt or equity securities. See "Liquidity and Capital
Resources".
4. RISK OF DEFAULT ON SENIOR NOTES DUE SEPTEMBER 30, 2002. There is a
significant risk that the Company will not be able to pay the remaining balance
of $982,000 on the 10% Senior Notes due September 30, 2002. For an explanation
of the $982,000 of 10% Senior that are due see Part II, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Liquidity and Capital Resources, as well as Part I, Item 3, Legal Proceedings,
of this document. This default could cause the Company to become insolvent and
may force the Company to consider seeking bankruptcy protection under Federal
bankruptcy law. This default could also cause other material, adverse problems
to the Company and could result in our shareholders and noteholders receiving
nothing in return for their investment in the Company.
-14-
5. INCOME TAXES. The Company had available at December 31, 2002 unused tax
operating loss carry forwards of approximately $19,300,000 that may be applied
against future taxable income, which unused losses will begin to expire in 2004.
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
(FASB 109), requires the Company to provide a net deferred tax asset or
liability equal to the expected future tax benefit or expense of temporary
reporting differences between book and tax accounting and any available
operating loss or tax credit carry forwards. At December 31, 2002, the total of
all deferred tax assets was approximately $10,539,000. Because of the
uncertainty about whether the Company will generate sufficient future taxable
income to realize the deferred tax assets, the Company has established a
valuation allowance of approximately $10,539,000 to offset all of its deferred
tax assets.
6. DEPENDENCE ON SIGNIFICANT CUSTOMERS. In 2002, one customer accounted for
14% of the Company's revenues, while sales to affiliates accounted for 6% of
revenues. In 2000 three customers accounted for approximately 18%, 16% and 15%
of the Company's revenues, respectively. See Item 1. Business, Major Customers
and Foreign Sales. The loss of any customer's business could have a material
adverse effect on the Company. Additionally, the quantity of each customer's
business with the Company depends substantially on market acceptance of the
customer's products that utilize the Company's software products and the
development cycle of the customer's products. The Company could be materially
adversely affected by a downturn in either customer's sales or their failure to
meet sales expectations. The Company will likely from time to time have other
customers that account for a significant portion of its business.
7. DEPENDENCE ON RELATIVELY NEW PRODUCTS. CODE motion control software was
introduced commercially in October 1995. The Company's communications products,
GEM, CIMConnect and CIM300 were introduced during 1997, 2000, and 2000
respectively. In addition, the Company only began to introduce commercially in
2000 its new software products recently purchased from SDI. As a result, the
Company has only limited history with these products, and there can be little
assurance that they will achieve market acceptance. The Company's future success
will depend on sales of these products, and the failure of these products to
achieve market acceptance would have a materially adverse effect on the Company.
In addition, the Company has limited experience with the installation,
implementation and operation of its products at customer sites. There is no
assurance that the Company's products will not require substantial modifications
to satisfy performance requirements or to fix previously undetected errors. If
customers were to experience significant problems with the Company's products,
or if the Company's customers were dissatisfied with the products'
functionality, performance, or support, the Company would be materially
adversely affected.
8. PRODUCT LIFE CYCLE; NEED TO DEVELOP NEW PRODUCTS AND ENHANCEMENTS. The
markets for the Company's products are new and emerging. As such, these markets
are characterized by rapid technological change, evolving requirements,
developing industry standards, and new product introductions. The dynamic nature
of these markets can render existing products obsolete and unmarketable within a
short period of time. Accordingly, the life cycle of the Company's products is
difficult to estimate. The Company's future success will depend in large part on
its ability to enhance its products and develop and introduce, on a timely
basis, new products that keep pace with technological developments and emerging
industry standards. The success of the Company's software development efforts
will depend on various factors, including its ability to integrate these
products with third-party products. If a competitor succeeds in duplicating or
surpassing the Company's technological advances, the Company's prospects might
be materially adversely affected.
-15-
9. COMPETITION. The automation technology market is extremely competitive.
Management believes that most, if not all, of the Company's competitors
currently have greater financial resources and market presence than it does.
Accordingly, these competitors may be able to compete very effectively on
pricing and to develop technology to increase the flexibility of their products.
Further, manufacturers of industrial robots, machine tools, and other automation
equipment which use their own proprietary controllers and software have already
established a share of the market for their products and may find it easier to
limit market penetration by the Company because of the natural tie-in of their
controllers and software to their mechanisms. Management is uninformed as to
whether any of these competitors are presently developing additional technology
that will directly compete with the Company's product offerings. See Item 1,
Business, Competition.
10. EXPORT SALES. Export sales accounted for approximately 36%, 41% and 40%
of the Company's business in 2002, 2001 and 2000, respectively. To service the
needs of these customers, the Company must provide worldwide sales and product
support services. There are a number of risks inherent in international
expansion, including language barriers, increased risk of software piracy,
unexpected changes in regulatory requirements, tariffs and other trade barriers,
costs and risks of localizing products for foreign companies, longer account
receivable cycles and increased collection risks, potentially adverse tax
consequences, difficulty in repatriating earnings, and the burdens of complying
with a wide variety of foreign laws. See Item 1. Business, Major Customers and
Foreign Sales
11. DEPENDENCE ON CERTAIN INDIVIDUALS. The Company is highly dependent on
the services of its key managerial and engineering personnel, including, Robert
H. Reback, President and CEO, David P. Faulkner, Executive Vice President of
Sales and Marketing, Michael D. Feaster, Vice President of Software Development
and Steven K. Sorensen, Vice President and Chief Engineer. Any material change
in the Company's senior management team could adversely affect the Company's
profitability and business prospects. The Company does not maintain key man
insurance for any of its key management and engineering personnel.
12. COPYRIGHT PROTECTION AND PROPRIETARY INFORMATION. The Company's
software innovations are proprietary in nature, and the Company has obtained
copyright protection for many of them. It is possible, however, for infringement
to occur. Although the Company intends to prosecute diligently any infringement
of its proprietary technology, copyright litigation can be extremely expensive
and time-consuming, and the results of litigation are generally uncertain.
Further, the use by a competitor of the Company's proprietary software to create
similar software through "reverse engineering" may not constitute an infringing
use. The Company relies on confidentiality and non-disclosure agreements with
employees and customers for additional protection against infringements, and the
Company's software is encoded to further protect it from unauthorized use. See
Item 1. Business, Intellectual Property Rights.
13. CONTROL. Stockholders will be entitled to vote in the election of the
Company's directors, but will not be entitled to separate board representation.
The executive officers and directors of the Company have direct or may be deemed
to have direct ownership of approximately 9% of the outstanding shares of Common
Stock of the Company.
14. MARKETABILITY OF COMMON STOCK. The Company's Common Stock is currently
listed on the OTC Bulletin Board under the trading symbol CMXX. There are
presently only 15 market makers. Obtaining a listing on a national securities
exchange or being quoted on an automated interdealer quotation system would
provide automated quotations of the stock's price. Trading through market makers
tends to limit the volume of sales and can cause wide fluctuations in a stock's
price, based on the available supply and demand for the stock at any particular
time.
-16-
15. ANTI-TAKEOVER PROVISIONS. Certain provisions of the Nevada General
Corporation Law have anti-takeover effects and may inhibit a non-negotiated
merger or other business combination. These provisions are intended to encourage
any person interested in acquiring the Company to negotiate with, and to obtain
the approval of, the Company's Board of Directors in connection with such a
transaction. However, certain of these provisions may discourage a future
acquisition of the Company, including an acquisition in which the shareholders
might otherwise receive a premium for their shares. As a result, shareholders
who might desire to participate in such a transaction may not have the
opportunity to do so.
16. QUARTERLY FLUCTUATIONS. The Company has experienced quarterly
fluctuations in operating results and anticipates that these fluctuations will
continue. These fluctuations have been caused by various factors, including the
capital procurement practices of its customers and the electronics industry in
general, the timing and acceptance of new product introductions and
enhancements, and the timing of product shipments and marketing. Future
operating results may fluctuate as a result of these and other factors,
including the Company's ability to continue to develop innovative products, the
introduction of new products by the Company's competitors, the Company's product
and customer mix, the level of competition and overall trends in the economy.
17. POSSIBLE VOLATILITY OF STOCK PRICE. The Company believes that factors
such as the announcement of new products by the Company or its competitors,
market conditions in the electronics industry in general, and quarterly
fluctuations in financial results, could cause the market price of the Common
Stock to vary substantially. In recent years, the stock market has experienced
price and volume fluctuations that have particularly affected the market prices
for many high technology companies and which often have been unrelated to the
operating performance of such companies. The market volatility may adversely
affect the market price of the Company's Common Stock.
ITEM 2. PROPERTIES
===================
The Company operates in a leased facility located at 6979 South High Tech
Drive, Midvale, Salt Lake County, Utah (about six miles south of Salt Lake
City). The Company entered into a 38-month lease beginning in October of 2002.
The present facility consists of approximately 15,000 square feet. All
operations of the Company are conducted from its headquarters, with its
satellite offices serving only as remote sales and technical support offices.
-17-
ITEM 3. LEGAL PROCEEDINGS
==========================
Litigation with PUMA Foundation, LTD. and Loving Spirit Foundation
On January 16, 2003, Puma Foundation, Ltd., a Bermuda limited liability
company ("Puma"), as plaintiff, filed a complaint against the Company, in the
United States District Court, Middle District of Florida, Tampa Division, Case
Number 8:03-CV-85-T-23TGW. The complaint alleges that Puma is the owner of a
Cimetrix 10% Senior Note in the amount of $500,000 allegedly donated to Puma by
Loving Spirit Foundation, a Florida foundation ("Loving Spirit"), and that on
January 2, 2003, Puma tendered the Senior Note certificate for payment, and is
entitled to payment of $500,000, plus accrued interest. Plaintiff also seeks
undisclosed attorneys fees and costs. The assets of Puma were unfrozen in the
case of The Securities and Exchange Commission v. Paul A. Bilzerian, et al.
(Civil Action No. 89-1854 (SSH)) and returned to Puma on or about December 30,
2002.The president of Puma is Terri L. Steffen, the wife of Paul A. Bilzerian,
the former President, CEO and Director of Cimetrix. During September 2002, the
Company had been in negotiations with Puma and believed that once the assets of
the foundation became unfrozen, Puma would accept the Company's proposal to
receive 50% payment in cash and roll over the other 50% into new Cimetrix 12%
Senior Notes due 2005, provided that no other holder of Cimetrix 10% Senior
Notes received payment of more than 50% in cash. Since that time, Puma has
issued several letters to the Company demanding payment in full. While the
Company has tried to negotiate acceptable payment terms, Puma's recent position
has been non-negotiable and it has demanded cash payment in full. Since learning
of this lawsuit, current management has examined its files relating to the
Senior Note certificate that is the subject of the lawsuit and has discovered
that this certificate may, in fact, not be a valid Company 1997 Senior Note. The
Company will continue to examine this issue and is currently conducting an
investigation to determine its legal obligations. On February 24, 2003, in
response to the complaint, Cimetrix filed a motion to dismiss or in the
alternative transfer this action to the District of Utah.
On or about March 18, 2003, the Company received an Amended Complaint filed
by Puma and Loving Spirit, as plaintiffs. The Amended Complaint adds an
additional claim that the Company has violated Section 517.301 of the Florida
statutes relating to securities violations by allegedly making untrue statements
to Loving Spirit when Loving Spirit paid $500,000 to Cimetrix for the 10% Senior
Note which was subsequently allegedly donated to Puma. Under this new claim
Loving Spirit seeks damages of $500,000 plus interest, attorney fees, costs and
any other damages and penalties recoverable under Florida law. Cimetrix intends
to defend against this claim vigorously.
Litigation with Steven D. Hausle, et al
On April 12, 2002, Steven D. Hausle, Daniel J. Garnett M.D., Stephanie A.
Garnett, Axcient Corporation, and Ronald Tripiano, as plaintiffs, filed suit
against the Company, Robert H. Reback and Randall A. Mackey, as defendants, in
United States District Court, Northern District of California, San Jose
Division, Case Number C02-01769. The complaint alleges breach of oral and
written contract, fraud, negligent misrepresentation, breach of privacy, unfair
competition, wrongful termination, negligence and shareholder derivative claims
for breach of fiduciary duties, constructive fraud, negligence, and seeks
injunctive and declaratory relief. The plaintiffs are demanding $16,000,000 and
a jury trial.
