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, 2003
[ ] 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 25, 2004, the registrant had 27,627,246 shares of its common stock,
par value $.0001, outstanding. The aggregate market value of the common stock
held by non-affiliates (calculation assumes that all officers and directors are
affiliates) of the registrant as of March 25, 2004 was approximately $7,574,250.
The aggregate market value of the common stock held by non-affiliates of the
registrant as of June 30, 2003 was approximately $3,570,940.
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 22, 2004, are
incorporated by reference into Part III hereof.
FORM 10-K
For the Fiscal Year Ended December 31, 2003
TABLE OF CONTENTS
PART I
Item 1. Business............................................................3
Item 2. Properties.........................................................16
Item 3. Legal Proceedings..................................................16
Item 4. Submission of Matters to a Vote of Security Holders................17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................17
Item 6. Selected Financial Data............................................22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................23
Item 7A Quantitative and Qualitative Disclosures about Market Risk.........36
Item 8. Financial Statements and Supplementary Data........................36
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosures..............................................36
Item 9A. Controls and Procedures............................................36
PART III
Item 10. Directors and Executive Officers of the Registrant.................37
Item 11. Executive Compensation.............................................37
Item 12. Security Ownership of Certain Beneficial Owners and Management.....37
Item 13. Certain Relationships and Related Transactions.....................37
Item 14. Principal Accountant Fees and Services.............................37
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....38
Signatures ...................................................................40
-2-
<page>
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 OEMs 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 CODE 6
(Cimetrix Open Development Environment version Six) 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 network or 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-
<page>
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:
semiconductor and SMT. Management believes that short-term revenue growth will
stem primarily from opportunities explored in the semiconductor industry, due to
the depressed nature of the SMT industry. Both the semiconductor and SMT
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.
-4-
<page>
Semiconductor Industry
The semiconductor industry includes the manufacturing, packaging and
testing of semiconductor wafers. It is a cyclical industry that is currently
growing out of the most severe downturn in industry history. The Company expects
strong capital investment throughout 2004 and 2005. In 2000, the semiconductor
industry began the migration from building 8-inch (200 mm) wafers to building
12-inch (300 mm) wafers. Most of the capital spending over the next five years
is expected to be for 300mm equipment. The Company's CIMConnect and CIM300
products are well positioned to take advantage of increased demand for 300mm
semiconductor tools. In 2003, Cimetrix gained seven 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.
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. This industry has quickly adopted the use
of PCs as equipment controllers and uses very few proprietary controllers. 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). 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.
Additional Markets
- ------------------
While the semiconductor and SMT 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 several
companies in the area of packaging, 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.
-5-
<page>
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.
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. While the interest level of tool manufacturers in open architecture
CNCs is high, the industry remains very similar to the industrial robot
industry, in that proprietary controller companies will continue to dominate the
market.
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. We do not expect this
to change in the short term.
Notable Achievements of 2003
- ----------------------------
The Company achieved major milestones in 2003 in the areas of financial
performance, customer satisfaction, product development and new customers.
Financial Performance
The Company was able to increase sales by 12% during 2003, while the cost
reduction programs initiated during 2002 reduced costs by 42% over prior year
levels. The combination of these activities reduced the loss from operations for
2003 to $592,000 (including the impairment loss of $313,000), which represented
an 84% improvement from the prior year.
Customer Satisfaction
The Company continued to provide dedicated support for its customer base,
which included assisting seven of our major OEM customers to ship their first
machines using Cimetrix software. This increased the Company's base of major OEM
accounts "shipping" machines using Cimetrix software to 23 accounts, compared to
five accounts at the end of 2001. The list of satisfied customers has been
instrumental in serving as references for the Company, which in turn facilitates
capturing new customers and enhances the reputation of Cimetrix in the
industries we serve.
-6-
<page>
Product Development
The Company invested in incremental new releases for its current products,
and was able to initiate R&D efforts for two new products.
CIM300Expert was introduced in 2003 as Cimetrix's first service based
product. This product enables complete lab-to-fab 300mm integration in six weeks
time without any preexisting factory automation technology on the tool at the
time the integration starts. CIM300Expert leverages our experience and expert
software management and development skills. We believe service based products
enable rapid integration of our shrink wrapped products while preserving our IP
and showcasing our key software development strengths.
Cimetrix is currently investing research money in products dealing with how
equipment suppliers better integrate their out-of-the-box equipment into fab
based advanced processing control (APC) systems. CIMPortal is the first set of
products to address this factory wide need. CIMPortal enables low-cost APC with
easier integration and it can either be purchased and/or used by the IC maker or
the OEM equipment supplier. Cimetrix believes a key strategy to improving market
share is by providing products that can be easily consumed by the IC makers and
equipment suppliers. This product is currently being tested at Advanced Micro
Devices Inc. (AMD) and will be released in 2004.
New Customers
The Company gained eight new major OEM customers during 2003, three of
which are considered "top tier" semiconductor accounts. One of the new major OEM
customers is routinely listed as one of the 10 largest semiconductor capital
equipment suppliers in the world, and two of the other new customers have been
listed among the 20 largest semiconductor capital equipment suppliers in the
world. These new customers have enabled the Company to significantly broaden its
base of major OEM customers, which provided incremental increases in annual
customer support contracts and the software royalty revenue received from
runtime licenses. As these new customers transition their machines to use
Cimetrix software, Cimetrix hopes to receive significant future software
revenues.
Cimetrix Product Line
- ---------------------
CODE
The Cimetrix Open Development Environment (CODE) is a family of open
architecture machine modeling and motion control software products designed to
control the most challenging multi-axis machine control applications. CODE 6
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.
-7-
<page>
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, E94 and E116. 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. CIM87 provides a standardized behavior for host computer
communication with the production equipment during the coordination, execution,
and completion of automated and manual transfer of the wafer carriers to and
from the equipment.
CIM40-Process Job - Provides process job functionality as defined in SEMI E40.
CIM40 enables complex recipe to wafer mapping within a tool enabling complex
processing of multiple wafers to multiple recipes. A recipe defines all of the
parameters of what to do with a wafer. This package works seamlessly with
CIMFoundation and CIM94 Process Job or as a stand-alone package.
CIM90-Substrate Tracking - Provides substrate tracking functionality as defined
in SEMI E90. CIM90 allows the factory host computer to track substrates
(manufactured products) or batches of substrates through the individual
components of the production equipment. It is possible to connect CIM90 to CIM87
for automatic substrate lifetime control.
-8-
CIM94-Control Job - Provides control job functionality as defined in SEMI E94.
CIM94 allows the factory to run Process Jobs in a tool. It covers very complex
batch job processing and single job processing. This package works seamlessly
with CIMFoundation and CIM40 Process Job or as a standalone package.
CIM116-Equipment Performance Tracking - Provides equipment performance tracking
(EPT) as defined in SEMI E116. CIM116 tracks equipment performance in an
automated and consistent manner without requiring operator or host computer
input. CIM116 provides unique functions for defining specific equipment modules
and automatically manages the equipment's EPT State Model.
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.
-9-
<page>
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.
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 David P. 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 Tokyo, 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 Condition
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 in 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.
-10-
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.
Major Customers and Foreign Sales
- ---------------------------------
In 2003, no single customer accounted for more than 10% of the Company's
revenues. In 2002, one customer accounted for 14% of the Company's revenues. In
2001, no single customer accounted for more than 10% of the Company's revenues.
Sales to the Company's former Japanese affiliate in which the company had a
minor equity interest, represented 0%, 6%, and 9% of the Company's total sales
in 2003, 2002 and 2001, respectively.
For the year ended December 31, 2003, revenues from export sales were 35%.
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 2003, 2002 and 2001:
Year Ended December 31, 2003 2002 2001
----------------------------------------------------------
Domestic sales 65% 64% 59%
Export Sales 35% 36% 41%
In 2003, no single country accounted for more than 10% of the Company's
total revenues. In 2002, sales to customers in Japan accounted for 14% of total
revenues. In 2001, sales to customers in Japan and Germany accounted for 19% and
10% respectively, of total revenues. No other country accounted for more than
10% of the Company's revenues in each of the fiscal periods ended 2003, 2002 and
2001.
Personnel
- ---------
As of March 25, 2004, the Company had 23 employees, 13 of whom are involved
in software development and providing software engineering services, five of
whom are involved in sales, marketing, and customer support, and five 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.
