UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 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, Utah 84047-3757
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (801) 256-6500
------------------------------------------------------------------
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 |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the registrant's common stock as
of May 8,2003: Common stock, par value $.0001 - 25,537,959
CIMETRIX INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
INDEX
PART I Financial Information
Item 1. Financial Statements
a) Consolidated Condensed Statements of Operations.....................3
b) Consolidated Condensed Balance Sheets...............................4
c) Consolidated Condensed Statements of Cash Flows.....................5
d) Notes to Consolidated Condensed Financial Statements................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........23
Item 4. Controls and Procedures..............................................23
PART II Other Information
Item 1. Legal Proceedings....................................................24
Item 2. Changes in Securities and Use of Proceeds............................26
Item 3. Defaults Upon Senior Securities......................................26
Item 4. Submission of Matters to a Vote of Security Holders..................26
Item 5. Other Information....................................................26
Item 6. Exhibits and Reports on Form 8-K.....................................27
Signatures....................................................................29
Certifications................................................................30
-2-
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
CIMETRIX INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share and share amounts)
(Unaudited)
Three Months Ended
March 31,
--------------------------
2003 2002
----- ----
Sales
Software 559 228
Services and support 350 291
--------- ---------
Total net sales $ 909 $ 519
--------- ---------
OPERATING EXPENSES
Cost of sales 69 104
Selling, marketing and customer support 303 449
Research and development 264 398
General and administrative 306 486
--------- ---------
Total operating expenses 942 1,437
--------- ---------
INCOME (LOSS) FROM OPERATIONS (33) (918)
--------- ----------
OTHER INCOME (EXPENSES)
Interest income 2 16
Interest expense (95) (69)
---------- ----------
Total other income (expense) (93) (53)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (126) (971)
CURRENT INCOME TAX EXPENSE
(BENEFIT) - -
---------- ----------
NET INCOME (LOSS) $ (126) $ (971)
========== ==========
BASIC INCOME (LOSS) PER
COMMON SHARE $ (.01) $ (.04)
===== =====
DILUTED INCOME (LOSS) PER
COMMON SHARE $ (.01) $ (.04)
===== =====
WEIGHTED AVERAGE SHARES
OUTSTANDING, BASIC 24,065,000 24,026,000
========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING, DILUTED 24,065,000 24,026,000
========== ==========
See notes to consolidated condensed financial statements
-3-
CIMETRIX INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
ASSETS
March 31, December 31,
2003 2002
------------ -----------
CURRENT ASSETS
Cash and cash equivalents $ 929 $ 1057
Marketable Securities 387 396
Accounts receivable, net 718 484
Inventories 89 87
Prepaid expenses and other current assets 83 79
------------ ------------
Total current assets 2,206 2,103
Property and equipment, net 129 181
Technology, net 610 632
Other assets 47 52
------------ ------------
$ 2,992 $ 2,968
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 288 $ 172
Accrued expenses 211 193
Deferred revenue 411 378
Note Payable -- 500
Current portion, senior notes 982 982
------------ ------------
Total current liabilities 1,892 2,225
LONG TERM DEBT, net of current portion 1,563 1,556
------------ ------------
Total Liabilities 3,455 3,781
REEDEMABLE COMMON STOCK -- 75
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value: 100,000,000 shares
Authorized, 25,537,959 and 24,089,833 shares issued
and outstanding, respectively 3 2
Additional paid-in capital 27,872 27,322
Treasury stock, at cost (49) (49)
Accumulated deficit (28,289) (28,163)
------------ ------------
Net Stockholders' Deficit (463) (888)
------------ ------------
$ 2,992 $ 2,968
============ ============
See notes to consolidated condensed financial statements
-4-
CIMETRIX INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands, except share amounts)
(Unaudited)
Three Months Ended
March 31,
2003 2002
---- ----
Cash Flows from Operating Activities:
Net loss $ (126) $ (971)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Amortization and depreciation 79 109
Increase in receivables allowance account 15 121
Common stock issued to retire interest on notes 17 --
Bond discount related to warrants 7 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (249) 774
(Increase) decrease in inventory (2) (25)
(Increase) decrease in prepaid expenses (4) 1
Increase (decrease) in accounts payable 116 (59)
Increase (decrease) in accrued expenses 18 (134)
(Increase) decrease in other assets -- (13)
Increase (decrease) in customer deposits 33 111
------------ ------------
Net cash flow used in operating activities (96) (86)
------------ ------------
Cash Flows from Investing Activities:
Purchase of property and equipment, net of retirements -- (12)
Proceeds from sale of marketable securities 9 --
Purchase of marketable securities -- (16)
------------ ------------
Net cash flow provided by (used in)
investing activities 9 (28)
------------ ------------
Cash Flows from Financing Activities:
Purchase of treasury stock (41) --
------------ ------------
Net cash flow used in financing activities (41) --
------------ ------------
Net Decrease in Cash and Cash Equivalents (128) (114)
Cash and Cash Equivalents at the Beginning of Period 1,057 743
------------ ------------
Cash and Cash Equivalents at the End of Period $ 929 $ 629
============ ============
See notes to consolidated condensed financial statements
-5-
CIMETRIX INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands, except share amounts)
(Unaudited)
(CONTINUED)
Three Months Ended
March 31,
2003 2002
---- ----
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Income taxes $ 1 $ 7
Supplemental Schedule of Non-cash Investing and Financing
Activities:
Interest payable retired with issuance of common stock $ 17 $ --
Note payable retired with issuance of common stock $ 500 $ --
See notes to consolidated condensed financial statements
-6-
CIMETRIX INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying unaudited consolidated condensed
financial statements of Cimetrix Incorporated have been prepared in accordance
with the Securities and Exchange Commission's instructions to Form 10-Q and,
therefore, omit or condense footnotes and certain other information normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America. The accounting
policies followed for quarterly financial reporting conform with generally
accepted accounting policies disclosed in Note 1 to the Notes to Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002. In the opinion of management, all adjustments of a
normal recurring nature that are necessary for a fair presentation of the
financial information for the interim periods reported have been made. The
results of operations for the three month period ended March 31, 2003 are not
necessarily indicative of the results that can be expected for the entire year
ending December 31, 2003. The unaudited consolidated condensed financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Historically, the
Company has not demonstrated the ability to generate sufficient cash flows from
operations to satisfy these liabilities and sustain operations. These factors
raise substantial doubt about the Company's ability to continue as a going
concern.