In response to the complaint, the Company filed a motion to dismiss and/or
transfer. Messrs. Reback and Mackey also filed a motion to dismiss and/or
transfer. Although the court issued "Tentative Rulings" granting and denying
various aspects of the motions, a final ruling on the motions has yet to be
issued. The Company still believes the complaint is without merit and intends to
continue to vigorously defend the action. On May 16, 2002, the Company filed an
action in the United States District Court, District of Utah, Case Number
2-02CV-0484K asserting certain claims against Mr. Hausle and Axcient
Corporation. No response has been filed, as by agreement the date to respond
falls within a period after the court rules on the aforesaid motions in the
California case.
-18-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
============================================================
No matters were submitted to a vote of the Company's shareholders during
the quarter ended December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
==============================================================================
The common stock of the Company is being quoted on the NASD OTC Bulletin
Board under the symbol "CMXX". The table below sets forth the high and low bid
prices of the Company's common stock for each quarter during the past three
fiscal years. The quotations presented reflect inter-dealer prices, without
retail markup, markdown, or commissions, and may not necessarily represent
actual transactions in the common stock.
Common Stock
Period (Calendar Year) Price Range
2000 High Low
- ---------------- ------ ------
First quarter $ 7.00 $ 2.25
Second quarter $ 5.31 $ 3.00
Third quarter $ 3.50 $ 1.88
Fourth quarter $ 2.38 $ 1.13
2001
- ----------------
First quarter $ 3.31 $ 1.25
Second quarter $ 1.60 $ .57
Third quarter $ .95 $ .40
Fourth quarter $ .51 $ .30
2002
- ----------------
First quarter $ .68 $ .33
Second quarter $ .45 $ .26
Third quarter $ .30 $ .17
Fourth quarter $ .35 $ .10
2003
- ----------------
First quarter (as of March 28, 2003) $ .20 $ .14
On March 28, 2003 the closing quotation for the Company's common stock on
the NASD OTC Bulletin Board was $.14 per share. Potential investors should be
aware that the price of the common stock in the trading market may change
dramatically over short periods as a result of factors unrelated to the earnings
and business activities of the Company.
On March 28, 2003 there were 24,089,833 shares of common stock issued and
outstanding, held by approximately 2,700 beneficial shareholders.
-19-
To date, the Company has not paid dividends with respect to its common
stock. There are no restrictions on the declaration or payment of dividends set
forth in the Articles of Incorporation of Cimetrix or any other agreement with
its shareholders. Management anticipates retaining any potential earnings for
working capital and investment in growth and expansion of the business of the
Company and does not anticipate paying dividends on the common stock in the
foreseeable future.
Treasury stock of the Company is recorded at cost and is disclosed in the
Stockholders' Equity section of the Company's financial statements. Presently
there are 25,000 shares held as treasury stock by the Company. The Company has
no plan to resell its treasury shares or issue additional shares of stock with
the exception of the shares to be issued to Tsunami Network Partners Corporation
(see Liquidity and Capital Resources following in this document)unless it has a
need for additional working capital.
Common Stock Options and Warrants
As of December 31, 2002, the Company had a significant number of derivative
securities outstanding, in the form of stock options and warrants representing a
potential total of 4,754,750 shares of common stock, respectively, which are
summarized in the following table with detail of each in the subsequent tables.
Strike Number Outstanding
Description Price December 31, 2002
-------------------------------------------------------------------
1998 Stock Option Plan $0.35-3.50 2,810,000 (1)
Directors Stock Option Plan $0.35-3.50 779,000
Warrants $0.35-1.00 1,165,750
------------------
Total Options and Warrants 4,754,750
-------------------------------------------------------------------
(1) Excludes 500,000 options, which expired as of December 31, 2002,
none having been exercised.
1998 Incentive Stock Option Plan as of December 31, 2002 and March 31, 2003
As of December 31, 2002 and March 31, 2003, respectively, there were issued
and outstanding to the Company's employees, options for the purchase of
2,810,000 and 3,747,500 shares of the Company's common stock, under the
Company's 1998 Incentive Stock Option Plan as amended. The following table
summarizes the quantity and exercise prices of the options.
Option Outstanding Outstanding
Price at December 31,2002 at March 31, 2003
---------------------------------------------------------------
$0.35 -- 1,140,000
$1.00 2,022,500 1,870,000
$2.50 (1) 387,500 337,500
$3.00 350,000 350,000
$3.50 50,000 50,000
----------- -----------
Total Options 2,810,000 3,747,500
---------------------------------------------------------------
(1) Excludes 500,000 options, which expired as of December 31, 2003,
none having been exercised.
A total of 4,000,000 shares of common stock have been reserved for issuance
under the plan. The existing options will begin to expire in April 2003 and
continue to expire through November 2006. None of these options have been
registered for resale. Subsequent to year end, on January 2, 2003, the Company
issued the 1,140,000 options exercisable at $0.35 per share, as included in the
above table.
-20-
Directors Stock Option Plan as of December 31, 2002 and March 31, 2003
As of December 31, 2002 and March 31, 2003, respectively, there were issued
and outstanding options for the purchase of 779,000 and 763,000 shares of the
Company's common stock, under the Company's Director Stock Option Plan. The
following table summarizes the quantity and exercise prices of the options.
Option Outstanding Outstanding
Price at December 31,2003 at March 31, 2003
----------------------------------------------------------------
$0.35 200,000 200,000
$1.00 225,000 225,000
$2.50 258,000 242,000(2)
$3.50 96,000 96,000
-------- --------
Total Options 779,000 763,000
-----------------------------------------------------------
(2) Excludes 16,000 options, which expired as of January 22, 2003,
none having been exercised
A total of 1,000,000 shares of common stock have been reserved for issuance
under the plan. Approximately 162,000 of these options are registered for
resale, pursuant to a Form S-3 Registration Statement, which became effective
December 9, 1998. 219,000 of the above options, are held by former Board of
Directors of the Company. Options issued to directors and former directors began
to expire in January 2003 and will continue to expire through January 2012
Equity Compensation Plans
The following table summarizes the Company's equity compensation plans as
of March 31, 2003. Equity compensation plans consist of the 1998 Incentive Stock
Option Plan and Directors Stock Option Plan.
Plan category Number of Weighted avg. Number of securities
securities exercise remaining available
to be issued upon price of outstanding for future issuance
exercise of out- options, warrants and
standing options, rights
warrants and rights
------------------- ---------------------- -------------------
Equity
compensation
plans approved
by security
holders 3,747,500 $1.16 252,500
Equity
compensation
plans not approved
by security holders 763,000 $1.62 237,000
--------- ---------
Total 4,510,500 489,500
-21-
Warrants
The following table summarizes the quantity and exercise price of
outstanding warrants.
Strike Number Underlying Shares
Description Price December 31, 2002
-------------------------------------------------------------------
2001 Series Warrants $1.00 114,250
2002 Series Warrants $0.35 1,051,500
---------
Total Warrants 1,165,750
The 2001 Series Warrants were issued in November 2001 to purchasers of the
Company's 10% Senior Notes due September 30, 2004. A total of 457 warrants were
issued, with each warrant entitling the holder to purchase 250 shares of common
stock at $1.00 per share, or a total of 114,250 shares. These warrants became
exercisable anytime after November 1, 2001 and on or before September 30, 2004,
provided the shares issuable have been registered under the Securities Act of
1933, as amended, and either registered or qualified for an exemption under any
applicable state securities laws. The Company intends to use its best efforts to
prepare and file a Registration Statement with the Securities and Exchange
Commission to register the shares issuable pursuant to the exercise of the 2001
Series Warrants. To date, none of the 2001 Series Warrants have been exercised.
The 2001 Series Warrants will expire on September 30, 2004.
The 2002 Series Warrants were issued October 2002 to purchasers of the
Company's 12% Senior Notes due September 30, 2005 and to a related party of the
Company. A total of 2,103 warrants were issued, with each warrant entitling the
holder to purchase 500 shares of common stock at $0.35 per share, or a total of
1,051,500 shares. Of the 2,103 warrants that were issued, 1,503 were issued to
purchasers of the Company's 12% Senior Notes due September 30, 2005.The
remaining 600 warrants were issued to Joe K. Johnson, an Officer and Director of
the Company. Mr. Johnson received these options because he had exchanged
$600,000 of the Company's 1997 10% Senior Notes for 400,000 shares of common
stock. This transaction will be disclosed in Related Party Transactions in the
Company's proxy statement on Form 14A which the Company will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this report relates.All 2,103 warrants became exercisable anytime after
October 1, 2002 and on or before September 30, 2005, provided the shares
issuable have been registered under the Securities Act of 1933, as amended, and
either registered or qualified for an exemption under any applicable state
securities laws. The Company intends to use its best efforts to prepare and file
a Registration Statement with the Securities and Exchange Commission to register
the shares issuable pursuant to the exercise of the 2002 Series Warrants. To
date, none of the 2002 Series Warrants have been exercised. The 2002 Series
Warrants will expire on September 30, 2005.
-22-
ITEM 6. SELECTED FINANCIAL DATA
================================
The following selected financial data is derived from the Company's audited
financial statements, and should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 7 of this Form 10-K and the financial statements and notes
thereto included in Item 8 of this Form 10-K.
Statements of Operations Data
Years ended December 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
Sales $ 2,975 $ 4,075 $ 5,900 $ 3,823 $ 4,161
Operating Expenses:
Cost of sales 952 718 647 103 454
Selling, marketing and
customer support 1,625 2,002 1,128 734 713
Research and development 1,074 1,899 1,595 1,508 1,479
General and administrative 1,544 1,645 1,936 1,239 1,854
Provision for doubtful accounts 337 287 59 42
Impairment loss 1224 3,112 - - 3,526
Compensation - stock options - - - 12 20
------- ------- ------- ------- -------
Total operating expenses 6,756 9,663 5,365 3,638 8,046
------- ------- ------- ------- -------
Income (loss) from operations (3,781) (5,588) 535 215 (3,885)
------- ------- ------- ------- -------
Net Income (loss) $(4,055) $(5,620) $ 513 $ 102 $(4,070)
======= ======= ======= ======= =======
Income (Loss) per
common share $ (.17) $ (.23) $ .02 $ .01 $ (.17)
======= ======= ======= ======= =======
Dividends per common share - - - - -
======= ======= ======= ======= =======
Balance Sheet Data
Current assets $ 2,103 $ 4,479 $ 6,040 $ 2,590 $ 2,839
Current liabilities 2,225 3,171 779 883 398
Working capital (1) (122) 1,308 5,261 1,707 2,441
Total assets 2,968 6,854 13,126 9,374 3,762
Total long-term debt 1,556 439 2,704 2,681 2,691
Stockholders' equity (deficit) (888) 3,020 9,643 5,810 673
- --------------------------------------------------------------------------------------------------
(1) Working capital deficit includes a $500,000 note payable to Tsunami
Network Partners Corporation. Subsequently on March 31, 2003 the Company
converted the note into 1,474,911 restricted shares of common stock thus freeing
up approximately $500,000 of additional working capital to fund operations. See
Part II. Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. Liquidity and Capital Resources.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
=====================
Following is a discussion and explanation of significant financial data,
which is presented to help the reader better understand the results of the
Company's financial performance for 2002. The information includes discussions
of revenues, expenses, liquidity, capital resources and other significant items.
Generally the information is presented in a three year comparison format using
2002, 2001 and 2000 data.
-23-
Statements of Operations Summary
The following table sets forth the percentage of costs and expenses to net
revenues derived from the Company's Statements of Operations for each of the
three preceding fiscal years.
Year Ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Net sales 100% 100% 100%
---- ---- ----
Operating expenses:
Cost of sales 32% 18% 11%
Selling, marketing and customer support 55 49 19
Research and development 36 47 27
General and administrative 52 40 33
Provision for doubtful accounts 11 7 1
Impairment Loss 41 76 -
-- -- --
Total operating expenses 227 237 91
--- --- --
Income (loss) from operations (127) (137) 9
Interest income, net of expense (8) (1) (1)
Other income (expenses) (1) 1 1
-- -- --
Net Income (loss) (136)% (138)% 9%
=== === ==
Significant Accounting Policies
Management's discussion and analysis of the Company's financial condition
and results are based upon financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The following accounting policies significantly affect the way the
financial statements are prepared.