-11-
<page>
Executive Officers
- ------------------
Robert H. Reback, President and Chief Executive Officer, age 44, 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 48,
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 33, 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 45, 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 sixteen years and is one of the principal architects of many of the
Company's most important products.
Joe K. Johnson, age 46, 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. from April 2001 to the
present.
-12-
<page>
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 MATTERS IN FINANCIAL STATEMENTS. The financial statements of
the Company as of December 31, 2003 reflect a net loss of approximately
$931,000, and an accumulated deficit of approximately $29,094,000.
2. LIMITED WORKING CAPITAL; LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT;
ANTICIPATED LOSSES. As of December 31, 2003, the Company had working capital of
$966,000. The Company also has an accumulated deficit of $29,094,000. 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.
3. LACK OF LIQUIDITY. The Company's liquidity is uncertain due to $500,000
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 2003 the Company's operating activities used
cash of approximately $577,000. 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. At the time of
the filing of this report, there was $500,000 of Senior Notes due September 30,
2002 that remain unpaid. For an explanation on these notes 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.
5. INCOME TAXES. The Company had available at December 31, 2003 unused tax
operating loss carry forwards of approximately $20,266,000 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, 2003, the total of
all deferred tax assets was approximately $10,865,000. 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 $10,865,000 to offset all of its deferred
tax assets.
-13-
<page>
6. DEPENDENCE ON SIGNIFICANT CUSTOMERS. In 2003, no single customer
accounted for more than 10% of the Company's revenues. In 2002, one customer
accounted for 14% of the Company's revenues, while sales to affiliates accounted
for 6% of revenues. In 2001, no single customer accounted for more than 10% of
the Company's revenues. See Item 1, Business, Major Customers and Foreign Sales.
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.
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 35%, 36% and 41%
of the Company's business in 2003, 2002 and 2001, 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.
-14-
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 claims 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 are entitled to vote at the election of
directors, but are not 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 6% 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.
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 may
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.
-15-
<page>
ITEM 2. PROPERTIES
===================
The Company's principal offices are located in a leased facility 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.
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 was amended to include Loving Spirit
Foundation, a Florida foundation ("Loving Spirit"), as an additional plaintiff.
The amended 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, 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 attorney's fees and costs. The amended complaint adds an
additional claim in equity for money lent and 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. The president of Puma and Loving Spirit
is Terri L. Steffen, the wife of Paul A. Bilzerian, the former President, CEO
and a director of Cimetrix.
On June 26, 2003, the Court accepted the Company's answer to the amended
complaint and the counterclaims of the Company against the plaintiffs. In the
amended answer the Company denied that the Company had issued a valid 10% Senior
Note to Plaintiffs and also denied that the Company has violated Section 517.301
of the Florida statutes relating to securities violation. The Company also
raised various affirmative defenses in law and equity to the amounts owed to
Puma and Loving Spirit. The counterclaims request the court to enter a
declaratory judgment that the Company's total obligation to Puma and Loving
Spirit (prior to considering the Company's claims for offsets) does not exceed
$200,000.
On or about May 6, 2003, plaintiffs filed a motion for partial summary
judgment claiming that as a matter of law, the court should grant judgment to
Puma and Loving Spirit of $500,000 plus interest with the issue of the Company's
claim of offset to be decided by the court in an appropriate hearing on the
matter. On or about May 28, 2003, the Company filed its own motion for partial
summary judgment and opposition to Plaintiffs' motion for partial summary
judgment claiming that as a matter of law, the court should find that there was
no valid 10% Senior Note issued to plaintiffs and that the Company does not owe
more than $200,000 before offsets are deducted. On or about January 28, 2004,
the Court denied both cross motions for partial summary judgment on the basis
that there are material issues of fact that must be decided by a jury. The Court
has set the date of April 5, 2004 for a jury trial on all issues.
-16-
<page>
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, 2003.
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
High Low
------ -----
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 $ .20 $ .13
Second quarter $ .45 $ .09
Third quarter $ .33 $ .12
Fourth quarter $ .40 $ .20
2004
First quarter (through March 25, 2004) $ .53 $ .24
On March 25, 2004 the closing quotation for the Company's common stock on
the NASD OTC Bulletin Board was $.31 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.
-17-
<page>
On March 25, 2004 there were 27,652,246 shares of common stock issued and
outstanding held by approximately 2,700 beneficial shareholders.
To date, the Company has not paid dividends with respect to its common
stock. There is no restriction on the declaration or payment of dividends set
forth in the Articles of Incorporation of the Company or in any agreement with
its shareholders. However, management plans to retain any future earnings that
may be earned by the Company for working capital and investment in growth and
expansion of the business of the Company. Management does not anticipate paying
any dividends on the common stock in the foreseeable future.
Treasury stock of the Company is recorded at cost and is disclosed in the
Stockholder's Equity section of the Company's financial statements. Presently,
there are 25,000 common shares held as treasury stock by the Company. The
Company has no plan to resell its treasury shares or issue additional shares of
stock unless it has a need for additional working capital. See Recent Sales of
Unregistered Securities under Part II, Item 5, of this document.
Equity Compensation Plan Information
- ------------------------------------
The following table summarizes the Company's equity compensation plans as
of December 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
exercise of out- options, warrants and issuance (2)
standing options, rights (1)
warrants and rights
- --------------- ------------------- ---------------------- -------------------
Equity
compensation
plans approved
by security
holders 3,717,500 $1.14 255,000
Equity
compensation
plans not approved
by security
holders 913,000 $1.41 87,000
- --------------------------------------------------------------------------------
Total 4,630,500 342,000
- --------------------------------------------------------------------------------
(1) Excludes 1,191,250 shares issuable upon the exercise of warrants issued to
purchasers of the Company's Senior Notes, as they were not issued as
compensation to Company Officers, Directors or employees. See Warrants,
discussed below.
(2) A total of 4,000,000 shares of common stock have been reserved for issuance
under the plan. To date a total of 27,500 options have been exercised under the
plan.
-18-
<page>
Common Stock Options and Warrants
- ---------------------------------
As of December 31, 2003, the Company had a significant number of derivative
securities outstanding in the form of stock options and warrants representing a
potential total of 5,821,750 shares of common stock, which are summarized in the
following table with detail of each in the subsequent tables.
Number Outstanding
Description Strike Price December 31, 2003
- -------------------------------------------------------------------------
1998 Stock Option Plan $0.35-3.50 3,717,500
Directors Stock Option Plan $0.35-3.50 913,000
Warrants $0.35-1.00 1,191,250
- -------------------------------------------------------------------------
Total Options and Warrants 5,821,750
1998 Incentive Stock Option Plan as of December 31, 2003 and March 29, 2004
- ---------------------------------------------------------------------------
As of December 31, 2003 and March 29, 2004, there were issued and
outstanding to the Company's employees, options for the purchase of 3,717,500
and 3,972,500, respectively, 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 at Outstanding at
Price December 31, 2003 March 29, 2004
-----------------------------------------------------------
$0.35 1,180,000 1,610,000
$1.00 1,835,000 1,835,000
$2.50 302,500 127,500
$3.00 350,000 350,000
$3.50 50,000 50,000
-----------------------------------------------------------
Total Options 3,717,500 3,972,500
A total of 4,000,000 shares of common stock have been reserved for issuance
under the plan. The existing options began to expire December 31, 2002 and will
continue to expire through August 2008. None of these options have been
registered for resale.
-19-
<page>
Directors Stock Option Plan as of December 31, 2003 and March 29, 2004
- ----------------------------------------------------------------------
As of December 31, 2003 and March 29, 2004, there were issued and
outstanding options for the purchase of 913,000 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 at Outstanding at
Price December 31, 2003 March 29, 2004
-----------------------------------------------------------
$0.35 350,000 350,000
$1.00 225,000 225,000
$2.50 242,000 242,000
$3.50 96,000 96,000
-----------------------------------------------------------
Total Options 913,000 913,000
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. In May 2003, 444,000 of the above options, which are held by
former members of the Board of Directors of the Company, were extended for an
additional five years beyond their original expiration dates. This extension
resulted in additional general and administrative expense of $22,000. Of the
above options, 663,000 are held by former members of the 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 August 2008.
Warrants
- --------
The following table summarizes the quantity and exercise price of
outstanding warrants.
Strike Number Underlying Shares
Description Price December 31, 2003
-----------------------------------------------------------------
2001 Series Warrants $1.00 114,250
2002 Series Warrants $0.35 1,077,000
-----------------------------------------------------------------
Total Warrants 1,191,250
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.