The Company's continuation as a going concern is dependent on its ability
to generate sufficient income and cash flow to meet its obligations on a timely
basis and to obtain additional financing as may be required. The Company is
actively seeking options to obtain additional capital and financing. There is no
assurance that the Company will be successful in its efforts.
NOTE 3 - STOCK OPTIONS AND WARRANTS
As of March 31, 2003 and May 8, 2003, the Company had a significant number
of stock options and warrants outstanding representing a potential total of
5,676,250 and 5,661,750 shares of common stock, respectively, which are
summarized in the following table with details of each in the subsequent tables.
Strike # Outstanding # Outstanding
Description Price March 31, 2003 May 8, 2003
- --------------------------------------------------------------------------------
1998 Stock Option Plan $0.35-3.50 3,747,500 3,712,500
Directors Stock Option Plan $0.35-3.50 763,000 763,000
Warrants $0.35-1.00 1,165,750 1,186,250
---------- ---------
Total Options and Warrants 5,676,250 5,661,750
-7-
1998 Incentive Stock Option Plan as of March 31, 2003 and May 8, 2003
- ---------------------------------------------------------------------
As of March 31, 2003 and May 8, 2003, respectively, there were issued and
outstanding to the Company's officers and employees, options for the purchase of
3,747,500 and 3,712,500 shares of the Company's common stock, under the
Company's 1998 Incentive Stock Option Plan as amended. The following table
summarizes the quantity and exercise prices of the options.
Option Number Outstanding Number Outstanding
Price March 31, 2003 May 8, 2003
---------------------------------------------------------------------
$0.35 1,140,000 1,140,000
$1.00 1,870,000 1,870,000
$2.50 337,500 302,500 (1)
$3.00 350,000 350,000
$3.50 50,000 50,000
------ ------
Total Options 3,747,500 3,712,500
---------------------------------------------------------------------
(1) Excludes 35,000 options, which expired as of April 19, 2003, none having
been exercised.
A total of 4,000,000 shares of common stock have been reserved for issuance
under the plan. The existing options began to expire in April 2003 and will
continue to expire through January 2008.
Directors Stock Option Plan as of March 31, 2003 and May 8, 2003
- ----------------------------------------------------------------
As of March 31, 2003 and May 8, 2003, respectively, there were issued and
outstanding options for the purchase of 763,000 and 763,000 shares of the
Company's common stock, under the Company's Director Stock Option Plan. The
following table summarizes the quantity and exercise prices of the options.
Option Number Outstanding Number Outstanding
Price March 31, 2003 May 8, 2003
-------------------------------------------------------------------------------
$0.35 200,000 200,000
$1.00 225,000 225,000
$2.50 242,000 242,000
$3.50 96,000 96,000
------ ------
Total Options 763,000 763,000
-------------------------------------------------------------------------------
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. Of the above options, 219,000 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
January 2012.
-8-
Warrants
- --------
The following table summarizes the quantity and exercise price of
outstanding warrants.
Number of Number of
Strike Underlying Shares Underlying Shares
Description Price March 31, 2003 May 8, 2003
- --------------------------------------------------------------------------------
2001 Series Warrants $1.00 114,250 114,250
2002 Series Warrants $0.35 1,051,500 1,072,000
---------------------------------
Total Warrants 1,165,750 1,186,250
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.
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 the time of the filing of this report, a total of 2,144
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 1,072,000 shares. All
2,144 warrants became exercisable anytime after October 1, 2002 and on or before
September 30, 2005, provided the shares issuable have been registered under the
Securities Act of 1933, as amended, and either registered or qualified for an
exemption under any applicable state securities laws. The Company intends to use
its best efforts to prepare and file a Registration Statement with the
Securities and Exchange Commission to register the shares issuable pursuant to
the exercise of the 2002 Series Warrants. To date, none of the 2002 Series
Warrants have been exercised. The 2002 Series Warrants will expire on September
30, 2005.