Revenue Recognition
The Company derives revenues from three primary sources: 1) sales of
software, 2) sales of application engineering services and 3) sales of technical
support services. Software sales are derived from the sale of the Company's
off-the-shelf software packages in the machine control and communications
product lines. Machine control products include items such as CODE 6.0(TM),
CIMControl(TM), and CIMulation(TM). Communications products include items such
as CIM300(TM), GEM Host Manager(TM) and CIMConnect(TM). Application engineering
sales are derived from the sale of services to design, develop and implement
custom software applications. Support sales are fixed annual contracts that
provide access to technical support personnel for help in the operation or
de-bugging of our software products.
Before the Company will recognize any revenue, the following criteria must
be met:
1) Evidence of a financial arrangement or agreement must exist between the
Company and its customer. Purchase orders and signed OEM contracts are two
examples of items accepted by the Company to meet this criterion.
2) Delivery of the products or services must have occurred. The Company
treats either physical or electronic delivery as having met this criterion.
-24-
3) The price of the products or services is fixed and measurable. It is the
policy of the Company to provide its customers a 30-day right to return.
However, because the amount of returns has been insignificant, the Company
recognizes revenue immediately upon the sale. If the number of returns was to
increase substantially, the Company would establish a reserve based on a
percentage of sales to account for any such returns.
4) Collectibility of the sale is reasonably assured, receipt is probable.
Collectibility of a sale is determined on customer by customer basis. Typically
the Company sells to large corporations which have demonstrated an ability to
pay. If it is determined that a customer may not have the ability to pay,
revenue is deferred until the payment is collected.
If a sale involves a bundled package of software, support and services at a
discounted price, revenue is allocated to each element based on the respective
list price of each. Assuming all of the above criteria have been met, revenue
from the software portion of the package is recognized immediately. Revenue from
material support contracts is recognized ratably over the term of the support
contract, which is generally 12 months. Revenue from services is recognized as
services are performed. Standard payment terms for sales are net 30 (net 45 - 60
for foreign customers). On occasion extended payment terms will be offered.
Revenues from sales with terms greater than net 90 days are generally recognized
as payments become due.
Allowance for Doubtful Accounts
The Company maintains a reserve for doubtful accounts, which is for
estimated losses resulting from uncollectible accounts receivable. Generally the
Company records an allowance for doubtful accounts based on a percentage of
overall sales. In addition if collectibility becomes doubtful on any receivable,
a reserve is set up for the entire amount.
Net Sales
Net sales for the three fiscal years ended December 31, 2002, 2001, and
2000 were approximately $2,975,000, $4,075,000, and $5,900,000, respectively.
Net sales for 2002 decreased $1,100,000, or 27%, to $2,975,000, from $4,075,000
in 2001. Net revenues for 2001 decreased $1,825,000, or 31%, to $4,075,000, from
$5,900,000 in 2000. These decreases were primarily due to a significant
reduction in the volume of software sales, rather than a reduction in the
selling price of the software.
Sales have been significantly below forecast since the second quarter of
2001, due to a slowdown in the electronics industry. The electronics industry
has been very cyclical in nature with periods of double-digit growth followed by
periods of little or no growth. At the present time, orders for new equipment in
the robot, SMT and semiconductor markets, which would include the runtime
licenses of the Company's software products, remain significantly below prior
periods. Because of this, the Company's software sales consist primarily of
development licenses to OEM customers. As new equipment orders increase, runtime
license revenue is expected to increase. In addition competitive pressures may
also be contributing to the drop in revenues, but this decrease is not
quantifiable.
While the Company cannot predict market conditions for subsequent quarters,
it continues to market its products aggressively in order to broaden its
customer base. Management hopes for, but does not anticipate a significant
increase in sales over the present levels. Unfortunately Management has not seen
any indication that the electronics industry is starting to recover or that
orders for new equipment will increase.
-25-
Net sales for 2002 included approximately $1.36 million of software
revenue, which represents a 54% decrease in software revenues from $2.93 million
in 2001. In addition net sales in 2002 included approximately $960,000 of
application engineering services revenue, which represents a 52% increase in
services revenue from $633,000 in 2001. 2002 net sales also included
approximately $655,000 of support revenue which represents a 29% increase in
support revenue from $507,000 in 2001.
Net sales for 2001 included approximately $2.93 million of software
revenue, which represents a 40% decrease in software revenue from $4.87 million
in 2000. In addition net sales in 2001 included approximately $633,000 of
application engineering services revenue, which represents an 11% increase in
services revenue from $571,000 in 2000. 2001 net sales also included
approximately $507,000 of support revenue, which represents a 10% increase in
support revenue from $459,000 in 2000.
The following table summarizes net revenues by categories, as a percent of
total net revenues:
Year Ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Software revenues 46 72 83
Application revenues 32 16 10
Support/training revenue 22 12 7
Cost of Sales
The Company's cost of sales as a percentage of net sales for the years
ended December 31, 2002, 2001, and 2000 were approximately 32%, 18%, and 11%,
respectively. Cost of sales increased by approximately $234,000 or 33%, to
approximately $952,000 for 2002, from $718,000 for 2001. This increase was
attributable to an increase in the sale of engineering services that were
performed internally. While the Company's focus is on the sale of software
products, it also provides application and integration services to its customers
that want to purchase a complete turnkey system. These services are performed
both internally and externally through resellers and distributors with the costs
related to the sale of services performed through external resources also
accounted for as cost of sales.
Cost of sales increased by approximately $71,000, or 11%, to approximately
$718,000 for 2001, from $647,000 for 2000. This increase was attributable to the
increase in the sale of outside engineering services during that period.
Selling, Marketing and Customer Support
Selling, marketing and customer support expenses decreased $377,000 or 19%,
to $1,625,000 in 2002, from $2,002,000 in 2001. This decrease was due to the
consolidation of operations from the Company's semiconductor division, which was
located in Los Gatos, California into its Salt Lake City, Utah headquarters in
March 2002, and the reduction in the number of sales and marketing personnel.
Selling, marketing and customer support expenses increased $874,000, or
77%, to $2,002,000 in 2001, from $1,128,000 in 2000. This substantial increase
was attributable to the costs the Company incurred to add additional personnel
in each of the selling, marketing and customer support areas during this period.
During this period a new office was established in Europe in October 2001, which
is located in Archamps, France. This office included two personnel, one sales
person who was responsible for direct sales and account management in Europe and
one engineer who was responsible for providing technical support to customers in
Europe. Additionally the Company maintained its office in Los Gatos, California
during 2001. That office included four personnel, including direct sales,
marketing and customer support.
-26-
Selling, marketing and customer support expenses for 2002, 2001, and 2000
reflect the direct payroll and related travel expenses of the Company's sales,
marketing and customer support staff, the development of product brochures and
marketing material, press releases, and the costs related to the Company's
representation at industry trade shows.
Research and Development
Research and development expenses decreased by $825,000, or 43%, to
$1,074,000 in 2002, from $1,899,000 in 2001. These expenses decreased due to the
reduction in the number of technical personnel involved in the development of
new products and maintenance of existing products.
Research and development expenses increased by $304,000, or 19%, to
$1,899,000 in 2001, from $1,595,000 in 2000. These expenses increased due to the
addition of technical personnel that were needed to continue work on the
development of new products and maintenance of existing products during the
period. The Company's efforts to develop its motion control and communications
products for Microsoft WindowsNT/2000 represented the majority of the research
and development expenditures during 2002, 2001 and 2000.
Research and development expenses included only direct costs for wages,
benefits, materials, and education of technical personnel. All indirect costs
such as rents, utilities, depreciation and amortization were reflected in
general and administrative expenses, discussed below.
General and Administrative
General and administrative expenses decreased $101,000, or 6%, to
$1,544,000 in 2002, from $1,645,000 in 2001. Significant cost reductions
resulted from decreases in depreciation, amortization, legal and operating
expenses, as the Company reduced the size of its staff and related operating
expenses.
General and administrative expenses decreased $291,000, or 15%, to
$1,645,000 in 2001, from $1,936,000 in 2000. The majority of this decrease is
due to the reduction in amortization expense of capitalized software costs.
Software development expenses that had been capitalized in 1995, and were being
amortized over a five year period, are now fully amortized. Acquired software
technologies, with a book value of approximately $2,500,000, which were being
amortized over a period of 12 years, were written-off at year end, reducing
future amortization expense by approximately $260,000 annually.
General and administrative costs include all direct costs for
administrative and accounting personnel, all rents and utilities for maintaining
Company offices. These costs also include all indirect costs such as
depreciation of fixed assets and amortization of intangible assets. Depreciation
and amortization expense for 2002 decreased $326,000 or 43%, to $434,000, from
$760,000 in 2001. Depreciation and amortization expense for 2001 decreased
$35,000 or 4%, to $760,000, from $795,000 in 2000. Depreciation and amortization
expense represented 28%, 39% and 40% of all general and administrative expenses
in 2002, 2001 and 2000, respectively.
-27-
Provision for Doubtful Accounts
Expenses related to a provision for doubtful accounts increased $50,000 or
17%, to $337,000 in 2002, from 287,000 in 2001. This increase was attributable
to poor economic conditions worldwide.
Expenses related to a provision for doubtful accounts increased $228,000 or
387%, to $287,000 in 2001, from 59,000 in 2000. This increase was attributable
to poor economic conditions worldwide
Impairment Loss
The Company incurred an impairment loss of $1,224,000 in the fourth quarter
of 2002. This loss consisted of the partial write-off of $1,224,000 of its
intangible asset relating to the SDI technology acquisition of approximately
$2,580,000. Due to poor economic conditions worldwide along with a decrease in
projected future cash flows resulting directly from sales relating to this
technology, management determined that a significant portion of the technology
was not recoverable. This asset, which had been acquired in December 1999, for
710,000 shares of common stock, and approximately $500,000 in cash, is currently
being amortized over a period of 10 years. Based on future sales estimates over
the remaining useful life of this asset, management believes that the Company
has the ability to recover the remaining carrying value of this asset as of
December 31, 2002.
In the fourth quarter of 2001, the Company incurred an impairment loss of
$3,112,000. This loss consisted of the write-off of technology, the write-off of
an investment in the Company's Japanese affiliate, and a reserve for divisional
closing costs, each of which is explained below.
In the fourth quarter of 2001, due to software licensing ownership issues,
low forecasted sales, and the high cost of integrating the AART product into the
Company's CODE products, management determined that it could no longer justify
devoting any additional working capital or resources to the Company's AART
products. Without a plan or the ability to recover its investment in this asset,
its valuation was in question. Therefore the Company wrote-off its remaining
intangible asset related to the AART technology acquisition of approximately
$2,490,000. This asset, which had been acquired in December 1999, for 1,200,000
shares of common stock, minus 400,000 shares that were subsequently returned,
and approximately $326,000 in cash, was being amortized over a period of 12
years. The Company continues to support its present customers, but has no other
plans to market and sell this product.
Due to poor economic conditions worldwide, the Company wrote-off its
investment in its Japanese affiliate, Aries, Inc. Aries is the Company's primary
distributor of its products in the Japanese market. The Company invested
approximately $522,000 in fiscal 2000 by purchasing 600 shares of Aries common
stock through the exchange of accounts receivable from Aries. The Company plans
to continue to work with and sell to Aries in fiscal 2003, and continues to hold
its shares. Should the Company recover any of this investment in the future, an
adjustment will be made to reflect that recovery.
In the fourth quarter 2001, the Company took a one-time charge against
income of approximately $90,000 for anticipated costs related to the closing of
its sales office located in Los Gatos, California. In order to reduce expenses,
management closed the office, which was primarily responsible for the selling
and marketing of the Company's CIM300 software products. The operations were
moved and consolidated into the Company's headquarters in Salt Lake City, Utah.
-28-
Other Income (Expenses)
Interest income decreased by $156,000, or 74%, to $55,000 for 2002, from
$211,000 for 2001. This decrease is a result of reduced cash reserves, which
were used to fund operations. Additionally, the rate of interest earned on cash
reserves decreased due to a drop in market interest rates. All cash reserves are
invested in conservative money market accounts, cash equivalents, and marketable
securities.
Interest income decreased by $11,000, or 5%, to $211,000 for 2001, from
$222,000 for 2000. This resulted from the decrease in the Company's cash
reserves as cash was used to fund operations in the period.