-20-
<page>
The 2002 Series Warrants began to be issued in October 2002 to purchasers
of the Company's 12% Senior Notes due September 30, 2005 and to a related party
of the Company. As of December 31, 2003, a total of 2,154 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 1,077,000 shares. All 2,154 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. Subsequent to December 31, 2003, the Company issued an
additional 241 warrants in connection with the roll over of $241,000 of new
Cimetrix 12% Senior Notes due 2005 (See Note 9, Senior Notes Payable, 1997
Senior Notes, of the Consolidated Financial Statements on page 59 of this
report).To date, none of the 2002 Series Warrants have been exercised. The 2002
Series Warrants will expire on September 30, 2005.
Recent Sales of Unregistered Securities
- ---------------------------------------
On December 26, 2003, Cimetrix, Incorporated (the "Company") completed a
private offering involving the sale of a total of 2,114,287 shares of its common
stock to eleven accredited investors under Section 4(2) of the Securities Act of
1933, as amended, and Rule 506 of Regulation D thereunder at a price of $.35 per
share. The Company received a total of $740,000 in cash from the private
placement transaction. The shares were sold through the officers and directors
of the Company who did not receive any commissions or other remuneration for
selling the shares. The Company intends to use the proceeds from the offering
for working capital and general corporate purposes.
-21-
<page>
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
- -----------------------------
Year ended December 31, 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------
(in thousands,
except per share data)
Net Sales $3,340 $2,975 $4,075 $5,900 $3,823
Operating Expenses:
Cost of sales 435 952 718 647 103
Selling, marketing and
customer support 1,221 1,625 2,002 1,128 734
Research and development 933 1,074 1,899 1,595 1,508
General and administrative 1,087 1,544 1,645 1,936 1,239
Provision for doubtful accounts (57) 337 287 59 42
Impairment loss 313 1,224 3,112 - -
Compensation - stock options - - - - 12
-------------------------------------------
-------------------------------------------
Total operating expenses 3,932 6,756 9,663 5,365 3,638
-------------------------------------------
-------------------------------------------
Income (loss) from operations (592) (3,781) (5,588) 535 215
-------------------------------------------
-------------------------------------------
Net Income (loss) $(931) $(4,055) $(5,620) $ 513 $ 102
===========================================
Income (Loss) per
common share $(0.04) $(0.17) $(0.23) $ 0.02 $ 0.01
===========================================
Dividends per common share - - - - -
===========================================
Balance Sheet Data
Current assets $2,639 $2,103 $4,479 $6,040 $2,590
Current liabilities 1,673 2,225 3,171 779 883
Working capital 966 (122) 1,308 5,261 1,707
Total assets 3,302 2,968 6,854 13,126 9,374
Total long-term debt 1,865 1,556 439 2,704 2,681
Stockholders' equity (deficit) (506) (888) 3,020 9,643 5,810
- --------------------------------------------------------------------------------
-22-
<page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
=============
Overview
- --------
The following Management's Discussion and Analysis ("MD&A") is intended to
help the reader understand Cimetrix, Inc. MD&A is provided as a supplement
to-and should be read in conjunction with- the Company's audited financial
statements and the accompanying notes. This overview of the Company provides
management's perspective on the individual sections of MD&A, which include the
following sections:
- Our Business -- a general description of Cimetrix Incorporated, key
factors in increasing value in Cimetrix.
- Critical Accounting Policies -- a brief discussion of accounting
policies that significantly affect the way the financial statements
are prepared.
- Operations Review -- an analysis of the Company's consolidated results
of operations for the three years presented in the Company's financial
statements.
- Liquidity and Capital Resources -- Contractual obligations, an
analysis of cash flows, and sources and uses of cash.
Our Business
General
Cimetrix designs, develops, markets and supports factory automation
software for the global semiconductor and electronics industries. The Company's
connectivity software allows equipment manufacturers to quickly implement the
SECS/GEM standards, with over 10,000 connections shipped worldwide, and provides
best in class solutions to meet the 300mm SEMI communications standards, with
OEM customer installs in all major 300mm fabs. The Company's PC based motion
control software is used by leading equipment manufacturers for demanding
robotic applications. The Company generates revenues from the sale of its core
products which include CIMConnect, CIM300 and CODE (Cimetrix Open Development
Environment). The Company also generates revenues from customer support
contracts and the sale of application and integration services. See also
"Notable Achievements of 2003" under Part I, Item I, Business earlier in this
report.
Key factors to increasing value in Cimetrix
- Expanding our customer base
- Maintaining superior product quality and technical support
- Controlling costs
- Managing our capital structure
Expanding Our Customer Base. One of the most critical factors to increasing
value in Cimetrix is to continue to expand our customer base. In 2003 we set a
goal to add 13 new OEM design wins. We gained eight. We competed on 13 available
opportunities for new business in 2003, resulting in a win rate of over 60%. Of
the eight design wins, three are new OEM customers considered to be "top tier"
semiconductor accounts, all of which had previously implemented 300mm factory
automation software solutions, but decided to convert to Cimetrix products.
These design wins set the stage for future revenue growth by increasing our base
of major OEM customers to 35 accounts.
-23-
<page>
Also in 2003 seven of our major OEM customers shipped their first machines
using Cimetrix software. We expect this trend to continue and contribute to
future runtime revenue as these customers ramp up shipment levels.
Maintaining Superior Product Quality and Technical Support. We feel that our
line of products is superior in the industry we serve. Our commitment to
improving existing products as well as introducing new products increases our
competitive edge. During 2003 we launched two new products-CIM300Expert and
CIMPortal. Our new CIM300Expert product allows our customers to convert their
equipment software with or without a GEM interface to full 300mm compliance in
as little as 6-8 weeks. This is an industry first. CIM300Expert is marketed
primarily to new OEM customers and provides significant advantages to new
machine development programs. The new CIMPortal product was developed as part of
an R&D project with AMD. It aims to test the emerging SEMI EDA standards in a
production semiconductor fab. CIMPortal was installed in a production fab during
the fourth quarter of 2003. It has already provided excellent information for
Cimetrix with respect to its EDA product plans. This is a strong potential
growth area for our Company as the EDA standards attain industry acceptance.
Cimetrix is now planning several versions of CIMPortal. One version will be
marketed directly to its base of semiconductor OEM customers and a second
version will be marketed to semiconductor IC manufacturers. We are not sure how
fast the semiconductor industry will adopt the new EDA standards, but Cimetrix
took an important step during 2003 to show our commitment to being a technology
leader in this area.
Another key area of focus for the Company is our commitment to providing
first-class technical support to our customers. During 2003 we received a number
of unsolicited messages from our customer base thanking us for the efforts of
our technical support team. During a time when our customer's engineering
departments are very lean, it is testament to our technical support team's
efforts that our customers would find time to convey a specific message of
thanks.
Controlling Costs. A key factor in the Company's ability to generate income from
operations is its ongoing commitment to effectively manage operating costs. Over
the past eighteen months, the Company has taken several steps to reduce these
costs. Some of these reductions include a 30% decrease in general and
administrative costs, as well as a 54% decrease in cost of goods sold from 2002.
By focusing on efficient ways to reduce costs, the Company will increase its
ability to achieve positive net income.
Managing Our Capital Structure. One of the most important financial measurements
that we focus on is our working capital. As of December 31, 2003, the Company
had working capital of $966,000. This is an increase of $1,088,000 from the same
period in 2002. In December 2003 the Company was successful in raising
additional capital at a low effective cost through a private placement offering.
Historically the Company's overall operating deficit has made obtaining working
capital through traditional bank loans or credit lines more difficult; however
in February of 2004, the Company obtained a $500,000 line of credit from its
bank. This line of credit is secured by the Company's own cash reserves and will
serve as an important part of the Company's capital structure. We believe that a
strong and well-managed capital structure is a key part to increasing value in
Cimetrix.
-24-
<page>
Critical 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.
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 were to increase, 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.
-25-
<page>
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.
Long-Lived Assets
Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that their net book value
may not by recoverable. When such factors and circumstances exist, the Company
compares the projected undiscounted future cash flows associated with the
related asset or group of assets over their estimated useful lives against their
respective carrying amounts. Impairment, if any, is based on the excess of the
carrying amount over the fair value of those assets and is recorded in the
period in which the determination is made.
-26-
<page>
Operations Review
- -----------------
Analysis of Consolidated Statement of Income
The following table summarizes the percent change in net revenues,
expenses, and net income derived from the Company's Statements of Operations for
each of the three preceding fiscal years. An analysis of these changes is
discussed following the table.