-9-
Stock Based Compensation
- ------------------------
At March 31, 2003, the Company has stock-based employee compensation plans,
which are described more fully in Note 3 above in this report. 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:
Three Months Ended
March 31,
--------------------------
2003 2002
--------------------------
Net (loss) income as reported $ (126) $ (971)
Deduct:
Total stock-based employee
compensation expense
determined under fair value
based method for all awards (216) (393)
--------------------------
Net (loss) income pro forma $ (342) $ (1,364)
--------------------------
Earnings per share:
Basic - as reported $ (.01) $ (.04)
--------------------------
Basic - pro forma $ (.01) $ (.06)
--------------------------
Diluted - as reported $ (.01) $ (.04)
--------------------------
Diluted - pro forma $ (.01) $ (.06)
--------------------------
NOTE 4 - SENIOR NOTES
As of March 31, 2003, and May 8, 2003, the Company had $2,616,000 and
$2,657,000 of debt in the form of Senior Notes, respectively, which are
summarized in the following table with the detail of each explained below.
Principal Amount Principal Amount
Outstanding Outstanding
Description March 31, 2003 May 8, 2003
- --------------------------------------------------------------------------------
10% Senior Notes due September 30, 2002 $982,000 $982,000
10% Senior Notes due September 30, 2004 11,000 11,000
10% Senior Notes due September 30, 2005 1,623,000 1,664,000
--------- ---------
Total Senior Notes Outstanding $2,616,000 $2,657,000
-10-
10% Senior Notes due September 30, 2002
- ---------------------------------------
In November 1997, the Company issued approximately $3.3 million of 10%
Senior Notes due September 30, 2002. Interest on the Senior Notes has been paid
on April 1 and October 1 of each year since issuance. Approximately $600,000 of
the Senior Notes were retired June 1998 in exchange for common stock of the
Company, leaving an outstanding principal balance of $2,681,000. An additional
$457,000 was retired as of April 30, 2002, in exchange for new notes due
September 30, 2004, which notes are discussed below, leaving a principal balance
of $2,224,000 due September 30, 2002. Subsequent to September 30, 2002, another
$1,242,000 of the notes were retired. Of this amount, $755,000 was exchanged for
new notes due September 30, 2005, with the remaining amount of $487,000 being
paid out in cash. (See Notes due September 30, 2005 discussed below) leaving a
principal unpaid balance of $982,000, as of the time of the filing of this
report.
The certificates representing the $982,000, which matured on September 30,
2002, still remain unpaid. While the Company has entered into negotiations with
the holders of the notes to invest some or all of the amount due in the
Company's new 12% Senior Note offering, (See Part II, Item I, Legal Proceedings,
below in this report) the final disposition of these notes has not been
determined. Of the $982,000 outstanding, $500,000 has been presented to the
Company for redemption. Because the Company has not paid the $500,000, the
holder of the notes, Puma Foundation, Ltd., filed a complaint against the
Company on January 16, 2003, in the United States District Court, Middle
District of Florida, Tampa Division, Case Number 8:03-CV-85-T-23TGW. In the
complaint Puma Foundation, Ltd., is seeking payment of the $500,000 note plus
interest, attorneys fees and costs. This complaint is discussed in Part II, Item
I, Legal Proceedings, below in this document.
The remaining $482,000 of Senior Notes due September 30, 2002, have not
been presented for payment because they are presently under the jurisdiction of
a Receivership established by the United States District Court for the District
of Columbia in 2000 in the case of The Securities and Exchange Commission v.
Paul A. Bilzerian et al. (Civil Action No. 89-1854 (SSH)). As requested by the
Company, the Receiver, appointed by the United States District Court for the
District of Columbia has filed with the court a motion to accept the Company's
proposal to receive 50% payment in cash with respect to two Senior Notes and to
roll over the other 50% into new Cimetrix 12% Senior Notes due 2005. One is a
$110,000 note owned by the Receiver, the other is a $372,000 note under the
Receiver's control. Consequently, with respect to these two notes totaling
$482,000, the Company expects to pay $241,000 in cash and expects to issue new
notes for the other $241,000, thus freeing up an additional $241,000 of working
capital to fund operations.
10% Senior Notes due September 30, 2004
- ---------------------------------------
In an effort to preserve its working capital, on October 8, 2001, the
Company made an offer to its 10% Senior Noteholders, to exchange their 10%
Senior Notes due September 30 2002 for 10% Senior Notes due September 30, 2004.
These notes were not registered with the Securities and Exchange Commission nor
with any state securities commission. The offer of replacement notes was made in
reliance upon statutory exemptions available under the Securities Act of 1933
and under applicable state securities laws.
-11-
Any Noteholder exchanging Senior Notes due September 30, 2002 for Senior
Notes due September 30, 2004 also received at no additional consideration one
common stock purchase warrant for each $1,000 principal amount of Senior Notes
due 2002 that was exchanged. Each warrant entitles the holder to purchase 250
shares of the Company's common stock for $1.00 per share. See Note 3 - Stock
Options and Warrants, above. The warrants that were issued in connection with
the Senior Notes due September 30, 2004 represent 114,250 potential shares, with
any unexercised warrants expiring September 30, 2004. These warrants are
exercisable anytime after November 1, 2001 and on or before September 30, 2004
as a whole, in part, or in increments.