Interest expense increased $29,000, or 11% to $297,000, for 2002. Interest
expense for this period was attributable to the Company's 10% and 12% Senior
Notes. The principal face value balance outstanding on the Senior Notes at
December 31, 2002 was $2,616,000. (See Note 8, Senior Notes Payable, of the
audited financial statements, following in this document.) The increase in
interest expense was due to the additional expense realized from the
amortization of bond discount related to the Warrants issued with the Company's
2001 and 2002 series Senior Notes. (The warrants are discussed above in, Item 5.
Market for Registrant's Common Equity and Related Stockholder Matters, and in
Note 15, Stock Options and Warrants, of the audited financial statements,
following in this document.)
Interest expense remained the same at $268,000 for 2001, compared to
$268,000 for 2000. Interest expense for this period was attributable to the
Company's 10% Senior Notes. The principal face value balance outstanding on the
Senior Notes at December 31, 2001 was $2,681,000, the same as at December 31,
2000. Interest expense on the Senior Notes is accrued monthly and paid
semi-annually on April 1 and October 1.
Compensation - Stock Options
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 Accounting for Stock-Based Compensation (FAS 123).
FAS 123 encourages, but does not require, companies to recognize compensation
expense based on the fair value of grants of stock options and other equity
investments to employees. Although expense recognition for employee stock-based
compensation is not mandatory, FAS 123 requires that companies not adopting must
disclose the pro forma effect on net income and earnings per share. This
information is disclosed in Note 15, Stock Options and Warrants, of the audited
financial statements, following in this document. The Company will continue to
apply prior accounting rules and make pro forma disclosures for stock option
grants to employees.
During 2002, no options were granted for non-employee services and,
accordingly, the Company was not required to record any compensation cost
related to such options.
Liquidity and Capital Resources
A contingent liability that existed as of September 30, 2002, in the form
of redeemable common stock, representing a potential cost to the Company of
$224,000, has been resolved by a Settlement Agreement entered into with Jana
Manley and a Letter of Agreement entered into with Parr Waddoups Brown Gee &
Loveless, attorneys for the Manleys. This contingent liability resulted from the
earlier settlement of litigation with Peter H. Manley and Jana Kay Manley,
plaintiffs, v. Cimetrix, wherein the Company agreed to repurchase up to 80,000
of its own Common Stock shares from the Manleys. (This litigation is discussed
in Part I, Item 3, Legal Proceedings, of the Company's Annual Report on Form
10-K, for the fiscal year ended December 31, 2001.)
-29-
As part of the settlement of the Manley litigation, the Company may have
been required to purchase up to 80,000 shares of Company common stock from the
Manleys at $2.80 per share, or a maximum total repurchase cost of $224,000,
beginning on December 1, 2002. Of this contingent liability, 53,214 shares of
Company common stock were controlled by Jana Manley, which at $2.80 per share
represented a potential repurchase cost of $149,000. The other 26,786 shares of
Company common stock were controlled by the law firm of Parr, Waddoups, Brown,
Gee & Loveless, which represented the Manleys during this litigation, which at
$2.80 per share represented a potential repurchase cost of $75,000. Due to the
Company's low cash balance, it would have been very difficult for the Company to
pay the full redemption amounts in cash to either Jana Manley or the law firm of
Parr, Waddoups, Brown, Gee & Loveless. On December 31, 2002, the Company and
Jana Manley reached agreement that in exchange for surrender and cancellation of
the 53,214 shares of Company common stock controlled by Ms. Manley, the Company
would pay a one time cash payment of $29,000 and deliver a Company 12% Senior
Note due 2005 in the amount of $120,000. All other terms and conditions
contained in the Manley litigation settlement agreement entered into effective
June 26, 2001 remain as stated in that agreement. On January 6, 2003, the
Company also reached an agreement with the law firm of Parr, Waddoups, Brown,
Gee & Loveless providing that in exchange for the surrender and cancellation of
the 26,786 shares of Company common stock owned by the law firm, the Company
would pay a one time cash payment of $41,250 and be released from any further
obligations with respect to the law firm's stock repurchase option.
The Company's future liquidity remains uncertain due to the following:
Approximately $982,000 of the Company's 10% Senior Notes that matured on
September 30, 2002 still remain unpaid. While the Company has entered into
negotiations with the holders of the notes to invest some or all of the amount
due in the Company's new 12% Senior Note offering (See Note 8, Senior Notes
Payable, of the audited financial statements following in this document), the
final disposition of these notes has not been determined. Of the $982,000
outstanding, $500,000 has been presented to the Company for redemption. Because
the Company has not paid the $500,000, the holder of the notes, Puma Foundation,
Ltd., filed a complaint against the Company on January 16, 2003, in the United
States District Court, Middle District of Florida, Tampa Division, Case Number
8:03-CV-85-T-23TGW. In the complaint Puma Foundation, Ltd., is seeking payment
of the $500,000 note plus interest, attorneys fees and costs. This complaint is
discussed in Part I, Item 3, Legal Proceedings, earlier in this document.
The remaining $482,000 of Senior Notes due September 30, 2002, have not
been presented for payment because they are presently under the jurisdiction of
a Receivership established by the United States District Court for the District
of Columbia in 2000 in the case of The Securities and Exchange Commission v.
Paul A. Bilzerian et al. (Civil Action No. 89-1854 (SSH)). As requested by the
Company, the Receiver, appointed by the United States District Court for the
District of Columbia has filed with the court a motion to accept the Company's
proposal to receive 50% payment in cash with respect to two Senior Notes and to
roll over the other 50% into new Cimetrix 12% Senior Notes due 2005. One is a
$110,000 note owned by the Receiver, the other is a $372,000 note under the
Receiver's control. Consequently, with respect to these two notes totaling
$482,000, the Company expects to pay $241,000 in cash and expects to issue new
notes for the other $241,000, thus freeing up an additional $241,000 of working
capital to fund operations.
While management believes that the Company does have sufficient working
capital to maintain its current level of operations for fiscal 2003, it does not
have sufficient capital to maintain its current level of operations and also
retire the remaining balance of $982,000 of its 10% Senior Notes. Payment of
this debt would consume a majority of the Company's cash and it may not be able
to continue operations.
-30-
The Company issued $1,503,000 of 12% Senior Notes due September 30, 2005
through its private placement offering. Of this amount, $395,000 was received in
cash from investors and $1,108,000 was received through the exchange of 10%
Senior Notes due September 30, 2002 and 10% Senior Notes due September 30, 2004.
It is critical to the Company's cash flow that the Company succeed in
negotiating the remaining $982,000 balance of its 10% Senior Notes. This would
free up working capital that is needed to fund operations if the Company's
operating results do not improve.
At December 31, 2002, the Company had cash and other current assets of
$2,103,000, and current liabilities of $2,225,000, resulting in a working
capital deficit of $122,000, as compared to working capital of $1,308,000 at
December 31, 2001. This decrease in working capital of $1,186,000 was due to the
use of working capital to fund operations due to operating losses as well as the
payment of $580,000 in settlement of Senior Notes.
On September 30, 2002, the Company entered into a convertible note purchase
agreement in the amount of $500,000, with Tsunami Network Partners Corporation,
a Japanese corporation and on October 7, 2002, the Company received the
$500,000. The terms of the agreement provided for a short- term loan with a
principal amount of $500,000 at a rate of 6 3/4 % annum, with principal and
interest that came due on March 31, 2003. The conversion feature of the note
provided that the note would convert into fully paid, nonassessable, restricted
shares of common stock at a conversion price of $0.35 per share. On March 31,
2003 the Company converted the note into 1,474,911 restricted shares of common
stock thus freeing up approximately $500,000 of additional working capital to
fund operations.
Future liquidity is also dependent upon the Company's ability to generate
cash flow from operations. In 2002 and 2001, the Company generated an operating
deficit, making its liquidity dependent on obtaining external financing through
debt or equity securities. The current operating deficit makes obtaining working
capital through traditional bank loans or credit lines more difficult; however
management continues to explore options to raise working capital.
Cash used in operating activities for the twelve months ended December 31,
2002 was $1,269,000 compared to cash used in operating activities of $971,000,
for the same period in 2001. The negative cash flow resulted primarily from the
net loss from operations of $4,055,000. The Company's trade receivables also
decreased by $1,228,000 to $484,000 for the twelve months ended December 31,
2002, from $1,712,000 at December 31, 2001, due to the collection of such
receivables, low sales volume, and additional reserves for doubtful accounts.
Cash provided by investing activities for the period ended December 31,
2002 was $1,297,000, compared to cash used in investing activities of $1,737,000
for the same period in 2001. This increase resulted from the sale of marketable
securities.
The Company has not been adversely affected by inflation but does believe
that technological advances and competition within the software industry have
generally caused prices of the products sold by the Company to decline. The
Company's software represents a small portion of our customer's product costs
and therefore management remains optimistic that demand for the Company's
products will continue. However, there are continued economic risks inherent in
foreign trade, because sales to foreign customers accounted for 36%, 41%, and
40% of the Company's net sales for 2002, 2001, and 2000, respectively.
-31-
Factors Affecting Future Results
Revenues for 2002 decreased significantly compared to the prior year,
coming in below the Company's target revenue. The economic slowdown continues
and has led to significant delays in the placement of orders by the Company's
OEM customers. As the end-user customers have cut back on capital equipment
expenditures, the Company's OEM customers have also cut back on their orders for
the Company's software products. Because of this, Management continues to invest
heavily in sales and marketing efforts in order to expand its customer base.
Management remains hopeful that these new customers will provide the needed
revenues to sustain operations.
Subsequent Events
See Item 3. Legal Proceedings and see Note 20 of the Consolidated Financial
Statements.
Contacting Cimetrix
In an effort to make information available to shareholders and customers,
the Company has established its World Wide Web site www.cimetrix.com. All
shareholders or other interested parties are encouraged to access the Company's
web site before contacting the Company directly. We are committed to keep the
information on this site up to date. The Company's web site contains links to
the Company's public filings with the SEC, press releases, detailed product
information, customer information, and employment opportunities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
====================================================================
The Company has no activities in derivative financial or commodity
instruments. The Company's exposure to market risks, (i.e. interest rate risk,
foreign currency exchange rate risk, equity price risk) through other financial
instruments, including cash equivalents, accounts receivable, lines of credit,
is not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
====================================================
The Financial Statements of the Company called for by this item are
contained in a separate section of this report. See "Index to Consolidated
Financial Statements" on Page 42.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
=====================
None
-32-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
===========================================================
Information regarding Directors and regarding disclosure of delinquent Form
3,4,and 5 filers is incorporated by reference from the information in the
Company's Proxy Statement for the 2003 Annual Meeting of Stockholders, which the
Company will file with the Securities and Exchange Commission within 120 days of
the end of the fiscal year to which this report relates. Information regarding
Executive Officers of the Company is contained in Part 1 of this report.
ITEM 11. EXECUTIVE COMPENSATION
===============================
Incorporated by reference from the information in the Company's Proxy
Statement for the 2003 Annual Meeting of Stockholders, which the Company will
file with the Securities and Exchange Commission within 120 days of the end of
the fiscal year to which this report relates.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
=======================================================================
Incorporated by reference from the information in the Company's Proxy
Statement for the 2003 Annual Meeting of Stockholders, which the Company will
file with the Securities and Exchange Commission within 120 days of the end of
the fiscal year to which this report relates.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
=======================================================
Incorporated by reference from the information in the Company's Proxy
Statement for the 2003 Annual Meeting of Stockholders, which the Company will
file with the Securities and Exchange Commission within 120 days of the end of
the fiscal year to which this report relates.
ITEM 14. CONTROLS AND PROCEDURES
================================
(a) Evaluation of disclosure controls and procedures.
Based on their evaluations as of a date within 90 days of the filing date
of this report, the principal executive officer and principal financial officer
of the Company have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act) are effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
-33-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
========
(a) Financial Statements and Schedules
The independent auditors' report with respect to the above-listed financial
statements appears on page 43 of this report.
The financial statements of Cimetrix as set forth under Item 8 are filed as
part of this report and appear on page 45 of this report.
Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise included in the
financial statements and notes thereto.
(b) Reports on Form 8-K
On November 19, 2002, the Company filed a Form 8-K, including Item 5. Other
Events, announcing the appointment of Joe K. Johnson as Interim Chief
Financial Officer. Mr. Johnson has served as director of the Company since
April 2001, and remains in that capacity. Mr. Johnson succeeds Riley G.