Percent Change
--------------------
Year Ended December 31, 2003 2002 2001 03 vs. 02 02 vs. 01
- ----------------------------------------------------------- --------- ---------
(in thousands)
Net sales $ 3,340 $ 2,975 $ 4,075 12% (27)%
----------------------------- --------- ---------
Operating Expenses:
Cost of sales 435 952 718 (54) 33
Selling, marketing and
customer support 1,221 1,625 2,002 (25) (19)
Research and development 933 1,074 1,899 (13) (43)
General and administrative 1,087 1,544 1,645 (30) (6)
Provision for doubtful
accounts (57) 337 287 (117) 17
Impairment loss 313 1,224 3,112 (74) (61)
----------------------------- --------- ---------
Total operating expenses $3,932 $6,756 $9,663 (42) (30)
----------------------------- --------- ---------
Loss from operations (592) (3,781) (5,588) (84) (32)
----------------------------- --------- ---------
Other income (expense):
Interest income 4 55 211 (93) (74)
Interest expense (316) (297) (268) 6 11
Other (expense) income (27) (29) 25 (7) (216)
----------------------------- --------- ---------
Total Other income (expense) $(339) $(271) $(32) 25 (747)
----------------------------- --------- ---------
Loss before provision
for income taxes (931) (4,052) (5,620) (77) (28)
Provision for income taxes - (3) - - -
----------------------------- --------- ---------
Net income (loss) $(931) $(4,055) $(5,620) (77) (28)
----------------------------- --------- ---------
-27-
<page>
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, 2003 2002 2001
- --------------------------------------------------------------------------------
Net sales 100% 100% 100%
Operating expenses:
Cost of sales 13% 32% 18%
Selling, marketing and customer support 37 55 49
Research and development 28 36 47
General and administrative 33 52 40
Provision for doubtful accounts (2) 11 7
Impairment Loss 9 41 76
---------------------------------
Total operating expenses 118% 227% 237%
---------------------------------
Income (loss) from operations (18)% (127)% (138)%
Interest income, net of expense (9) (8) (1)
Other income (expenses) (1) (1) 1
---------------------------------
Net Income (loss) (28)% (136)% (138)%
=================================
Net Sales
Net sales for the three fiscal years ended December 31, 2003, 2002, and
2001 were approximately $3,340,000, $2,975,000, and $4,075,000, respectively.
Net sales for 2003 increased $365,000, or 12%, to $3,340,000, from $2,975,000 in
2002. This increase in net sales was primarily due to an increase in software
license revenue for the period. Net revenues for 2002 decreased $1,100,000, or
27%, to $2,975,000, from $4,075,000 in 2001. The decrease in sales from 2001 to
2002 was primarily due to a significant reduction in the volume of software
sales, rather than a reduction in the selling price of the software.
During 2003, the Company successfully added eight new major OEM customers,
which contributed to the increase in software license revenue. These new design
wins along with an increase in the number of major OEM customers gained during
2002, has enabled the Company to incrementally increase its base of software
support and maintenance contracts, as well as incrementally increase its
engineering services work. In addition, as more of the Company's major OEM
customers release new machines to the marketplace, this provides an increase in
the Company's runtime license revenue as the Company typically receives runtime
license revenue associated with every machine shipment.
Though the Company's software revenues over the past eighteen months have
been negatively impacted by the current economic slowdown, management believes
that there are indications of an increase in the general economic conditions of
the SMT and semiconductor markets, the primary markets served by the Company.
Management hopes to see a corresponding increase in the respective capital
equipment markets in the near future, which should result in increased software
revenues for the Company.
-28-
<page>
While the Company cannot predict market conditions for subsequent quarters,
it continues to market its products aggressively in order to broaden its
customer base.
The following table summarizes the percent changes in net revenues for each
of the three preceding fiscal years (revenues are in thousands):
Percent Change
---------------------
Year Ended December 31, 2003 2002 2001 03 vs. 02 02 vs. 01
- ------------------------------------------------------ --------- ---------
Software revenues $1,855 $1,360 $2,935 36 (54)
Application revenues 707 960 633 (26) 52
Support/training revenue 778 655 507 19 29
- ------------------------------------------------------------------------------
Total $3,340 $2,975 $4,075
The following table summarizes net revenues by categories, as a percent of total
net revenues:
Year Ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------
Category:
Software revenues 56% 46% 72%
Application revenues 21 32 16
Support/training revenue 23 22 12
Cost of Sales
The Company's cost of sales as a percentage of net sales for the years
ended December 31, 2003, 2002, and 2001 were approximately 13%, 32%, and 18%,
respectively. Cost of sales decreased by approximately $517,000 or 54%, to
approximately $435,000 for 2003, from $952,000 for 2002. This decrease was
attributable to a reduction in the use of contract labor in performing
engineering services. During the year ended December 31, 2003, such services
were provided mainly by employees of the Company, thus resulting in lower costs
to provide such services.
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
by the Company and externally through resources outside the Company. The costs
related to the sale of services performed through external resources are also
accounted for as cost of sales.
Cost of sales increased by approximately $234,000, or 33%, to approximately
$952,000 for 2002, from $718,000 for 2001.This increase was attributed to an
increased number of application and integration service projects that the
Company provided to its customers during 2002.
-29-
<page>
Selling, Marketing and Customer Support
Selling, marketing and customer support expenses decreased $404,000 or 25%,
to $1, 221,000 in 2003, from $1,625,000 in 2002. This decrease was attributable
to a reduction in the number of sales and marketing personnel, including a
reduction in personnel and operating costs associated with the Company's office
located in Archamps, France.
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 for 2003, 2002, and 2001
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 $141,000, or 13%, to
$933,000 in 2003, from $1,074,000 in 2002. 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 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. As the Company's products
have matured, emphasis has moved from development and software enhancements to
providing services and support to customers as they prepare for and begin to
ship the Company's products on their equipment. The Company's efforts to develop
its motion control and communications products represented the majority of the
research and development expenditures during 2003, 2002, 2001.
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 $457,000, or 30%, to
$1,087,000 in 2003, from $1,544,000 in 2002. These decreases resulted from a
reduction in depreciation, amortization, rent, legal and other operating
expenses. The decrease in amortization expense was due primarily to a partial
write-off in 2002 of $1,224,000 of the Company's intangible asset relating to
the SDI technology acquisition (see Impairment Loss below).
General and administrative expenses decreased $101,000, or 6%, to
$1,544,000 in 2002, from $1,645,000 in 2001. These decreases resulted from a
reduction in depreciation, amortization, legal and other operating expenses.
-30-
<page>
General and administrative costs include all direct costs for
administrative and accounting personnel, and 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 2003 decreased $224,000, or 52%, to $210,000, from
$434,000 in 2002. Depreciation and amortization expense for 2002 decreased
$326,000, or 43%, to $434,000, from $760,000 in 2001. Depreciation and
amortization expense represented 19%, 28% and 46% of all general and
administrative expenses in 2003, 2002 and 2001, respectively.
Provision for Doubtful Accounts
Expenses related to a provision for doubtful accounts decreased $394,000,
or 117%, to a negative $57,000 in 2003, from $337,000 in 2002. This decrease was
attributable to the Company's improved collections of accounts receivable.
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.
Impairment Loss
The Company incurred an impairment loss of $265,000 in the fourth quarter
of 2003. This loss consisted of the partial write-off of its intangible asset
relating to the SDI technology acquired in 1999 for 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 of $276,000 as
of December 31, 2003.
Also in 2003, the Company impaired $78,000 of its inventory due to
decreases in sales of these products. Of the $78,000, $48,000 was recorded as
impairment expense while $30,000 was recorded as research and development costs.
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 its intangible asset
relating to the SDI technology acquired in 1999 for approximately $2,580,000.
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.
-31-
<page>
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.
During the year ended December 31, 2001, due to poor economic conditions
worldwide, the Company wrote-off its investment in its then Japanese affiliate,
Aries, Inc. Aries was 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. 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.
Other Income (Expenses)
Interest income decreased by $51,000, or 93%, to $4,000 for 2003, from
$55,000 for 2002. This decrease was due to a reduction in the Company's cash
reserves that were used to fund operations, and a reduction in the rate of
interest the Company earned on its cash reserves, due to market conditions and
an overall drop in interest rates.
Interest income decreased by $156,000, or 74%, to $55,000 for 2002, from
$211,000 for 2001. This resulted from the decrease in the Company's cash
reserves as cash was used to fund operations in the period.