The offer to exchange the Senior Notes due September 30, 2002 was extended
from the original date of February 28, 2002 until April 30, 2002. As of that
date, $457,000 of these Senior Notes had been exchanged for Senior Notes due
September 30, 2004, leaving a principal balance of $2,224,000 due September 30,
2002. Of the $457,000 of Senior Notes that were exchanged, approximately $18,000
of the face value was attributable to the value of the warrants issued.
Therefore, the face value of these Senior Notes on the Company's balance sheet
was $444,000. This $18,000 was fully accreted as interest expense in 2002.
Subsequent to September 30, 2002 , $446,000 of the total $457,000 of notes
due September 30, 2004 were exchanged for cash of $93,000 and notes of $353,000
due September 30, 2005, leaving a principal balance due of $11,000 on the 2004
notes.
12% Senior Notes due September 30, 2005
- ---------------------------------------
Because a sufficient number of Noteholders did not accept the Company's
offer to exchange their 10% Senior Notes due September 30, 2002 for 10% Senior
Notes due September 30, 2004, the Company has undertaken a new Senior Note
offering. On June 26, 2002, the Company issued a confidential Private Placement
Memorandum for an offering of an aggregate principal amount of a minimum of
$500,000 and a maximum of $5,000,000 in unsecured 12% Senior Notes Due September
30, 2005, at 100% of face value, coupled with warrants to purchase 500 shares of
the Company's common stock for each $1,000 principal amount of Senior Notes
purchased, with the warrants expiring on September 30, 2005. The securities are
being offered to existing noteholders in exchange for their current notes, and
to new investors. The offering is being made directly by the Company on a best
efforts basis and is not being underwritten. The new Senior Note offering was to
close no later than August 31, 2002, but has been extended by the Company on a
monthly basis, to allow the Receivership appointed by the United States District
Court for the District of Columbia additional time to consider whether or not to
participate in the offering.
These Senior Notes are not being registered with the Securities and
Exchange Commission nor with any state securities commission. The Company is
relying upon an exemption from registration available under Regulation D, Rule
506, promulgated under the Securities Act of 1933 and also upon statutory
exemptions available under the Securities Act of 1933 and under applicable state
securities laws.
Any Noteholder exchanging Senior Notes due September 30, 2002 or 2004 for
Senior Notes due September 30, 2005 also received at no additional consideration
one common stock purchase warrant for each $1,000 principal amount of Senior
Notes that was exchanged.
-12-
Each warrant entitles the holder to purchase 500 shares of the Company's common
stock for $0.35 per share. See Note 3 - Stock Options and Warrants, above.
The sale of the 2002 Senior Notes was a result of the following:
Conversion of 1997 Senior Notes to 2002 Senior Notes $ 755,000
Conversion of 2001 Senior Notes to 2002 Senior Notes 353,000
2002 Senior Notes issued in connection with litigation
settlement 120,000
Cash proceeds received from the sale of 2002 Senior Notes 395,000
--------------------
Total $ 1,623,000
--------------------
As of March 31, 2003, there were $1,552,000 (net of the remaining $71,000
note discount related to warrants issued in connection with the 2002 Senior
Notes) 2002 Senior Notes payable.
NOTE 5 - EARNINGS PER SHARE
A reconciliation of the shares used in the computation of the Company's
basic and diluted earnings per common share is as follows (in thousands):
Three Months Ended
March 31,
2003 2002
---- ----
Weighted average common shares
Outstanding 24,065 24,026
Dilutive effect of :
Stock options -- --
Warrants -- --
------- -------
Weighted average common shares
outstanding, assuming dilution 24,065 24,026
------- -------
Weighted average common shares outstanding, assuming dilution, would
normally include the incremental shares that would be issued upon the assumed
exercise of stock options and warrants (see Note 3 - Stock Options and Warrants
and Note 4 - Senior Notes). However, during the three months ended March 31,
2003, stock options and warrants to exercise 5,676,250 shares were excluded from
the calculation of diluted earnings per share because they were antidilutive.
These options and warrants could be dilutive in the future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ----------------------------------------------------------
Following is a brief discussion and explanation of significant financial
data, which is presented to help the reader better understand the results of the
Company's financial performance for the first quarter of 2003.
-13-
The information includes discussions of sales, expenses, capital resources and
other significant items. Generally the information is presented in a two-year
comparison format using the first quarter data of 2003 and 2002.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's Condensed Financial
Statements and Notes thereto included elsewhere in this Quarterly Report. The
ensuing discussion and analysis contains both statements of historical fact and
forward-looking statements. Forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, generally are identified by the
words "expects," "believes" and "anticipates" or words of similar import.
Examples of forward-looking statements include: (a) projections regarding sales,
revenue, liquidity, capital expenditures and other financial items; (b)
statements of the plans, beliefs and objectives of the Company or its
management; (c) statements of future economic performance; and (d) assumptions
underlying statements regarding the Company or its business. Forward-looking
statements are subject to certain factors and uncertainties that could cause
actual results to differ materially from the forward-looking statements,
including, but not limited to, those factors and uncertainties described below
under "Liquidity and Capital Resources" and "Factors Affecting Future Results."