Astill who left the Company to pursue other opportunities. Mr. Johnson will
serve as Interim Chief Financial Officer until further notice.
Subsequent to year end, on February 18, 2003, the Company filed a Form 8-K
including Item 5. Other Events, addressing two items relating to the future
liquidity of the company namely (1) $982,000 of the Company's 10% Senior
Notes that matured on September 30, 2002 and (2) the contingent liability
which existed as of December 31, 2002 with respect to the settlement of the
Manley litigation (see Liquidity and Capital Resources under Part II. Item
7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations).
-34-
(c) Exhibit listing
Exhibit No. Description
3.1 Articles of Incorporation (1)
3.2 Articles of Merger of Cimetrix (USA) Incorporated with
Cimetrix Incorporated (2)
3.3 Amended Bylaws
10.1 Lease with Capitol Properties Four, L.C. (3)
10.2 1998 Incentive Stock Option Plan (4)
10.3 Security Agreement with Michael and Barbara Feaster (5)
10.4 Employment Agreement with Robert H. Reback, President and
Chief Executive Officer (6)
10.5 Employment Agreement with David P. Faulkner, Executive
Vice President and Managing Director of Machine
Control Products (6)
10.6 Employment Agreement with Michael D. Feaster, Vice
President of Software
Development (6)
10.7 Employment Agreement with Steven K. Sorensen, Vice
President and Chief Technical Officer (6)
10.8 Amendment 1 to 1998 Incentive Stock Option Plan (7)
10.9 Amendment 2 to 1998 Incentive Stock Option Plan (8)
10.10 Form of Indemnification Agreement with directors and
officers (9)
10.11 Settlement Agreement and Mutual Release with Peter Manley
and Jana Manley (9)
10.12 Convertible Note Purchase Agreement and Convertible Note
with Tsunami Network Partners Corporation (10)
--------------------------------------
(1) Incorporated by reference to Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
(2) Incorporated by reference to
Quarterly Report on Form 10-QSB for the quarter ended September 30, 1995.
(3) Incorporated by reference from the Registration Statement on Form
S-2, File No. 333-60, as filed on July 2, 1997.
(4) Incorporated by reference to Proxy Statement on Schedule 14A dated
April 20, 1998.
(5) Incorporated by reference to Annual Report on Form 10-K for
the fiscal year ended December 31,2000, filed April 2, 2001.
(6) Incorporated by reference to Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002, filed May 15, 2002.
(7) Incorporated by reference to Proxy Statement on Schedule 14A dated
April 30, 2001, as filed on May 14, 2001.
(8) Incorporated by reference to Proxy Statement on Schedule 14A dated
April 30, 2002, as filed on April 30, 2002.
(9) Incorporated by reference to Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002, as filed on August 14, 2002.
(10) Incorporated by reference to Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002, as filed on November 14, 2002.
-35-
SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized,
on the 31st day of March, 2003.
REGISTRANT
CIMETRIX INCORPORATED
By: /S/ Robert H. Reback
--------------------
Robert H. Reback
President and Chief Executive Officer
(Principal Executive Officer)
By: /S/ Joe K. Johnson
--------------------
Joe K. Johnson
Interim Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/S/Robert H.Reback President and Chief Executive Officer March 31, 2003
- -------------------- (Principal Executive Officer, Director)
Robert H. Reback
/S/Joe K.Johnson Interim Chief Financial Officer March 31, 2003
- ------------------ (Principal Financial and Accounting
Joe K.Johnson Officer,Director)
/S/Randall A. Mackey Chairman of the Board and Director March 31, 2003
- ---------------------
Randall A. Mackey
/S/DR.Lowell K.Anderson Director March 31, 2003
- ------------------------
Lowell K. Anderson
/S/Richard Gommermann Director March 31, 2003
- ----------------------
Richard Gommermann
-36-
CERTIFICATIONS
==============
I, Robert H. Reback, certify that:
1. I have reviewed this annual report on Form 10-K of Cimetrix Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/S/ Robert H. Reback
- --------------------
Robert H. Reback
President and Chief Executive Officer
-37-
I, Joe K. Johnson, certify that:
1. I have reviewed this annual report on Form 10-K of Cimetrix Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/S/ Joe K. Johnson
- ------------------
Joe K. Johnson
Interim Chief Financial Officer
(Principal Financial and Accounting Officer)
-38-
EXHIBIT 3 TO FORM 10-K
(By-laws, Articles of Incorporation)
Exhibit No. Page No. Description
3.1 * Articles of Incorporation
3.2 * Articles of Merger of Cimetrix (USA) Incorporated
with Cimetrix Incorporated
3.3 * Amended Bylaws
- --------------------------------------------------------------------------------
*Incorporated by reference (See exhibit listing above in ITEM 15. Exhibits,
Financial Schedules, and Reports on Form 8-K.)
-39-
EXHIBIT 10 TO FORM 10-K
(Material Contracts)
Exhibit No. Page No. Description
10.1 * Lease with Capitol Properties Four, L.C.
10.2 * 1998 Incentive Stock Option Plan
10.3 * Security Agreement with Michael and Barbara Feaster
10.4 * Employment Agreement with Robert H. Reback, President
and Chief Executive Officer
10.5 * Employment Agreement with David P. Faulkner, Executive
Vice President and Managing Director of
Machine Control Products
10.6 * Employment Agreement with Michael D. Feaster, Vice
President of Software Development
10.7 * Employment Agreement with Steven K. Sorensen, Vice
President and Chief Technical Officer
10.8 * Amendment 1 to 1998 Incentive Stock Option Plan
10.9 * Amendment 2 to 1998 Incentive Stock Option Plan
10.10 * Form of Indemnification Agreement with directors and
officers
10.11 * Settlement Agreement and Mutual Release with Peter
Manley and Jana Manley
10.12 * Convertible Note Purchase Agreement and Convertible Note
with Tsunami Network Partners Corporation
- --------------------------------------------------------------------------------
*Incorporated by reference (See exhibit listing above in ITEM 15. Exhibits,
Financial Schedules, and Reports on Form 8-K.)
-40-
Consolidated Financial Statements
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
F-1
-41-
CIMETRIX INCORPORATED AND SUBSIDIARY
Index to Consolidated Financial Statements
Page
Independent auditors' report F-3
Consolidated balance sheet F-5
Consolidated statement of operations F-6
Consolidated statement of stockholders' equity F-7
Consolidated statement of cash flows F-9
Notes to consolidated financial statements F-10
- --------------------------------------------------------------------------------
F-2
-42-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Cimetrix Incorporated
We have audited the consolidated balance sheet of Cimetrix Incorporated as
of December 31, 2002 and 2001, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the years ended December
31, 2002, 2001 and 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cimetrix
Incorporated as of December 31, 2002 and 2001, and the results of its operations
and its cash flows for the years ended December 31, 2002, 2001 and 2000 in
conformity with accounting principles generally accepted in the United States of
America.
- --------------------------------------------------------------------------------
F-3
-43-
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2, the
Company has incurred significant losses, and has been unable to generate cash
flows from operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's 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.
Salt Lake City, Utah
February 7, 2003
- --------------------------------------------------------------------------------
F-4
-44-
CIMETRIX INCORPORATED
Consolidated Balance Sheet
(In thousands, except share amounts)
December 31,
- --------------------------------------------------------------------------------
Assets 2002 2001
---------------------------
Current assets:
Cash and cash equivalents $ 1,057 $ 743
Marketable securities 396 1,785
Receivables, net 484 1,712
Inventories 87 156
Prepaid expenses and other current assets 79 83
---------------------------
Total current assets 2,103 4,479
Property and equipment, net 181 230
Technology, net 632 2,120
Other assets 52 25
---------------------------
$ 2,968 $ 6,854
---------------------------
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 172 $ 262
Accrued expenses 193 504
Deferred revenue 378 181
Note payable 500 -
Current portion of senior notes payable 982 2,224
--------------------------
Total current liabilities 2,225 3,171
Senior notes payable 1,556 439
--------------------------
Total liabilities 3,781 3,610
--------------------------
Commitments and contingencies
Redeemable common stock 75 224
Stockholders' deficit:
Common stock, $.0001 par value, 100,000,000 shares
authorized; 24,089,833 and 24,457,690 shares
issued, 2002 and 2001, respectively 2 2
Additional paid-in capital 27,322 27,926
Treasury stock, 25,000 and 431,722 shares at cost,
2002 and 2001, respectively (49) (800)
Accumulated deficit (28,163) (24,108)
--------------------------
Total stockholders' deficit: (888) 3,020
--------------------------
$ 2,968 $ 6,854
--------------------------
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-5
-45-
CIMETRIX INCORPORATED
Consolidated Statement of Operations
(In thousands, except share amounts)
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------
Net sales $ 2,551 $ 3,692 $ 5,576
Net related party sales 424 383 324
------------------------------------------------
2,975 4,075 5,900
------------------------------------------------
Operating expenses:
Cost of sales 952 718 647
General and administrative 1,544 1,645 1,936
Selling, marketing and customer support 1,625 2,002 1,128
Research and development 1,074 1,899 1,595
Provision for doubtful accounts 337 287 59
Impairment loss 1,224 3,112 -
------------------------------------------------
6,756 9,663 5,365
------------------------------------------------
(Loss) income from operations (3,781) (5,588) 535
------------------------------------------------
Other income (expense):
Interest income 55 211 222
Interest expense (297) (268) (268)
Other (expense) income (29) 25 29
------------------------------------------------
(271) (32) (17)
------------------------------------------------
(Loss) income before income taxes (4,052) (5,620) 518
Provision for income taxes (3) - (5)
------------------------------------------------
Net (loss) income $ (4,055) $ (5,620) $ 513
------------------------------------------------
Net (loss) income per common share-
basic and diluted (see note 15) $ (0.17) $ (0.23) $ 0.02
------------------------------------------------
- -----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-6
-46-
CIMETRIX INCORPORATED
Consolidated Statement of Stockholders' Deficit
(In thousands, except share amounts)
Years Ended December 31, 2002, 2001, 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury Stock Common Stock Additional Accumu-
--------------- ------------------ Paid-in lated
Shares Amount Shares Amount Capital Deficit Total
-------------------------------------------------------------------------------
Balance, January 1, 2000 6,722 $ (1) 23,125,690 $ 2 $ 24,810 $ (19,001) $ 5,810
Common stock issued for cash - - 1,300,000 - 3,244 - 3,244
Common stock options exercised - - 31,000 - 76 - 76
Net income - - - - - 513 513
-------------------------------------------------------------------------------
Balance, December 31, 2000 6,722 (1) 24,456,690 2 28,130 (18,488) 9,643
Common stock issued for services - - 1,000 - 2 - 2
Common stock returned to treasury from
lawsuit settlement 400,000 (752) - - - - (752)
Reclassification of common stock to redeemable
common stock due to settlement of lawsuit
(see note 7) - - - - (224) - (224)
Issuance of common stock warrants attached to
senior notes - - - - 18 - 18
Purchase of treasury shares 25,000 (47) - - - - (47)
Net loss - - - - - (5,620) (5,620)
-------------------------------------------------------------------------------
Balance, December 31, 2001 431,722 (800) 24,457,690 2 27,926 (24,108) 3,020
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-7
-47-
CIMETRIX INCORPORATED
Consolidated Statement of Stockholders' Deficit
(In thousands, except share amounts)
Years Ended December 31, 2002, 2001, 2000
(Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury Stock Common Stock Additional Accumu-
--------------- ------------------ Paid-in lated
Shares Amount Shares Amount Capital Deficit Total
-------------------------------------------------------------------------------
Common stock issued for services - - 92,079 - 22 - 22
Options and warrants issued for services - - - - 43 - 43
Issuance of common stock warrants attached to
senior notes - - - - 82 - 82
Purchase of treasury shares 53,214 (149) - - 149 - -
Cancellation of treasury shares (459,936) 900 (459,936) - (900) - -
Net loss - - - - - (4,055) (4,055)
-------------------------------------------------------------------------------
Balance, December 31, 2002 25,000 $ (49) 24,089,833 $ 2 $ 27,322 (28,163) $ (888)
-------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-8
-48-
<page>
CIMETRIX INCORPORATED
Consolidated Statement of Cash Flows
(In thousands, except share amounts)
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------------------
Cash flows from operating activities:
Net (loss) income $ (4,055) $ (5,620) $ 513
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Amortization and depreciation 434 760 795
Provison for doubtful accounts 337 (46) 97
Loss on disposition of assets - 5 8
Stock compensation expense 22 2 -
Option and warrant compensation expense 43 - -
Impairment loss on technology 1,224 2,490 -
Impairment on equity investment - 522 -
Interest expense from bond discount 22 - -
(Increase) decrease in:
Receivables 891 699 (1,022)
Inventories 69 (35) (19)
Prepaid expenses and other current assets 4 (54) (23)
Other assets (56) 58 (13)
Increase (decrease) in:
Accounts payable (90) 138 30
Accrued expenses (311) (28) (111)
Deferred revenue 197 138 (27)
-------------------------------------------
Net cash (used in) provided by operating activities (1,269) (971) 228
-------------------------------------------
Cash flows from investing activities:
Sale (purchase) of marketable securities 1,389 (1,785) -
Purchase of property and equipment - (162) (117)
Payment (issuance) of note receivable - related party - 416 (416)
Increase in other assets - - (478)
Purchase of technology (92) (217) (56)
Proceeds from disposal of property - 11 2
-------------------------------------------
Net cash provided by (used in) investing activities 1,297 (1,737) (1,065)
-------------------------------------------
Cash flows from financing activities:
Proceeds from current note payable 500 - -
Proceeds from issuance of common stock - - 3,320
Proceeds from long-term debt 395 - -
Payments of long-term debt (580) (27) -
Retirement of common stock (29) - -
Purchase of treasury stock - (47) -
-------------------------------------------
Net cash provided by (used in) financing activities 286 (74) 3,320
-------------------------------------------
Net increase (decrease) in cash and cash equivalents 314 (2,782) 2,483
Cash and cash equivalents at beginning of year 743 3,525 1,042
-------------------------------------------
Cash and cash equivalents at end of year $ 1,057 $ 743 $ 3,525
-------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-9
-49-
<page>
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Organization
Cimetrix Incorporated (Cimetrix or the Company) is primarily engaged
in the development and sale of open architecture, standards-based,
personal computer software for controlling machine tools, robots,
electronic equipment, communication products that allow communication
between equipment on the factory floor and host systems, and
semiconductor connectivity products that connect new semiconductor
tools to each other and host systems.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of trade receivables.