Interest expense increased $19,000, or 6%, to $316,000, for 2003, compared
to $297,000 for 2002. This increase was attributable to the Company's 12% Senior
Notes and the attached warrants, (See Note 9, Senior Notes Payable, of the
audited financial statements, following in this document) as well as accrued
interest on a note payable to Tsunami Network Partners Corporation (See Note 9,
Senior Notes Payable, of the audited financial statements, following in this
document). The principal face value balance outstanding on the Senior Notes at
December 31, 2003 was $2,667,000. Interest expense on the Company's Senior Notes
is accrued monthly and is payable April 1 and October 1 of each year.
Interest expense increased $29,000, or 11%, to $297,000 for 2002, compared
to $268,000 for 2001. Interest expense for this period was attributable to the
Company's 12% and 10% Senior Notes. The principal face value balance outstanding
on the Senior Notes at December 31, 2002 was $2,616,000, compared to $2,681,000
at December 31, 2001. Interest expense on the Senior Notes is accrued monthly
and paid semi-annually on April 1and October 1.
-32-
<page>
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 2003, 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
- -------------------------------
Contractual Obligations and Future Cash Payments
As of December 31, 2003, the Company's contractual obligations, including
future cash payments due by period, are as follows (in thousands):
Payments Due by Period
---------------------------
Total 2004 2005 2006
- --------------------------------------------------------------------------------
Current portion of senior
notes payable (1) $ 752 $ 752 - -
Senior notes payable (2) 1,915 - 1,915 -
Lease obligations (3) 198 103 95 -
Estimated interest payments (4) 492 262 230 -
- --------------------------------------------------------------------------------
Total Contractual Obligations $ 3,357 $ 1,117 $ 2,240 -
- --------------------------------------------------------------------------------
(1) Refer to Note 9 of the Consolidated Financial Statements on page 59 of this
report
(2) Refer to Note 9 of the Consolidated Financial Statements on page 59 of this
report
(3) The Company leases certain office space and office equipment under
noncancelable operating lease agreements. Refer to Note 7 of the
Consolidated Financial Statements on page 58 of this reoprt.
(4) Represents future estimated interest payments made on the Company's Senior
Notes.
The Company's future liquidity remains uncertain due to the following:
As of December 31, 2003, approximately $982,000 of the Company's 10% Senior
Notes that matured on September 30, 2002 remained unpaid. Of the $982,000,
$482,000 was 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 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. Subsequently on February 11, 2004, the Receiver presented
to the Company the $482,000 of 10% Senior Notes due September 30, 2002. The
Company then paid the Receiver 50% in cash and rolled over the remaining 50%
into new Cimetrix 12% Senior Notes due 2005. The $482,000 of 10% Senior Notes
was comprised of two separate notes. One was a $110,000 note owned by the
Receiver, the other was a $372,000 note under the Receiver's control.
-33-
<page>
The remaining $500,000 of Senior Notes due September 30, 2002, have been
presented to the Company for redemption. (See Note 9, Senior Notes Payable, of
the audited financial statements following in this document) 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, attorney's fees and costs. This complaint is
discussed in Part I, Item 3, Legal Proceedings, earlier in this document.
While management believes that the Company has sufficient working capital
to maintain its current level of operations for fiscal 2004, retirement of the
remaining balance of $500,000 of its 10% Senior Notes would consume a
substantial portion of the Company's cash and could adversely affect its ability
to continue operations.
As of December 31, 2003, the Company had issued $1,554,000 of 12% Senior
Notes due September 30, 2005 through its private placement offering which
commenced on June 26, 2002. In addition, in connection with the settlement of
litigation, the Company issued an additional $120,000 of 12% Senior Notes due
September 30, 2005. Of the $1,554,000 issued, $446,000 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.
On December 26, 2003, the Company completed a private offering involving
the sale of a total of 2,114,287 shares of its common stock to eleven accredited
investors under Section 4(2) of the Securities Act of 1933, as amended, and Rule
506 of Regulation D thereunder at a price of $.35 per share. The Company
received a total of $740,000 in cash from the private placement transaction and
intends to use the proceeds for working capital and general corporate purposes.
At December 31, 2003, the Company had cash and other current assets of
$2,639,000, and current liabilities of $1,673,000, resulting in working capital
of $966,000, as compared to a working capital deficit of $122,000 at December
31, 2002. This increase in working capital of $1,088,000 was attributable to
factors which include the following: the $500,000 note payable to Tsunami
Network Partners Corporation being converted to common stock on March 31, 2003,
proceeds from the private placement offering held in December 2003, and a
reclassification of $241,000 from the current portion of senior notes payable to
long-term debt.
Future liquidity is also dependent upon the Company's ability to generate
cash flow from operations. In 2003 and 2002, 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,
2003 was $577,000 compared to cash used in operating activities of $1,269,000,
for the same period in 2002. The negative cash flow resulted primarily from the
net loss from operations of $931,000. The Company's trade receivables increased
by $436,000 to $920,000 for the twelve months ended December 31, 2003, from
$484,000 at December 31, 2002. This increase in receivables was primarily due to
an increase in sales volume during the fourth quarter of 2003.
-34-
<page>
Cash provided by investing activities for the period ended December 31,
2003 was $159,000, compared to cash provided by investing activities of
$1,297,000 for the same period in 2002. This reduction resulted from the sale of
a smaller amount of marketable securities held for investment.
Cash provided by financing activities for 2003 was $750,000, compared to
cash provided by financing activities of $286,000 in 2002. The cash provided by
financing activities in 2003 was due to common stock issued under the private
placement offering closed in December 2003. See Recent Sales of Unregistered
Securities under Item 5, Market For Registrant's Common Equity and Related
Stockholder Matters.
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 its 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 35%, 36% and 41%
of the Company's net sales for 2003, 2002 and 2001, respectively.
Factors Affecting Future Results
Revenues for 2003 increased 12% compared to the prior year. During 2003,
the economic slowdown 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. It is essential that the Company
continue to incrementally expand its customer base during the current economic
slowdown in order to increase revenues. Management remains hopeful that its
expanded customer base will provide the needed revenues on a quarterly basis to
sustain operations and start generating cash from operations.
The Company's future operating results and financial condition are
difficult to predict and will be affected by a number of factors. The markets
for the Company's products are emerging and specialized, and the Company's
technology has been commercially available for a relatively short time.
Accordingly, the Company has limited experience with the commercial use and
acceptance of its products and the extent of the modifications, adaptations and
custom applications that are required to integrate its products and satisfy
customer performance requirements. There can be no assurance that the emerging
markets for industrial motion control that are served by the Company will
continue to grow or that the Company's existing and new products will satisfy
the requirements of those markets and achieve a successful level of customer
acceptance. Because of this, the Company continues to devote significant
research and development resources to improve its existing products.
Because of these and other factors, past financial performance is not
necessarily indicative of future performance, historical trends should not be
used to anticipate future operating results, and the trading price of the
Company's common stock may be subject to wide fluctuations in response to
quarter-to-quarter variations in operating results and market conditions.
-35-
<page>
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
ITEM 9A. CONTROLS AND PROCEDURES
=================================
(a) Evaluation of disclosure controls and procedures.
Based on their evaluations as of December 31, 2003, 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-15(e) and
15d-15(e) 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 over
financial reporting or in other factors that could significantly affect these
internal controls subsequent to the date of their most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
-36-
<page>
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 2004 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. The Information
regarding Executive Officers of the Company is contained in Part 1 of this
report.
The Company has not yet adopted a code of ethics that applies to its
principal executive officer, principal financial officer, controller or persons
performing similar functions. The Company is still in the process of studying
this issue and intends to adopt a code of ethics in the near future.
The Company's board of directors has determined that Scott C. Chandler, who
currently serves as a director of the Company as well as a member of the
Company's audit committee, is an independent audit committee financial expert.
ITEM 11. EXECUTIVE COMPENSATION
===============================
Incorporated by reference from the information in the Company's Proxy
Statement for the 2004 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 2004 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 2004 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. PRINCIPAL ACCOUNTANT FEES AND SERVICES
===============================================
Incorporated by reference from the information in the Company's Proxy
Statement for the 2004 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.
-37-
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 44 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 December 26, 2003, the Company filed Form 8-K including Item 5.
Other Events, announcing the completion of a private offering
involving the sale of a total of 2,114,287 shares of its common stock
to eleven accredited investors under Section 4(2) of the Securities
Act of 1933, as amended, and Rule 506 of Regulation D thereunder at a
price of $.35 per share. The Company received a total of $740,000 in
cash from the private placement transaction and intends to use the
proceeds for working capital and general corporate purposes.