Overview of Products
The Company is the developer of the world's first open architecture,
standards-based, personal computer (PC) software for controlling motion-oriented
equipment that operates on the factory floor. The Company introduced its first
motion control products (CODE) in 1989, and has developed considerable expertise
through working with demanding original equipment manufacturer (OEM) customers.
In 2000, the Company introduced two new product families using the latest
in software technologies. Both products complement the Company's CODE motion
control family of products. CIMConnect is a next generation design for enabling
production equipment in the electronics industries to communicate data to the
factory's host computer using the SECS/GEM SEMI (Semiconductor Equipment and
Materials International) standard. CIM300 is a family of seven software products
that reduces the time required to connect new 300mm semiconductor tools to each
other and host computers into a factory by using the new SEMI 300mm standards.
Both products were winners of Semiconductor International's Editor's Choice
Award in 2001.
In 2001, Cimetrix introduced CODE 6 with Core Motion after six months of
field beta testing at customer sites. CODE 6 with Core Motion is the result of
18 months of research and development effort resulting in new technology to move
motion control from proprietary motion boards onto the PC. This can result in up
to a 50% savings in hardware costs for our OEM customers and positions us for
the evolution to network based drives.
In 2002 and early 2003, the Company designed, field tested and announced
the availability of CIM300Expert. This product further reduces the time required
by OEM customers to automate a semiconductor tool to comply with the SEMI 300 mm
standards. By reducing the implementation time from 12-24 weeks to 6-8 weeks,
CIM300Expert dramatically reduces the cost to implement SEMI compliance for
equipment suppliers. Cimetrix also introduced additional calibration technology
to its CODE 6 product, which allows faster time to market for key SMT customers.
-14-
Significant Accounting Policies
Management's discussion and analysis of the Company's financial condition
and results are based upon financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The following accounting policies significantly affect the way the
financial statements are prepared.
Revenue Recognition
The Company derives revenues from three primary sources: 1) sales of
software, 2) sales of application engineering services and 3) sales of technical
support services. Software sales are derived from the sale of the Company's
off-the-shelf software packages in the machine control and communications
product lines. Machine control products include items such as CODE 6.0(TM),
CIMControl(TM), and CIMulation(TM). Communications products include items such
as CIM300(TM), GEM Host Manager(TM) and CIMConnect(TM). Application engineering
sales are derived from the sale of services to design, develop and implement
custom software applications. Support sales are fixed annual contracts that
provide access to technical support personnel for help in the operation or
de-bugging of our software products.
Before the Company will recognize any revenue, the following criteria must
be met:
1) Evidence of a financial arrangement or agreement must exist between
the Company and its customer. Purchase orders and signed OEM contracts
are two examples of items accepted by the Company to meet this
criterion.
2) Delivery of the products or services must have occurred. We treat
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 our 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 substantially, the Company would
establish a reserve based on a percentage of sales to account for any
such returns.
4) Collectibility of the sale is reasonably assured, receipt is probable.
Collectibility of a sale is determined on customer by customer basis.
Typically the Company sells to large corporations which have a
demonstrated 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 upon
delivery of major project milestones or the percentage of completion method if
there are no milestones. 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.
-15-
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.
Statement of Operations Summary
The following table sets forth the percentage of costs and expenses to net
revenues derived from the Company's Condensed Statements of Operations for the
three months ended, March 31, 2003 and 2002, respectively:
Three Months Ended
March 31,
------------------
2003 2002
---- ----
NET SALES 100% 100%
---- ----
OPERATING EXPENSES
Cost of sales 8 20
Selling, marketing and customer support 33 86
Research and development 29 77
General and administrative 34 93
---- ----
Total operating expenses 104 276
------- -------
INCOME (LOSS) FROM OPERATIONS (4) (176)
Interest income -- 3
Interest expense (11) (13)
NET INCOME (LOSS) (14)% (187)%
------- -------
Results of Operations
Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31,
2002
Net Sales
Net sales increased by $390,000, or 75%, to $909,000, for the three months
ended March 31, 2003, from $519,000, for the three months ended March 31, 2002.
Net sales for the three months ended March 31, 2003, consisted of sales of
software (62%), engineering services (18%), and support and training (20%). Net
sales for the same period in 2002 consisted of sales of software (44%),
engineering services (27%), and support and training (29%).
-16-
The increase in first quarter sales was the result of an increase in
revenues derived from software sales, engineering services, and software support
services. During the first quarter of 2003, the Company successfully added three
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 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. However the Company has
no indication yet of any increase in the general economic conditions of the SMT
and semiconductor markets, the primary markets served by the Company.
While the Company cannot predict market conditions for subsequent quarters,
it continues to market its products aggressively in order to broaden its
customer base. Management hopes but has not seen any indication that the
electronics industry is starting to recover and that orders for new equipment
will increase.
Major Customers
Sales to two non-affiliated customers accounted for 19% and 14% of the
Company's revenues for the three months ended March 31, 2003, respectively.
Sales to two different non-affiliated customers accounted for 15% and 17%,
respectively, of the Company's revenues for the three months ended March 31,
2002. No other single non-affiliated customer accounted for 10% or more of the
Company's revenues for the three months ended March 31, 2003 and 2002,
respectively.
Sales to Aries, Inc., the Company's Japanese affiliate, accounted for 0%
and 8% of the Company's revenues for the three months ended March 31, 2003 and
2002, respectively.