In the normal course of business, the Company provides credit terms to
its customers. Accordingly, the Company performs ongoing credit
evaluations of its customers and maintains allowances for possible
losses which, when realized, have been within the range of
management's expectations.
The Company maintains its cash in bank deposit accounts and brokerage
investment accounts. At times, the bank deposits may exceed federally
insured limits and the brokerage investment accounts are not insured.
The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk in its cash
deposits.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include those of the Company and
its wholly owned subsidiary. All intercompany accounts and
transactions have been eliminated in consolidation.
- --------------------------------------------------------------------------------
F-10
-50-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies (Continued)
Cash Equivalents
For purposes of the statement of cash flows, cash includes all cash
and investments with original maturities to the Company of three
months or less.
Marketable Securities
The Company classifies its marketable debt and equity securities as
"held to maturity" if it has the positive intent and ability to hold
the securities to maturity. All other marketable debt and equity
securities are classified as "available for sale." Securities
classified as "available for sale" are carried in the financial
statements at fair value. Realized gains and losses, determined using
the specific identification method, are included in earnings;
unrealized holding gains and losses are reported as accumulated other
comprehensive income which is a separate component of stockholders'
equity. Securities classified as held to maturity are carried at
amortized cost.
For both categories of securities, declines in fair value below
amortized cost that are other than temporary are included in earnings.
At December 31, 2002 and 2001 the Company had an investment in a
mutual fund that was classified as a marketable security "Available
for Sale." The fair market value of the Company's investment at
December 31, 2002 and 2001 was $396 and $1,785, respectively,which
also was the cost basis of the investment. Because the fair market
value and cost of the investment were the same, no unrealized holding
gain or loss has been recorded as a separate component of
stockholders' equity.
Inventories
Inventories consist of finished goods and are recorded at the lower of
cost or market, cost being determined on a first-in, first-out (FIFO)
method.
- --------------------------------------------------------------------------------
F-11
-51-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies (Continued)
Property and Equipment
Property and equipment are recorded at cost, less accumulated
depreciation. Depreciation and amortization on property and equipment
is determined using the straight-line method over the estimated useful
lives of the assets or terms of the lease. Expenditures for
maintenance and repairs are expensed when incurred and betterments are
capitalized. Gains and losses on sale of property and equipment are
reflected in operations.
Software Development Costs
Certain software development costs are capitalized when incurred.
Capitalization of software development costs begins upon the
establishment of technological feasibility. Costs incurred prior to
the establishment of technological feasibility are expensed as
incurred. The Company also expenses hardware design and prototype
expenses as incurred as research and development costs. The
establishment of technological feasibility and the ongoing assessment
of recoverability of capitalized software development costs requires
considerable judgment by management with respect to certain external
factors, including, but not limited to, technological feasibility,
anticipated future gross revenues, estimated economic life and changes
in software and hardware technologies.
Amortization of capitalized software development costs is provided on
a product-by-product basis at the greater of the amount computed using
(a) the ratio of current gross revenues for a product to the total of
current and anticipated future gross revenues or (b) the straight-line
method over the remaining estimated economic life of the product.
Software costs are carried at the unamortized cost or net realizable
value. Net realizable value is reviewed on an annual basis after
assessing potential sales of the product in that the unamortized
capitalized cost relating to each product is compared to the net
realizable value of that product and any excess is written off.
Technology
Technology consists of the costs to obtain the Company's AART and SDI
SECS/GEM technology (see Note 5). The technology is being amortized on
the straight-line method over ten years.
- --------------------------------------------------------------------------------
F-12
-52-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies (Continued)
Patents and Copyrights
The Company has obtained a patent related to certain technology. In
addition, the Company has registered much of its software system
products with the Copyright Office of the United States, and will
continue to timely register any updates to current products or any new
products. Generally, other than the patent and the copyright
registrations, the Company relies on confidentiality and nondisclosure
agreements with its employees and customers, appropriate security
measures, and the encoding of its software in order to protect the
proprietary nature of its technology. No cost has been capitalized
with respect to the patent.
Revenue Recognition
The software component of the Company's products is an integral part
of its functionality. As such, the Company applies the provisions of
the American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" as
modified by SOP 98-9.
The Company's products are fully functional at the time of shipment.
The software components of the Company's products do not require
significant production, modification or customization. As such,
revenue from product sales is recognized upon shipment provided that
(1) a purchase order has been received or a contract has been
executed; (2) title has transferred; (3) the fee is fixed and
determinable; and (4) collectibility is deemed probable.
The Company also may provide application, training, and support
services to its customers. Revenue related to services is recognized
as services are performed if there is not an extended contract related
to such services. If the services are provided pursuant to a contract
that extends over a period of time, the revenue from services is
recorded ratably over the contract period. If the service contract is
sold in connection with the sale of software, the portion of the sale
related to the service contract, which is determined based on the
sales price of such contract on a stand-alone basis, is deferred and
recognized ratably over the contract term.
- --------------------------------------------------------------------------------
F-13
-53-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies (Continued)
Income Taxes
Deferred income taxes are provided in amounts sufficient to give
effect to temporary differences between financial and tax reporting,
principally related to depreciation, asset impairment, and accrued
liabilities.
Stock-Based Compensation
At December 31, 2002, the Company has stock-based employee
compensation plans, which are described more fully in Note 15. The
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations, and has adopted the
disclosure-only provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized in the financial
statements, as all options granted under those plans had an exercise
price equal to or greater than the market value of the underlying
common stock on the date of grant. Had compensation expense for the
Company's stock options been determined based on the fair value at the
grant date consistent with the provisions of SFAS No. 123, the
Company's results of operations would have been reduced to the pro
forma amounts indicated below:
Years Ended
December 31,
-------------------------------------
2002 2001 2000
-------------------------------------
Net (loss) income as reported $ (4,055) $ (5,620) $ 513
Deduct:
Total stock-based employee
compensation expense
determined under fair value
based method for all awards (706) (649) (307)
-------------------------------------
Net (loss) income pro forma $ (4,761) $ (6,269) $ 206
-------------------------------------
Earnings per share:
Basic - as reported $ (.17) $ (.23) $ .02
-------------------------------------
Basic - pro forma $ (.19) $ (.26) $ .01
-------------------------------------
Diluted - as reported $ (.17) $ (.23) $ .02
-------------------------------------
Diluted - pro forma $ (.19) $ (.26) $ .01
-------------------------------------
- --------------------------------------------------------------------------------
F-14
-54-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies (Continued)
Stock-Based Compensation - Continued
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
December 31,
------------------------------------------
2002 2001 2000
------------------------------------------
Expected dividend yield $ - $ - $ -
Expected stock price
volatility 99% 102% 105%
Risk-free interest rate 4.0% 4.0% 6.0%
Expected life of options 5 years 5 years 5 years
------------------------------------------
The weighted average fair value of options granted during 2002, 2001,
and 2000, was $.14, $.32, and $2.23, respectively.
(Loss) Earnings Per Share
The computation of basic (loss) earnings per common share is based on
the weighted average number of shares outstanding during each year.
The computation of diluted earnings per common share is based on the
weighted average number of shares outstanding during the year plus the
common stock equivalents which would arise from the exercise of stock
options and warrants outstanding using the treasury stock method and
the average market price per share during the year. Options and
warrants to purchase 4,754,750 and 5,114,250 shares of common stock at
prices ranging from $.35 to $3.50 per share were outstanding at
December 31, 2002 and 2001, respectively. At December 31, 2002 and
2001, common stock equivalents were not included in the diluted
earnings (loss) per share calculation because the effect would have
been antidilutive. At December 31, 2000, 461,000 common stock
equivalents were included in the diluted earning per share
calculation.
- --------------------------------------------------------------------------------
F-15
-55-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
2. Going Concern
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Historically, the Company has not demonstrated the ability to generate
sufficient cash flows from operations to satisfy their liabilities and
sustain operations and the Company has incurred significant losses.
These factors raise substantial doubt about the Company's ability to
continue as a going concern.
The Company's continuation as a going concern is dependent on its
ability to generate sufficient income and cash flow to meet its
obligations on a timely basis and to obtain additional financing as
may be required. The Company is actively seeking options to obtain
additional capital and financing. There is no assurance the Company
will be successful in its efforts.
3. Receivables
December 31,
-----------------------------------
2002 2001
-----------------------------------
Receivables:
Trade receivables $ 727 $ 1,828
Less allowance for doubtful
accounts (243) (116)
------------------------------------
$ 484 $ 1,712
------------------------------------
- --------------------------------------------------------------------------------
F-16
-56-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
4. Property and Equipment
Property and equipment consists of the following:
December 31,
-----------------------------------
2002 2001
-----------------------------------
Software development costs $ 464 $ 464
Equipment 482 482
Office equipment and software 458 368
Furniture and fixtures 183 181
Leasehold improvements 83 83
-----------------------------------
1,670 1,578
Accumulated depreciation and
amortization (1,489) (1,348)
-----------------------------------
-----------------------------------
$ 181 $ 230
-----------------------------------
5. Technology
SDI SECS/GEM
During the year ended December 31, 1999, the Company purchased all
rights, title, interest, and benefit in and to the technology that is
referred to as the sdiStationTM. This technology is used in the
semiconductor and electronics industries.
During the fourth quarter 2002, due to decreased projected future cash
flows relating to this technology, management determined that a
significant portion of the technology was not recoverable, and
accordingly has recorded an impairment loss of $1,224.
At December 31, 2002 and 2001, the net book value of the sdiStationTM
technology was $632 and $2,120, respectively.
- --------------------------------------------------------------------------------
F-17
-57-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
5. Technology (Continued)
AART
During the year ended December 31, 1999, the Company purchased
technology that is referred to as AART(TM). This technology uses a
component-based approach to control machines using industry standard
languages. When combined with the Company's other products, the
combined product line offers an integrated complete solution for
building component-based workcells using open software standards. The
Company purchased all rights, title, interest, and benefit in and to
the technology for 1,200,000 shares of restricted common stock of the
Company valued at $3,450 plus cash of $327.