-38-
<page>
(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)
10.13 Amendment to Employment Agreement with Robert H.
Reback, President and Chief Executive Officer (11)
10.14 Amendment to Employment Agreement with David P.
Faulkner, Executive Vice President of Sales and
Marketing (11)
10.15 Amendment to Employment Agreement with Michael D.
Feaster, Vice President of Software Development (11)
31.1 Certification of Principal Executive Officer pursuant
to Rule 13a-15(e) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant
to Rule 13a-15(e) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Principal Executive Officer pursuant to
18 U.S.C Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of Principal Financial Officer pursuant to
18 U.S.C Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
--------------------------------------
(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.
(11) Attached
-39-
<page>
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 29th
day of March, 2004.
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, Chief Executive Officer and March 29, 2004
- -------------------- Director (Principal Executive Officer)
Robert H. Reback
/S/Joe K.Johnson Interim Chief Financial Officer and March 29, 2004
- ------------------ Director(Principal Financial and
Joe K.Johnson Accounting Officer)
/S/Scott C. Chandler Director March 29, 2004
- ---------------------
Scott C. Chandler
/S/C. Alan Weber Director March 29, 2004
- ----------------------
C. Alan Weber
-40-
<page>
Cimetrix Incorporated
Consolidated Financial Statements
December 31, 2003 and 2002
-41-
CIMETRIX INCORPORATED AND SUBSIDIARY
Index to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Page
Independent auditors' report F-3
Consolidated balance sheet F-4
Consolidated statement of operations F-5
Consolidated statement of stockholders' deficit F-6
Consolidated statement of cash flows F-8
Notes to consolidated financial statements F-9
- --------------------------------------------------------------------------------
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, 2003 and 2002, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the years ended December
31, 2003, 2002 and 2001. 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, 2003 and 2002, and the results of its operations
and its cash flows for the years ended December 31, 2003, 2002 and 2001 in
conformity with accounting principles generally accepted in the United States of
America.
/S/Tanner + Co
Salt Lake City, Utah
February 11, 2004
- --------------------------------------------------------------------------------
F-3
-43-
CIMETRIX INCORPORATED
Consolidated Balance Sheet
(In thousands, except share amounts)
December 31,
- --------------------------------------------------------------------------------
Assets 2003 2002
------ ---------------------------
Current assets:
Cash and cash equivalents $ 1,389 $ 1,057
Marketable securities 234 396
Receivables, net 920 484
Inventories 7 87
Prepaid expenses and other current assets 89 79
---------------------------
Total current assets 2,639 2,103
Property and equipment, net 84 181
Technology, net 276 632
Other assets 33 52
---------------------------
$ 3,032 $ 2,968
---------------------------
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 167 $ 172
Accrued expenses 192 193
Deferred revenue 562 378
Note payable - 500
Current portion of senior notes payable 752 982
--------------------------
Total current liabilities 1,673 2,225
Senior notes payable 1,865 1,556
--------------------------
Total liabilities 3,538 3,781
--------------------------
Commitments and contingencies
Redeemable common stock - 75
Stockholders' deficit:
Common stock, $.0001 par value, 100,000,000 shares
authorized; 27,652,246 and 24,089,833 shares
issued, 2003 and 2002, respectively 3 2
Additional paid-in capital 28,634 27,322
Treasury stock, 25,000 shares at cost (49) (49)
Accumulated deficit (29,094) (28,163)
--------------------------
Total stockholders' deficit: (506) (888)
--------------------------
$ 3,032 $ 2,968
--------------------------
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-4
-44-
CIMETRIX INCORPORATED
Consolidated Statement of Operations
(In thousands, except share amounts)
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------------------------
Sales:
Software $ 1,846 $ 936 $ 2,552
Services and support 1,448 1,615 1,140
Net related party sales 46 424 383
------------------------------------------------
3,340 2,975 4,075
------------------------------------------------
Operating expenses:
Cost of sales 435 952 718
General and administrative 1,087 1,544 1,645
Selling, marketing and customer support 1,221 1,625 2,002
Research and development 933 1,074 1,899
Provision for doubtful accounts (57) 337 287
Impairment loss 313 1,224 3,112
------------------------------------------------
3,932 6,756 9,663
------------------------------------------------
Loss from operations (592) (3,781) (5,588)
------------------------------------------------
Other income (expense):
Interest income 4 55 211
Interest expense (316) (297) (268)
Other (expense) income (27) (29) 25
------------------------------------------------
(339) (271) (32)
------------------------------------------------
Loss before provision for income taxes (931) (4,052) (5,620)
Provision for income taxes - (3) -
------------------------------------------------
Net (loss) income $ (931) $ (4,055) $ (5,620)
------------------------------------------------
Net (loss) income per common share-
basic and diluted $ (0.04) $ (0.17) $ (0.23)
------------------------------------------------
Weighted average shares outstanding
basic and diluted 25,186,000 24,488,000 24,092,000
------------------------------------------------
- -----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-5
-45-
CIMETRIX INCORPORATED
Consolidated Statement of Stockholders' Deficit
(In thousands, except share amounts)
Years Ended December 31, 2003, 2002, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury Stock Common Stock Additional Accumu-
--------------- ------------------ Paid-in lated
Shares Amount Shares Amount Capital Deficit Total
-------------------------------------------------------------------------------
Balance, January 1, 2001 6,722 $ (1) 24,456,690 $ 2 $ 28,130 $ (18,488) $ 9,643
Common stock issued for service - - 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 - - - - (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
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-6
-46-
CIMETRIX INCORPORATED
Consolidated Statement of Stockholders' Deficit
(In thousands, except share amounts)
(Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury Stock Common Stock Additional Accumu-
--------------- ------------------ Paid-in lated
Shares Amount Shares Amount Capital Deficit Total
-------------------------------------------------------------------------------
Purchase and cancellation of treasury shares - - (26,786) - 34 - 34
Options and warrants issued for services - - - - 22 - 22
Common stock issued for debt and accrued
interest - - 1,474,911 - 517 - 517
Common stock issued for cash - - 2,114,288 1 739 - 740
Net loss - - - - - (931) (931)
-------------------------------------------------------------------------------
Balance, December 31, 2003 25,000 $ (49) 27,652,246 $ 3 $ 28,634 (29,094) $ (506)
-------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-7
-47-
<page>
CIMETRIX INCORPORATED
Consolidated Statement of Cash Flows
(In thousands, except share amounts)
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------
Cash flows from operating activities:
Net (loss) income $ (931) $ (4,055) $ (5,620)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization and depreciation 210 434 760
Provison for doubtful accounts (57) 337 287
Loss on disposition of assets - - 5
Stock compensation expense - 22 2
Option and warrant compensation expense 22 43 -
Impairment loss on technology 265 1,224 2,490
Impairment on equity investment - - 522
Impairment loss on inventory 78 - -
Interest expense from bond discount 28 22 -
(Increase) decrease in:
Receivables (379) 891 366
Inventories 2 69 (35)
Prepaid expenses and other current assets (10) 4 (54)
Other assets - (56) 58
Increase (decrease) in:
Accounts payable (5) (90) 138
Accrued expenses 16 (311) (28)
Deferred revenue 184 197 138
-------------------------------------------
Net cash used in operating activities (577) (1,269) (971)
-------------------------------------------
Cash flows from investing activities:
Sale (purchase) of marketable securities 162 1,389 (1,785)
Purchase of property and equipment (3) - (162)
Payment (issuance) of note receivable - related party - - 416
Purchase of technology - (92) (217)
Proceeds from disposal of property - - 11
-------------------------------------------
Net cash provided by (used in) investing activities 159 1,297 (1,737)
-------------------------------------------
Cash flows from financing activities:
Proceeds from note payable - 500 -
Proceeds from issuance of common stock 740 - -
Proceeds from long-term debt 51 395 -
Payments of long-term debt - (580) (27)
Purchase and Retirement of common stock (41) (29) (47)
-------------------------------------------
Net cash provided by (used in) financing activities 750 286 (74)
-------------------------------------------
Net increase (decrease) in cash and cash equivalents 332 314 (2,782)
Cash and cash equivalents at beginning of year 1,057 743 3,525
-------------------------------------------
Cash and cash equivalents at end of year $ 1,389 $ 1,057 $ 743
-------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-8
-48-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
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, and 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-9
-49-
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 Continued 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, 2003 and 2002 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, 2003 and 2002 was $234 and $396, 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-10
-50-
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 6). The technology is being amortized on
the straight-line method over ten years.