Export sales were approximately 43% and 35% of the Company's revenues for
the three months ended March 31, 2003 and 2002, respectively. All export sales
were made in US dollars.
Export sales to countries that exceeded 10 percent of net sales were as
follows:
Three Months Ended
March 31,
2003 2002
-------------------
Japan 7% 15%
Switzerland 22% 5%
Cost of Sales
Cost of sales decreased by $35,000, or 34%, to $69,000 for the three months
ended March 31, 2003, from $104,000 for the comparable period in 2002. This
decrease was attributable to a decrease in the use of contract labor in
performing engineering services. During the quarter ended March 31, 2003, such
services were provided mainly by employees of the Company, thus resulting in
lower costs to provide such services.
-17-
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.
Selling, Marketing and Customer Support
Selling, marketing and customer support costs decreased by $146,000, or
33%, to $303,000 for the three months ended March 31, 2003, from $449,000 for
the comparable period in 2002. 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. The Company
continues to invest in general corporate marketing and outside public relations
services in an effort to expand the Company's customer base.
Selling, marketing and customer support expenses 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 $134,000, or 34%, to
$264,000 for the three months ended March 31, 2003, from $398,000 for the
comparable period in 2002. This decrease was due to a reduction in the number of
software development personnel. 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.
While shifting the Company's emphasis, significant investment in research
and development is still required for maintenance to existing products. The
Company expects to incur research and development expenses of approximately
$1,000,000 during 2003, compared to approximately $1,075,000 during 2002.
Research and development expenses include only direct costs for wages, benefits,
materials and education of technical personnel. All indirect costs such as
rents, utilities, depreciation and amortization are reflected in general and
administrative costs.
General and Administrative
General and administrative expenses decreased by $180,000, or 37%, to
$306,000 for the three months ended March 31, 2003, from $486,000 for the
comparable period in 2002. This decrease resulted from a reduction in
depreciation, amortization, rent, and legal expenses.
-18-
It is important to note that General and Administrative expenses 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, such as capitalized software and technology. Amortization and
depreciation expense for the three months ended March 31, 2003 was approximately
$79,000, or 26%, of all general and administrative expenses, compared to
$109,000, or 22%, for the same period in 2002. This decrease was attributable to
the impairment of technology assets at December 31, 2002.
Other Income (Expenses)
Interest income decreased by $14,000, or 87%, to $2,000 for the three
months ended March 31, 2003, from $16,000 for the comparable period in 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 expense increased by $26,000, or 38%, to $95,000 for the three
months ended March 31, 2003, from $69,000 for the comparable period in 2002.
This increase was attributable to the Company's new 12% Senior Notes and the
attached warrants, (See Note 4 - Senior Notes, to the Consolidated Condensed
Financial Statements above) as well as accrued interest on a note payable to
Tsunami Network Partners Corporation. (See "Liquidity and Capital Resources"
below in this document) Interest expense on the Company's Senior Notes is
accrued monthly and is payable April 1 and October 1 of each year.
Other Items
The Company is involved in two legal actions, which are discussed in Part
II, Item 1. Legal Proceedings, below in this report.
Liquidity and Capital Resources
The Company's future liquidity is uncertain due to the following factors:
Approximately $982,000 of the Company's 10% Senior Notes that matured on
September 30, 2002 still remain unpaid. While the Company has entered into
negotiations with the holders of the notes to invest some or all of the amount
due in the Company's new 12% Senior Note offering, (See Note 8, Senior Notes
Payable, of the audited financial statements of the Company's Annual Report
filed on Form 10-K, for the period ended December 31, 2002, filed March 31,
2003) the final disposition of these notes has not been determined. Of the
$982,000 outstanding, $500,000 has been presented to the Company for redemption.
Because the Company has not paid the $500,000, the holder of the notes, Puma
Foundation, Ltd., filed a complaint against the Company on January 16, 2003, in
the United States District Court, Middle District of Florida, Tampa Division,
Case Number 8:03-CV-85-T-23TGW. In the complaint Puma Foundation, Ltd., is
seeking payment of the $500,000 note plus interest, attorneys fees and costs.
This complaint is discussed in Part II, Item 1, Legal Proceedings, below in this
document.
The remaining $482,000 of Senior Notes due September 30, 2002, have not
been presented for payment because they are presently under the jurisdiction of
a Receivership established by the United States District Court for the District
of Columbia in 2000 in the case of The Securities and Exchange Commission v.
Paul A. Bilzerian et al. (Civil Action No. 89-1854 (SSH)).
-19-
As requested by the Company, the Receiver, appointed by the United States
District Court for the District of Columbia has filed with the court a motion to
accept the Company's proposal to receive 50% payment in cash with respect to two
Senior Notes and to roll over the other 50% into new Cimetrix 12% Senior Notes
due 2005. One is a $110,000 note owned by the Receiver, the other is a $372,000
note under the Receiver's control. Consequently, with respect to these two notes
totaling $482,000, the Company expects to pay $241,000 in cash and expects to
issue new notes for the other $241,000, thus freeing up an additional $241,000
of working capital to fund operations.
While management believes that the Company does have sufficient working
capital to maintain its current level of operations for fiscal 2003, it does not
have sufficient capital to maintain its current level of operations and also
retire the remaining balance of $982,000 of its 10% Senior Notes. Payment of
this debt would consume a majority of the Company's cash and it may not be able
to continue operations.