Due to certain disputes regarding the technology acquired, the Company
entered into litigation regarding the purchase price of such
technology. In February 2001, the Company settled all litigation
related to the acquisition of the technology through the return of
400,000 of the original 1,200,000 shares issued in the acquisition.
This settlement resulted in a net reduction of approximately $752 to
technology and a corresponding increase to treasury stock.
During the fourth quarter 2001, the Company discontinued use of the
AART(TM) technology due to poor sales, integration and legal concerns.
The Company has removed the technology from its software applications
and has recorded an impairment loss for $2,490, the carrying value at
the date of the impairment.
Amortization expense of technology costs for 2002, 2001 and 2000 was
approximately $264, $530 and $530, respectively. Accumulated
amortization was $724, $460 and $566 as of December 31, 2002, 2001 and
2000, respectively.
- --------------------------------------------------------------------------------
F-18
-58-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
6. Lease Obligations
The Company leases certain office space under noncancelable operating
lease agreements. Future minimum lease payments required under
operating leases are as follows:
Year Ending December 31: Amount
------------------------ -----------------
2003 $ 141
2004 103
2005 77
-----------------
$ 321
-----------------
Rental expense for the years ended December 31, 2002, 2001 and 2000 on
operating leases was $249, $301 and $291, respectively.
The Company subleases certain office space under a noncancelable
operating lease arrangement. Future minimum rentals to be received
under the sublease are as follows:
Year Ending December 31: Amount
------------------------ -----------------
2003 $ 27
-----------------
Rental income for the years ended December 31, 2002, 2001, and 2000 on
subleases was $20, $25 and $27, respectively.
7. Note Payable
During the year ended December 31, 2002, the Company issued a
convertible note payable in the amount of $500 to a company, bearing
interest at a rate of 6.75% per annum, with principal and interest due
on March 31, 2003. The conversion feature of the note provides the
note will be convertible into fully paid, nonassessable, restricted
shares of common stock at a conversion price equal to the average per
share closing sales price of the Company's common stock from January
1, 2003 to March 31, 2003. However, the conversion price will not be
greater than $0.75 per share or less than $0.35 per share (see Note
20).
- --------------------------------------------------------------------------------
F-19
-59-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
8. Senior Notes Payable
1997 Senior Notes
In 1997, the Company sold 10% unsecured Senior Notes (1997 Senior
Notes) with interest payable semiannually on April 1 and October 1 of
each year and the principal maturing on September 30, 2002.
Each purchaser of each 1997 Senior Note also received, for no
additional consideration, one common stock purchase warrant (1997
Warrant) for each $1 principal amount of 1997 Senior Notes purchased.
Each 1997 Warrant entitled the holder to purchase 250 shares of the
Company's common stock for $2.50 per share. The 1997 Warrants were
exercisable any time before September 30, 2002, as a whole, in part,
or increments, but only if the shares of common stock issuable upon
exercise of the 1997 Warrants were registered with the Securities and
Exchange Commission pursuant to a current and effective registration
statement and qualified for sale under the securities laws of the
various states where the 1997 Warrant holders resided. During the year
ended December 31, 1998, the Company registered the common stock
issuable upon exercise of the 1997 Warrants. The exercise price of the
1997 Warrants was payable at the holder's option, either in cash or by
the surrender of 1997 Senior Notes at their face amount plus accrued
interest. The 1997 Warrants were transferable separately from the 1997
Senior Notes.
As noted below, during 2001 and 2002, $457 and $755, respectively, of
the 1997 Senior Notes were converted into 2001 Senior Notes and 2002
Senior Notes, respectively (see explanation of the 2001 Senior Notes
and the 2002 Senior Notes below). In addition, during 2002, in
connection with the 2002 Senior Note offering, $487 of the 1997 Senior
Notes were paid with cash. Therefore, as of December 31, 2001 and
2002, there were $2,224 and $982 1997 Senior Notes payable,
respectively. The $982 of 1997 Senior Notes payable were due September
30, 2002, but remained outstanding as of December 31, 2002.
- --------------------------------------------------------------------------------
F-20
-60-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
8. Senior Notes Payable (Continued)
2001 Senior Notes
During the fourth quarter 2001, the Company initiated an offer to all
holders of the 1997 Senior Notes that would extend the maturity date
from the current date of September 30, 2002 to September 30, 2004. If
accepted, each 1997 Senior Note holder would receive, for no
additional consideration, one common stock purchase warrant (2001
Warrant) for each $1 in principal amount of Notes extended. Each 2001
Warrant would entitle the holder to purchase 250 shares of the
Company's stock for $1.00 per share. At December 31, 2001, holders of
$457 of 1997 Senior Notes had elected to extend the maturity date of
their 1997 Senior Notes and were issued new 2001 Senior Notes and the
attached 2001 Warrants on December 31, 2001.
Under the terms of the extension, the Company issued 457 Warrants to
purchase 114,250 shares of the Company's common stock for $1.00 per
share. The fair value of the 2001 Warrants was estimated on the date
of grant using the Black-Scholes pricing model with the following
assumptions:
Expected dividend yield $ -
Expected stock price volatility 102%
Risk-free interest rate 4.0%
Expected life of warrants 3.75 years
Using these assumptions, the value of the 2001 Warrants was estimated
to be $18, and was recorded as a reduction in the principal value of
the 2001 Senior Notes and an addition to additional paid-in capital.
This discount was accreted as interest expense in 2002.
As noted below, during 2002, $353 of the 2001 Senior Notes were
converted into 2002 Senior Notes (see explanation of the 2002 Senior
Notes below). In addition, during 2002, in connection with the 2002
Senior Note offering, $93 of the 2001 Senior Notes were paid with
cash. Therefore, as of December 31, 2001 and 2002, there were $439 and
$11 of 2001 Senior Notes payable, respectively.
- --------------------------------------------------------------------------------
F-21
-61-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
8. Senior Notes Payable (Continued)
2002 Senior Notes
During 2002, in accordance with a Private Placement Memorandum, the
Company sold $1,503 of 12% unsecured Senior Notes (2002 Senior Notes)
with interest payable semiannually on April 1 and October 1 of each
year and the principal maturing on September 30, 2005. In addition, in
connection with the settlement of litigation, the Company issued an
additional $120 of 2002 Senior Notes.
The sale of the 2002 Senior Notes was a result of the following:
Conversion of 1997 Senior Notes to 2002 Senior Notes 755
Conversion of 2001 Senior Notes to 2002 Senior Notes 353
2002 Senior Notes issued in connection with litigation
settlement 120
Cash proceeds received from the sale of 2002 Senior Notes 395
--------
Total 1,623
--------
Each purchaser of each 2002 Senior Note also received, for no
additional consideration, one common stock purchase warrant (2002
Warrant) for each $1 principal amount of 2002 Senior Notes purchased.
Each 2002 Warrant will entitle the holder to purchase 500 shares of
the Company's common stock for $.35 per share. The 2002 Warrants are
exercisable any time before September 30, 2005, as a whole, in part,
or increments, but only if the shares of common stock issuable upon
exercise of the 2002 Warrants are registered with the Securities and
Exchange Commission pursuant to a current and effective registration
statement and qualified for sale under the securities laws of the
various states where the 2002 Warrant holders resided. The exercise
price of the 2002 Warrants is payable at the holder's option, either
in cash or by the surrender of 1997 Senior Notes or 2001 Senior Notes
at their face amount plus accrued interest. The 2002 Warrants will be
transferable separately from the 2002 Senior Notes.
As of December 31, 2002, there were $1,545 (net of the remaining $78
note discount related to warrants issued in connection with the 2002
Senior Notes) 2002 Senior Notes payable.
- --------------------------------------------------------------------------------
F-22
-62-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
8. Senior Notes Payable (Continued)
2002 Senior Notes - Continued
Under the terms of the refinancing, the Company issued 1,503 warrants
to purchase 751,500 shares of the Company's common stock for $.35 per
share. The fair value of the warrants was estimated on the date of
grant using the Black-Scholes pricing model with the following
assumptions:
Expected dividend yield $ -
Expected stock price volatility 95%
Risk-free interest rate 4.7%
Expected life of warrants 3 years
Using these assumptions, the value of the 2002 Warrants was estimated
to be $82, and was recorded as a reduction in the principal value of
the 2002 Senior Notes and an addition to additional paid-in capital.
This discount will be accreted and recognized as interest expense over
the life of the 2002 Senior Notes.
Under certain circumstances related to a change in ownership control,
the Company may be required to repurchase the 2001 and 2002 Senior
Notes prior to the maturity date.
Future maturities of Senior Note are as follows:
2002 $ 982
2003 -
2004 11
2005 1,623
--------
$ 2,616
--------
Less amount representing interest
to be accreted (78)
--------
2,538
Less current portion of senior notes (982)
--------
Long-term portion of senior notes $ 1,556
--------
- --------------------------------------------------------------------------------
F-23
-63-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
9. Income Taxes
The benefit (provision) for income taxes is different than amounts
which would be provided by applying the statutory federal income tax
rate to (loss) income before income taxes for the following reasons:
Years Ended
December 31,
-------------------------------------
2002 2001 2000
-------------------------------------
Income tax benefit (provision)
at statutory rate $ 1,511 $ 2,113 $ (191)
Life insurance and meals (11) (9) (8)
Other (26) - -
Change in valuation allowance (1,477) (2,104) 194
-------------------------------------
$ (3) $ - $ (5)
-------------------------------------
Deferred tax assets (liabilities) are comprised of the following:
December 31,
------------------------------------
2002 2001
------------------------------------
Net operating loss carryforwards $ 7,205 $ 6,281
Asset impairment 2,361 2,336
Depreciation and amortization 259 (14)
Allowance for doubtful accounts 80 43
Accrued vacation and bonus 29 27
Deferred income 141 72
Inventory reserve 18 18
Capital loss carryover 108 100
Research & development credit 338 199
------------------------------------
------------------------------------
10,539 9,062
Less valuation allowance (10,539) (9,062)
------------------------------------
$ - $ -
------------------------------------
At December 31, 2002, the Company has a net operating loss
carryforward available to offset future taxable income of
approximately $19,300, which will begin to expire in 2004. If
substantial changes in the Company's ownership should occur, there
would also be an annual limitation of the amount of NOL carryforward,
which could be utilized.
- --------------------------------------------------------------------------------
F-24
-64-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
10. Impairment Loss
During the fourth quarter 2002, due to decreased projected future cash
flows relating to the sdiStationTM technology, management determined
that a significant portion of the technology was not recoverable, and
accordingly has recorded an impairment loss of $1,224 (see Note 5).
During 2001, the Company discontinued its use of a purchased
technology. Due to integration and legal concerns, management
determined the asset was impaired and recorded a loss of $2,490, the
carrying value of the asset at the time of impairment (see note 5).
The Company had an investment in a corporate entity (see note 14).
During the year ended December 31, 2001, the Company determined the
likelihood of recovering the cost of its investment was remote. As a
result, the Company recorded a loss of $522 related to this
investment.
11. Supplemental Cash Flow Information
During the year ended December 31, 2002:
- The Company redeemed common stock in exchange for senior
notes of $120.
- The Company recorded a discount for warrants attached to
senior notes in the amount of $82.
- The Company cancelled 459,936 shares of treasury stock in
the amount of $900.
During the year ended December 31, 2001:
- The Company reduced technology in exchange for treasury
stock valued at $752.
- The Company returned equipment with a cost of $76 and
decreased the corresponding payable amount.
During the year ended December 31, 2000, the Company financed the
purchase of a vehicle with debt in the amount of $27.
- --------------------------------------------------------------------------------
F-25
-65-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
11. Supplemental Cash Flow Information (Continued)
Actual amounts paid for interest and income taxes are as follows:
Years Ended December 31,
----------------------------------------------
2002 2001 2000
----------------------------------------------
Interest $ 297 $ 268 $ 271
----------------------------------------------
Income taxes $ 3 $ 17 $ 5
----------------------------------------------
12. Major Customers
Sales to major customers which exceeded 10 percent of net sales are
approximately as follows:
Years Ended December 31,
----------------------------------------------
2002 2001 2000
----------------------------------------------
Company A $ - $ - $ 1041
Company B $ - $ - $ 960
Company C $ - $ - $ 885
Company D $ 411 $ - $ -
Export sales to unaffiliated customers were approximately $884,
$1,310, and $2,048, in 2002, 2001 and 2000, respectively.