- --------------------------------------------------------------------------------
F-11
-51-
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-12
-52-
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, 2003, the Company has stock-based employee
compensation plans, which are described more fully in Note 16. 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,
-------------------------------------
2003 2002 2001
-------------------------------------
Net (loss) income as reported $ (931) $ (4,055) $ (5,620)
Deduct:
Total stock-based employee
compensation expense
determined under fair value
based method for all awards (478) (706) (649)
-------------------------------------
Net (loss) income pro forma $ (1,409) $ (4,761) $ (6,269)
-------------------------------------
Loss per share:
Basic - as reported $ (.04) $ (.17) $ (.23)
-------------------------------------
Basic - pro forma $ (.06) $ (.19) $ (.26)
-------------------------------------
Diluted - as reported $ (.04) $ (.17) $ (.23)
-------------------------------------
Diluted - pro forma $ (.06) $ (.19) $ (.26)
-------------------------------------
- --------------------------------------------------------------------------------
F-13
-53-
<page>
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,
------------------------------------------
2003 2002 2001
------------------------------------------
Expected dividend yield $ - $ - $ -
Expected stock price
volatility 87% 99% 102%
Risk-free interest rate 3.35% 4.0% 4.0%
Expected life of options 5 years 5 years 5 years
------------------------------------------
The weighted average fair value of options granted during 2003, 2002,
and 2001, was $.11, $.14, and $.32, 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 5,821,750, 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, 2003, 2002 and 2001, respectively, but
were not included in the diluted earnings (loss) per share calculation
because the effect would have been antidilutive.
- --------------------------------------------------------------------------------
F-14
-54-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
2. Liquidity
The Company has incurred net losses and negative cash flows from
operating activities for the years ended December 31, 2003, 2002, and
2001 and has an accumulated deficit. As of December 31, 2003, the
Company has working capital of $966 and during 2003 the Company was
able to reduce its losses and negative cash flows from operations.
Management believes that the combination of existing working capital
and continued improvements in operations will be sufficient to assure
continuation of the Company's operations through December 31, 2004.
There can be no assurance that operations will continue to improve or
that the existing working capital will be sufficient to sustain
operations through 2004. In addition, the Company has Senior Notes
payable due in 2005 in the amount of $1,915. If the Company is unable
to improve operations sufficiently or refinance the Senior Notes due
in 2005, it may be unable to continue development of its products and
may be required to substantially curtail operations during 2004 or
2005.
3. Private Placement of Common Stock
During 2003, the Company sold 2,114,288 shares of common stock in a
private Private placement offering for net proceeds of $740.
4. Receivables
Receivables consist of the following:
December 31,
-----------------------------------
2003 2002
-----------------------------------
Receivables:
Trade receivables $ 1,101 $ 727
Less allowance for doubtful
accounts (181) (243)
------------------------------------
$ 920 $ 484
------------------------------------
- --------------------------------------------------------------------------------
F-15
-55-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
5. Property and Equipment
Property and equipment consists of the following:
December 31,
-----------------------------------
2003 2002
-----------------------------------
Software development costs $ 464 $ 464
Equipment 365 482
Office equipment and software 346 458
Furniture and fixtures 170 183
Leasehold improvements 83 83
-----------------------------------
1,428 1,670
Accumulated depreciation and
amortization (1,344) (1,489)
-----------------------------------
-----------------------------------
$ 84 $ 181
-----------------------------------
6. 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 quarters of 2003 and 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 recorded impairment losses of $265 and
$1,224, respectively.
At December 31, 2003 and 2002, the net book value of the sdiStationTM
technology was $276 and $632, respectively.
- --------------------------------------------------------------------------------
F-16
-56-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
6. Technology (Continued)
AART
During the year ended December 31, 1999, the Company purchased
technology that is referred to as AARTTM. 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
AARTTM technology due to poor sales, integration and legal concerns.
The Company removed the technology from its software applications and
recorded an impairment loss in 2001 for $2,490, the carrying value at
the date of the impairment.
Amortization expense of technology costs for 2003, 2002 and 2001 was
approximately $91, $264, and $530, respectively. Accumulated
amortization was $1,080, $724, and $460 as of December 31, 2003, 2002
and 2001, respectively.
- --------------------------------------------------------------------------------
F-17
-57-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
7. 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
------------------------ -----------------
2004 $ 103
2005 95
-----------------
$ 198
-----------------
Rental expense for the years ended December 31, 2003, 2002 and 2001 on
operating leases was $121, $249 and $301, respectively.
The Company subleased certain office space under a noncancelable
operating lease arrangement that expired during 2003.
Rental income for the years ended December 31, 2003, 2002, and 2001 on
subleases was $0, $20 and $25, respectively.
8. 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 provided the
note would 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 $17 of accrued interest.
- --------------------------------------------------------------------------------
F-18
-58-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
9. 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 2002 and 2003, $755 and $0, 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, 2002 and
2003, there were $982 of 1997 Senior Notes payable. The $982 of 1997
Senior Notes payable were due September 30, 2002, but remained
outstanding as of December 31, 2003.
- --------------------------------------------------------------------------------
F-19
-59-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
9. Senior Notes Payable (Continued)
Subsequent to December 31, 2003, the holder of $482 of the 1997 Senior
Notes Senior presented its notes to the Company in exchange for
payment of $241 and new 2002 Senior Notes of $241. Accordingly, $241
of the current portion of Senior Notes payable has been reclassified
as long-term and included in the Senior Notes payable balance.
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.
- --------------------------------------------------------------------------------
F-20
-60-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
9. Senior Notes Payable (Continued)
2001 Senior Notes - Continued
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, 2002 and 2003, there were $11 of
2001 Senior Notes payable.
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 2002 Senior Notes at their face amount
plus accrued interest. The 2002 Warrants will be transferable
separately from the 2002 Senior Notes.
- --------------------------------------------------------------------------------
F-21
-61-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
9. Senior Notes Payable (Continued)
2002 Senior Notes - Continued
During 2003, another $51 of the 12% unsecured Senior Notes (2002
Senior Notes) were sold prior to the closing of the Private Placement
Memorandum.
As of December 31, 2003 and 2002, there were $1,624 and $1,545,
respectively (net of the remaining $50 and $78 note discount related
to warrants issued in connection with the 2002 Senior Notes) 2002
Senior Notes payable.
Under the terms of the refinancing, the Company issued 1,554 warrants
to purchase 777,000 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.
- --------------------------------------------------------------------------------
F-22
-62-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
9. Senior Notes Payable (Continued)
Future maturities of Senior Note are as follows:
2002 $ 741
2003 -
2004 11
2005 1,915
--------
$ 2,667
--------
Less amount representing interest
to be accreted (50)
--------
2,617
Less current portion of senior notes (752)
--------
Long-term portion of senior notes $ 1,865
--------
10. 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,
-------------------------------------
2003 2002 2001
-------------------------------------
Income tax benefit (provision)
at statutory rate $ 348 $ 1,511 $ 2,113
Life insurance and meals (9) (11) (9)
Other (13) (26) -
Change in valuation allowance (326) (1,477) (2,104)
-------------------------------------
$ - $ (3) $ -
-------------------------------------
- --------------------------------------------------------------------------------
F-23
-63-
<page>
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
10. Income Taxes (Continued)
Deferred tax assets (liabilities) are comprised of the following:
December 31,
------------------------------------
2003 2002
------------------------------------
Net operating loss carryforwards $ 7,559 $ 7,205
Asset impairment 2,134 2,361
Depreciation and amortization 371 259
Allowance for doubtful accounts 68 80
Accrued vacation and bonus 30 29
Deferred income 210 141
Inventory reserve 47 18
Capital loss carryover 108 108
Research & development credit 338 338
------------------------------------
------------------------------------
10,865 10,539
Less valuation allowance (10,865) (10,539)
------------------------------------
$ - $ -
------------------------------------
At December 31, 2003, the Company has a net operating loss
carryforward available to offset future taxable income of
approximately $20,266, 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.
11. Impairment Loss
During the fourth quarter 2003 and 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 $265
and $1,224, respectively (see Note 6).
During 2003, the Company recorded an impairment of a significant
portion of its inventory due to decreases in sales of these products.
Of the total impairment of $78, $48 was recorded as impairment expense
and $30 was recorded as research and development costs as the
unsalable inventory was used in the Company's research and development
activities.