As of March 31, 2003, the Company had issued $1,503,000 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 $1,503,000 issued, $395,000 was received in cash from investors and
$1,108,000 was received through the exchange of 10% Senior Notes due September
30, 2002 and 10% Senior Notes due September 30, 2004. It is critical to the
Company's cash flow that the Company succeed in negotiating the remaining
$982,000 balance of its 10% Senior Notes. This would free up working capital
that is needed to fund operations if the Company's operating results do not
improve.
On September 30, 2002, the Company entered into a convertible note purchase
agreement in the amount of $500,000, with Tsunami Network Partners Corporation,
a Japanese corporation and on October 7, 2002, the Company received the
$500,000. The terms of the agreement provided for a short- term loan with a
principal amount of $500,000 at a rate of 6 3/4 % per annum, with principal and
interest that came due on March 31, 2003. The conversion feature of the note
provided that the note would convert into fully paid, nonassessable, restricted
shares of common stock at a conversion price of $0.35 per share. On March 31,
2003 the Company converted the note into 1,474,911 restricted shares of common
stock thus freeing up additional working capital to fund operations.
At March 31, 2003, the Company had cash and other current assets of
$2,206,000, and current liabilities of $1,892,000, resulting in working capital
of $314,000, as compared to a working capital deficit of $122,000 at December
31, 2002. This increase in working capital of $436,000 was attributable to the
$500,000 note payable to Tsunami Network Partners Corporation which was
converted to common stock on March 31,2003.
Future liquidity is also dependent upon the Company's ability to generate
cash flow from operations. Since inception, the Company has 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.
-20-
Cash used in operating activities for the period ended March 31, 2003 was
$96,000 compared to cash used in operating activities of $86,000 for the same
period in 2002. The negative cash flow year to date resulted primarily from the
net loss from operations of $126,000. The Company's trade receivables also
increased by $234,000 to $718,000 for the three months ended March 31, 2003,
from $484,000 at December 31, 2002, due to normal operating fluctuations and
increased sales during the quarter.
Cash provided by investing activities for the period ended March 31, 2003
was $9,000, compared to cash used by investing activities of $28,000 for the
same period in 2002. This increase resulted from the sale of marketable
securities held for investment.
Cash used in financing activities for the period ended March 31, 2003 was
$41,000 compared to no cash used by financing activities for the same period in
2002. This decrease resulted from the purchase and retirement of common stock
redeemable.
The Company has not been adversely affected by inflation but does believe
that technological advances and competition within the software industry have
generally caused prices of the products sold by the Company to decline. The
Company's software represents a small portion of our customer's product costs
and therefore management remains optimistic that demand for the Company's
products will continue. However, there are continued economic risks inherent in
foreign trade, because sales to foreign customers accounted for 43% and 35% of
the Company's net sales for the three months ended March 31, 2003 and 2002,
respectively.
Factors Affecting Future Results
First quarter revenues increased 75% compared to the prior year, meeting
the Company's target revenue, which was expected to increase slightly over the
fourth quarter of 2002. The economic slowdown continues and has led to
significant delays in the placement of orders by the Company's OEM customers. As
the end-user customers have cut back on capital equipment expenditures, the
Company's OEM customers have also cut back on their orders for the Company's
software products. Because of this, management significantly reduced the
Company's operating expenses over the past eighteen months, such that costs are
now in-line with expected revenues. The Company's ability to incrementally
expand its customer base during current poor economic conditions has been the
primary reason for the increase in 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.
-21-
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.
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 several of 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 be
considered comprehensive. For a more complete discussion of risk factors, the
reader should refer to the Company's Annual Report filed on Form 10-K, for the
period ended December 31, 2002, filed March 31, 2003.
Lack of Liquidity
The Company's liquidity is uncertain due to $982,000 of Senior Notes that
are presently due but unpaid which is discussed earlier in Liquidity and Capital
Resources. Since 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".
Risk of Default on Senior Notes Due September 30, 2002
There is a significant risk that the Company will not be able to pay the
remaining balance of $982,000 on the 10% Senior Notes due September 30, 2002.
(See Note 4-Senior Notes, to the Consolidated Condensed Financial Statements
above.) While only a portion of the remaining balance of Senior Notes has been
presented to the Company for redemption, payment in full may be required. This
default could cause the Company to become insolvent and may force the Company to
consider seeking bankruptcy protection under Federal bankruptcy law. This
default could also cause other material, adverse problems to the Company and
could result in our shareholders and noteholders receiving nothing in return for
their investment in the Company.
Operating Losses, Accumulated Deficit
The financial statements of the Company for the three months ended March
31, 2003, reflect a net loss of $126,000, and an accumulated deficit of
$28,289,000. As of that date, the Company had working capital of $314,000.
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.
-22-
Dependence Upon Major Customers
A large percentage of the Company's sales is to only a few customers. (See
"Major Customers" under Item 2, Management's Discussion and Analysis, "Results
of Operations".) The loss of any customer's business could have a material
adverse effect on the Company. Additionally, the quantity of each customer's
business with the Company depends substantially upon market acceptance of the
customer's products that utilize the Company's software products and upon the
development cycle of the customer's products. The nature of the Company's
business is such that it will likely continue to have few customers accounting
for a significant portion of its business.