Export sales to countries which exceeded 10 percent of net sales were
as follows:
Years Ended December 31,
----------------------------------------------
2002 2001 2000
----------------------------------------------
Japan 14% 19% 13%
Germany 6% 10% 5%
Switzerland 7% 7% 17%
- --------------------------------------------------------------------------------
F-26
-66-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
13. Employee Benefit Plan
The Company has a defined contribution retirement savings plan, which
is qualified under Section 401(K) of the Internal Revenue Code. The
plan provides retirement benefits for employees meeting minimum age
and service requirements. Participants may contribute up to the
maximum amounts allowed under the Internal Revenue Code.
The Company will match 50% of the employees' contribution up to a
maximum of 2% of the employees' annual pay. Participants vest in the
employers' contribution over a five-year period. For the years ended
December 31, 2002, 2001 and 2000, the Company contributed
approximately $37, $28 and $31, respectively, to the plan.
14. Related Party Transactions
The Company had an investment in a corporate entity. The investment
was accounted for at the lower of cost or market and was included in
other assets. During the year ended December 31, 2001 the Company
determined the likelihood of recovering the cost of its investment was
remote. As a result, the Company recorded a loss of $522 related to
this investment. During the years ended December 31, 2002, 2001 and
2000, the Company recognized sales of approximately $190, $383, and
$324 to this entity, respectively. In addition as of December 31,
2002, 2001 and 2000, the Company had net receivables from this entity
of approximately $125, $269, and $159, respectively.
During the year ended December 31, 2000 the Company purchased a
vehicle for use by the family of the Company's former president in the
amount of $27. The automobile was subsequently disposed of in 2001.
- --------------------------------------------------------------------------------
F-27
-67-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
15. Stock Options and Warrants
The Company has a stock option plan (Incentive Option Plan), which
allows a maximum of 4,000,000 options which may be granted to purchase
common stock at prices generally not less than the fair market value
of common stock at the date of grant. Under the Incentive Option Plan,
grants of options may be made to selected officers and key employees
without regard to any performance measures. The options may be
immediately exercisable or may vest over time as determined by the
Board of Directors. However, the maximum term of an option may not
exceed five years.
The Company has a stock option plan (Directors Option Plan), which
allows a maximum of 1,000,000 shares of common stock to be granted at
prices not less than the fair market value at the date of grant. Under
the Directors Option Plan, directors will receive options to purchase
24,000 shares of common stock annually, or amounts as determined by
the board of directors, on each anniversary date during the term of
this plan.
Information regarding the stock options and warrants is summarized
below:
Number of Weighted
Options Average
and Exercise
Warrants Price
-------------------------------
Outstanding at January 1, 2000 2,164,500 $ 2.52
Granted 726,000 2.89
Exercised (31,000) 2.45
Forfeited (224,000) 2.62
-------------------------------
Outstanding at December 31, 2000 2,635,500 2.71
Granted 2,493,750 1.04
Exercised - -
Forfeited (15,000) 3.33
-------------------------------
Outstanding at December 31, 2001 5,114,250 1.91
Granted 1,288,000 .29
Exercised - -
Forfeited (1,647,500) 2.60
-------------------------------
Outstanding at December 31, 2002 4,754,750 $ 1.26
-------------------------------
- --------------------------------------------------------------------------------
F-28
-68-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
15. Stock Options and Warrants (Continued)
The following table summarizes information about stock options and
warrants outstanding at December 31, 2002:
Outstanding Exercisable
------------------------------------ ----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (Years) Price Exercisable Price
------------------------------------------------- ----------------------
$ .35 1,251,500 3.08 $ .35 1,084,833 $ .35
$ 1.00 2,361,750 3.78 $ 1.00 826,125 $ 1.00
$2.50-3.50 1,141,500 1.47 $ 2.78 823,375 $ 2.75
------------------------------------------------- ----------------------
$ .35-3.50 4,754,750 3.04 $ 1.26 2,734,333 $ 1.27
--------------------------------------------------- -------------------------
16. Earnings Per Share
Financial accounting standards require companies to present basic
earnings per share (EPS) and diluted earnings per share along with
additional informational disclosures. Information related to earnings
per share is as follows:
Years Ended
December 31,
--------------------------------------
2002 2001 2000
--------------------------------------
Basic EPS:
Net (loss) income available to
common stockholders $ (4,055) $ (5,620) $ 513
--------------------------------------
Weighted average common
shares 24,488,000 24,092,000 24,160,000
--------------------------------------
Net income (loss) per share $ (.17) $ (.23) $ .02
--------------------------------------
Diluted EPS:
Net income (loss) available to
common stockholders $ (4,055) $ (5,620) $ 513
--------------------------------------
Weighted average common
shares 24,488,000 24,092,000 24,621,000
--------------------------------------
Net income (loss) per share $ (.17) $ (.23) $ .02
--------------------------------------
- --------------------------------------------------------------------------------
F-29
-69-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
17. Fair Value of Financial Instruments
The Company's financial instruments consist of cash, marketable
securities, receivables, payables, and notes payable. The carrying
amount of cash, marketable securities, receivables and payables
approximates fair value because of the short-term nature of these
items. The carrying amount of the notes payable approximates fair
value as to the individual borrowings bear interest at market interest
rates.
18. Commitments and Contingencies
Employment Agreements
The Company has entered into employment agreements with certain
employees, which require annual aggregate payments of $525 through
2003.
Product Warranties
The Company provides certain product warranties to customers including
repayment or replacement for defect in materials and workmanship of
hardware products. The Company also warrants that software and
firmware products will conform to published specifications and not
fail to execute the Company's programming instructions due to defects
in materials and workmanship. In addition, if the Company is unable to
repair or replace any product to a condition warranted, within a
reasonable time, the Company will provide a refund to the customer. As
of December 31, 2002, 2001, and 2000, no provision for warranty claims
has been established since historically any amounts expended in
connection with warranties has not been material. Management believes
that any allowance for warranty would be immaterial to the financial
condition of the Company.
- --------------------------------------------------------------------------------
F-30
-70-
<page>
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
18. Commitments and Contingencies (Continued)
Litigation
Litigation with Steven D. Hausle, et al
On April 12, 2002, Steven D. Hausle, Daniel J. Garnett M.D., Stephanie
A. Garnett, Axcient Corporation, and Ronald Tripiano, as plaintiffs,
filed suit against the Company, Robert H. Reback and Randall A.
Mackey, as defendants, in United States District Court, Northern
District of California, San Jose Division, Case Number C02-01769. The
complaint alleges breach of oral and written contract, fraud,
negligent misrepresentation, breach of privacy, unfair competition,
wrongful termination, negligence and shareholder derivative claims for
breach of fiduciary duties, constructive fraud, negligence, and seeks
injunctive and declaratory relief. The plaintiffs are demanding
$16,000 and a jury trial.
In response to the complaint, the Company filed a motion to dismiss
and/or transfer. Messrs. Reback and Mackey also filed a motion to
dismiss and/or transfer. Although the court issued "Tentative Rulings"
granting and denying various aspects of the motions, a final ruling on
the motions has not yet been issued. The Company still believes the
complaint is without merit and intends to continue to vigorously
defend the action. On May 16, 2002, the Company filed an action in the
United States District Court, District of Utah, Case Number
2-02CV-0484K asserting certain claims against Mr. Hausle and Axcient
Corporation. No response has been filed, as by agreement the date to
respond falls within a period after the court rules on the aforesaid
motions in the California case.
- --------------------------------------------------------------------------------
F-31
-71-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
18. Commitments and Contingencies (Continued)
Litigation - Continued
Litigation with PUMA Foundation, LTD. and Loving Spirit Foundation
On January 16, 2003, Puma Foundation, LTD., a Bermuda limited
liability company ("Puma"), as plaintiff, filed a complaint against
the Company, in the United States District Court, Middle District of
Florida, Tampa Division, Case Number 8:03-CV-85-T-23TGW. The complaint
alleges that Puma is the owner of a Cimetrix 10% Senior Note in the
amount of $500 allegedly donated to Puma by Loving Spirit Foundation,
a Florida foundation ("Loving Spirit"), and that on January 2, 2003,
Puma tendered the Senior Note certificate for payment, and is entitled
to payment of $500, plus accrued interest. Plaintiff also seeks
undisclosed attorneys fees and costs. The assets of Puma were unfrozen
in the case of The Securities and Exchange Commission v. Paul A.
Bilzerian, et al. (Civil Action No. 89-1854 (SSH)) and returned to
Puma on or about December 30, 2002.The president of Puma is Terri L.
Steffen, the wife of Paul A. Bilzerian, the former President, CEO and
Director of Cimetrix. During September 2002, the Company had been in
negotiations with Puma and believed that once the assets of the
foundation became unfrozen, Puma would accept the Company's proposal
to receive 50% payment in cash and roll over the other 50% into new
Cimetrix 12% Senior Notes due 2005, provided that no other holder of
Cimetrix 10% Senior Notes received payment of more than 50% in cash.
Since that time, Puma has issued several letters to the Company
demanding payment in full. While the Company has tried to negotiate
acceptable payment terms, Puma's recent position has been
non-negotiable and it has demanded cash payment in full. Since
learning of this lawsuit, current management has examined its files
relating to the Senior Note certificate that is the subject of the
lawsuit and has discovered that this certificate may, in fact, not be
a valid Company 1997 Senior Note. The Company will continue to examine
this issue and is currently conducting an investigation to determine
its legal obligations.On February 24, 2003, in response to the
complaint, Cimetrix filed a motion to dismiss or in the alternative
transfer this action to the District of Utah.
- --------------------------------------------------------------------------------
F-32
-72-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
- --------------------------------------------------------------------------------
18. Commitments and Contingencies (Continued)
Litigation with PUMA Foundation, LTD. and Loving Spirit Foundation -
Continued
On or about March 18, 2003, the Company received an Amended Complaint
filed by Puma and Loving Spirit, as plaintiffs. The Amended Complaint
adds an additional claim that the Company has violated Section 517.301
of the Florida statutes relating to securities violations by allegedly
making untrue statements to Loving Spirit when Loving Spirit paid $500
to Cimetrix for the 10% Senior Note which was subsequently allegedly
donated to Puma. Under this new claim, Loving Spirit seeks damages of
$500 plus interest, attorney fees, costs and any other damages and
penalties recoverable under Florida law. Cimetrix intends to defend
against this claim vigorously.
19. Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 145, "Rescission of FASB Statements Nos. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." This
statement requires the classification of gains or losses from the
extinguishments of debt to meet the criteria of APB Opinion No. 30
"Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and
Infrequently occurring Events and Transactions" before they can be
classified as extraordinary in the income statement. As a result,
companies that use debt extinguishment as part of their risk
management cannot classify the gain or loss from that extinguishment
as extraordinary. The statement also requires sale-leaseback
accounting for certain lease modifications that have economic effects
similar to sale-leaseback transactions. The Company does not expect
the adoption of SFAS 145 to have a material impact on its financial
position or future operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This standard, which is
effective for exit or disposal activities initiated after December 31,
2002, provides new guidance on the recognition, measurement and
reporting of costs associated with these activities. The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date a company
commits to an exit or disposal plan. The adoption of SFAS No. 146 by
the Company is not expected to have a material impact on the Company's
financial position or future operations.
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CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
Continued
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19. Recent Accounting Pronouncements (Continued)
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of
FASB Statement No. 123," which is effective for all fiscal years
ending after December 15, 2002. SFAS No. 148 provides alternative
methods of transition for a voluntary change to fair value based
method of accounting for stock-based employee compensation under SFAS
No. 123 from intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25. SFAS 148 also changes the
disclosure requirement of SFAS 123, requiring a more prominent
disclosure of the pro-forma effect of the fair value based method of
accounting for stock-based compensation. The adoption of SFAS No. 148
by the Company did not have any impact on the Company's financial
position or operations for the year ended December 31, 2002 and is not
expected to have any impact on future operations.
20. Subsequent Event
During the year ended December 31, 2002, the Company issued a
convertible note payable in the amount of $500 to a company, bearing
interest at a rate of 6.75% per annum, with principal and interest due
on March 31, 2003 (see Note 7). The conversion feature of the note
provides the note will be convertible into fully paid, nonassessable,
restricted shares of common stock at a conversion price of $0.35 per
share. On March 31, 2003 the Company converted the note into 1,474,911
restricted shares of common stock as payment of the $500 principal
amount of the note and payment of $16 of accrued interest.
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