- --------------------------------------------------------------------------------
F-24
-64-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
11. Impairment Loss
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 6).
The Company had an investment in a corporate entity (see note 15).
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.
12. Supplemental Cash Flow Information
During the year ended December 31, 2003:
The Company issued 1,474,911 shares of common stock as payment of
notes payable and accrued interest of $517.
The Company purchased and cancelled 26,786 shares of redeemable common
stock valued at $75 by paying $41 of cash. The remaining $34 was
recorded as additional paid-in capital.
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.
- --------------------------------------------------------------------------------
F-25
-65-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
12. Supplemental Cash Flow Information (Continued)
Actual amounts paid for interest and income taxes are as follows:
Years Ended December 31,
----------------------------------------------
2003 2002 2001
----------------------------------------------
Interest $ 288 $ 297 $ 268
----------------------------------------------
Income taxes $ - $ 3 $ 17
----------------------------------------------
13. Major Customers
During 2003 and 2001 there were no customers that accounted for 10% or
more of the Company's total sales. During 2002, one customer accounted
for $411, or 14%, of the Company's total sales.
Export sales to unaffilliated customers were approximately $1,160,
$884, and $1,310, in 2003, 2002 and 2001, respectively.
Export sales to countries which exceeded 10 percent of net sales were
as follows:
Years Ended December 31,
----------------------------------------------
2003 2002 2001
----------------------------------------------
Japan 9% 14% 19%
Germany 7% 6% 10%
14. 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, 2003, 2002 and 2001, the Company contributed
approximately $31, $37, and $28, respectively, to the plan.
- --------------------------------------------------------------------------------
F-26
-66-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
15. 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, 2003, 2002, and
2001, the Company recognized sales of approximately $6, $190, and $383
to this entity, respectively. In addition as of December 31, 2003,
2002, and 2001, the Company had net receivables from this entity of
approximately $29, $125, and $269, respectively.
16. 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
50,000 shares of common stock annually, or amounts as determined by
the board of directors, on each anniversary date during the term of
this plan.
- --------------------------------------------------------------------------------
F-27
-67-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
16. Stock Options and Warrants (Continued)
Information regarding the stock options and warrants is summarized
below:
Number of Weighted
Options Average
and Exercise
Warrants Price
-------------------------------
Outstanding at January 1, 2001 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
Granted 1,380,500 .35
Exercised - -
Forfeited (313,500) 1.46
-------------------------------
Outstanding at December 31, 2003 5,821,750 $ 1.03
-------------------------------
The following table summarizes information about stock options and
warrants outstanding at December 31, 2003:
Outstanding Exercisable
------------------------------------ ----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (Years) Price Exercisable Price
------------------------------------------------- ----------------------
$ .35 2,607,000 3.14 $ .35 1,327,000 $ .35
$ 1.00 2,174,250 2.90 $ 1.00 1,256,750 $ 1.00
$2.50-3.50 1,040,500 1.70 $ 2.81 910,500 $ 2.75
------------------------------------------------- ----------------------
$ .35-3.50 5,821,750 2.79 $ 1.03 3,494,250 $ 1.22
--------------------------------------------------- -------------------------
- --------------------------------------------------------------------------------
F-28
-68-
<page>
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 the individual borrowings bear interest at market interest
rates.
18. Commitments and Contingencies
Employment Agreements
The Company entered into employment agreements with certain employees,
which required 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, 2003, 2002, and 2001, 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-29
-69-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
18. Commitments and Contingencies (Continued)
Litigation
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
was amended to include Loving Spirit Foundation, a Florida foundation
("Loving Spirit"), as an additional plaintiff. The amended 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, 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 attorney's fees and costs.
The amended complaint adds an additional claim in equity for money
lent and 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. The president of Puma and
Loving Spirit is Terri L. Steffen, the wife of Paul A. Bilzerian, the
former President, CEO and a director of Cimetrix.
On June 26, 2003, the Court accepted the Company's answer to the
amended complaint and the counterclaims of the Company against the
plaintiffs. In the amended answer the Company denied that the Company
had issued a valid 10% Senior Note to Plaintiffs and also denied that
the Company has violated Section 517.301 of the Florida statutes
relating to securities violation. The Company also raised various
affirmative defenses in law and equity to the amounts owed to Puma and
Loving Spirit. The counterclaims request the court to enter a
declaratory judgment that the Company's total obligation to Puma and
Loving Spirit (prior to considering the Company's claims for offsets)
does not exceed $200,000.
- --------------------------------------------------------------------------------
F-30
-70-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
18. Commitments and Contingencies (Continued)
On or about May 6, 2003, plaintiffs filed a motion for partial summary
judgment claiming that as a matter of law, the court should grant
judgment to Puma and Loving Spirit of $500,000 plus interest with the
issue of the Company's claim of offset to be decided by the court in
an appropriate hearing on the matter. On or about May 28, 2003, the
Company filed its own motion for partial summary judgment and
opposition to Plaintiffs' motion for partial summary judgment claiming
that as a matter of law, the court should find that there was no valid
10% Senior Note issued to plaintiffs and that the Company does not owe
more than $200,000 before offsets are deducted. On or about January
28, 2004, the Court denied both cross motions for partial summary
judgment on the basis that there are material issues of fact that must
be decided by a jury.
The Court has set the date of April 5, 2004 for a jury trial on all
issues.
19. Recent Accounting Pronouncements
In November 2002, the EITF reached a consensus on Issue No.00-21,
Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21
provides guidance on how to account for certain arrangements that
involve the delivery or performance of multiple products, services
and/or rights to use assets. The provisions of EITF Issue No. 00-21
will apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF Issue No. 00-21
did not have a material impact on operating results or financial
condition of the Company as the Company followed the provisions of
Statement of Position ("SOP") 97-2, Software Revenue Recognition, as
modified by SOP 98-9, Modification of SOP 97-2 with Respect to Certain
Transactions, which provide guidance for revenue recognition of
arrangements with multiple deliverables.
- --------------------------------------------------------------------------------
F-31
-71-
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
(In thousands, except share amounts)
(Continued)
- --------------------------------------------------------------------------------
19. Recent Accounting Pronouncements (Continued)
In December 2003, the FASB issued Interpretation No. 46 ("FIN 46R")
(revised December 2003), Consolidation of Variable Interest Entities,
an Interpretation of Accounting Research Bulletin No. 51 ("ARB 51"),
which addresses how a business enterprise should evaluate whether it
has a controlling interest in an entity though means other than voting
rights and accordingly should consolidate the entity. FIN 46R replaces
FASB Interpretation No. 46 (FIN 46), which was issued in January 2003.
Before concluding that it is appropriate to apply ARB 51 voting
interest consolidation model to an entity, an enterprise must first
determine that the entity is not a variable interest entity (VIE). As
of the effective date of FIN 46R, an enterprise must evaluate its
involvement with all entities or legal structures created before
February 1, 2003, to determine whether consolidation requirements of
FIN 46R apply to those entities. There is no grandfathering of
existing entities. Public companies must apply either FIN 46 or FIN
46R immediately to entities created after January 31, 2003 and no
later than the end of the first reporting period that ends after March
15, 2004. The adoption of FIN 46 had no effect on the Company's
consolidated financial position, results of operations or cash flows.
In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities under SFAS 133, Accounting for Derivatives and Hedging
Activities. SFAS 149 is generally effective for derivative
instruments, including derivative instruments embedded in certain
contracts, entered into or modified after June 30, 2003. The adoption
of SFAS 149 did not have a material impact on the operating results or
financial condition of the Company.
- --------------------------------------------------------------------------------
F-32
-72-
19. Recent Accounting Pronouncements (Continued)
In May 2003, the FASB issued SFAS 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity. SFAS 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities and equity and
requires that those instruments be classified as liabilities in
statements of financial position. Previously, many of those financial
instruments were classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. On November 7, 2003, FASB Staff
Position 150-3 was issued, which indefinitely deferred the effective
date of SFAS 150 for certain mandatory redeemable non-controlling
interests. As the Company does not have any of these financial
instruments, the adoption of SFAS 150 did not have any impact on the
Company's consolidated financial statements.
In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104
revises or rescinds portions of the interpretive guidance included in
Topic 13 of the codification of staff accounting bulletins in order to
make this interpretive guidance consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations. The
adoption of SAB 104 did not have a material effect on the Company's
results of operations or financial position.
- --------------------------------------------------------------------------------
F-33
-73-