Risk of Technological Changes
The markets for the Company's products are new and emerging and 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 and gain a competitive advantage.
Dependence Upon Key Personnel
The Company is highly dependent on the services of its key managerial and
engineering personnel, including, Robert H. Reback, President and Chief
Executive Officer, 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. The loss of any member of
the Company's senior management team could adversely affect the Company's
business prospects. The Company does not maintain key-man insurance for any of
its key management personnel.
ITEM 3. 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, and lines of
credit, is not material.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
(a) Evaluation of disclosure controls and procedures.
Based on their evaluations as of a date within 90 days of the filing date
of this report, the principal executive officer and principal financial officer
of the Company have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act) are effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC.
-23-
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Litigation with Steven D. Hausle, et al,
On April 12, 2002, Steven D. Hausle, Daniel J. Garnett M.D., Stephanie A.
Garnett, Axcient Corporation, and Ronald Tripiano, as plaintiffs, filed suit
against the Company, Robert H. Reback and Randall A. Mackey, as defendants, in
United States District Court, Northern District of California, San Jose
Division, Case Number C02-01769. The complaint alleges breach of oral and
written contract, fraud, negligent misrepresentation, breach of privacy, unfair
competition, wrongful termination, negligence and shareholder derivative claims
for breach of fiduciary duties, constructive fraud, negligence, and seeks
injunctive and declaratory relief. The plaintiffs are demanding $16,000,000 and
a jury trial.
In response to the complaint, the Company filed a motion to dismiss and/or
transfer. Messrs. Reback and Mackey also filed a motion to dismiss and/or
transfer. By way of order dated April 15, 2003 the court ruled on the motions
(formal discovery has not begun). The court denied dismissal of the breach of
contract, wrongful termination and declaratory relief claims. It dismissed the
fraud, negligent misrepresentation, breach of privacy, shareholder derivative
and unfair competition claims with 20 days leave to amend. This does not
necessarily mean that successful amendments will be accomplished. The court also
dismissed the constructive fraud claim without leave to amend and dismissed the
negligence claim with 20 days to amend but also stating that "the court doubts
that amendment can be successfully be [sic] made." The court did not transfer
any of the case from California to Utah. Mr. Mackey was dismissed from the case
for lack of personal jurisdiction; however, Mr. Reback was not dismissed from
the case. Plaintiffs filed an amended complaint dated May 1, 2003 in an effort
to overcome the dismissal of claims where leave was given to amend. The Company
is in the process of reviewing the amended complaint for the potential of filing
a further motion. The Company intends to continue to vigorously defend the
action as it believes the dismissed as well as non dismissed claims are without
merit. A case management conference is scheduled for July 25, 2003, by which
time the parties are to have completed court ordered mediation.
As previously reported, on May 16, 2002, the Company filed an action in the
United States District Court, District of Utah, Case Number 2-02CV-0484K
asserting certain claims against Mr. Hausle and Axcient Corporation. No response
has been filed, as by agreement the date to respond falls within a period after
the court rules on the above mentioned motions in the California case.
-24-
Litigation with Puma Foundation, Ltd. and Loving Spirit Foundation
On January 16, 2003, Puma Foundation, Ltd., a Bermuda limited liability
company ("Puma"), as plaintiff, filed a Complaint against the Company, in the
United States District Court, Middle District of Florida, Tampa Division, Case
Number 8:03-CV-85-T-23TGW. The Complaint alleges that Puma is the owner of a
Cimetrix 10% Senior Note in the amount of $500,000 allegedly donated to Puma by
Loving Spirit Foundation, a Florida foundation ("Loving Spirit"), and that on
January 2, 2003, Puma tendered the Senior Note certificate for payment, and is
entitled to payment of $500,000, plus accrued interest. Plaintiff also seeks
undisclosed attorney's fees and costs. The assets of Puma were unfrozen in the
case of The Securities and Exchange Commission v. Paul A. Bilzerian, et al.
(Civil Action No. 89-1854 (SSH)) and returned to Puma on or about December 30,
2002. The president of Puma is Terri L. Steffen, the wife of Paul A. Bilzerian,
the former President, CEO and Director of Cimetrix. During September 2002, the
Company had been in negotiations with Puma and believed that once the assets of
the foundation became unfrozen, Puma would accept the Company's proposal to
receive 50% payment in cash and roll over the other 50% into new Cimetrix 12%
Senior Notes due 2005, provided that no other holder of Cimetrix 10% Senior
Notes received payment of more than 50% in cash. Since that time, Puma has
issued several letters to the Company demanding payment in full. While the
Company has tried to negotiate acceptable payment terms, Puma's recent position
has been non-negotiable and it has demanded cash payment in full. Since learning
of this lawsuit, current management has examined its files relating to the
Senior Note certificate that is the subject of the lawsuit and has discovered
that this certificate may, in fact, not be a valid Company 1997 Senior Note. The
Company will continue to examine this issue and is currently conducting an
investigation to determine its legal obligations. On February 24, 2003, in
response to the Complaint, Cimetrix filed a motion to dismiss or in the
alternative transfer this action to the District of Utah. Once plaintiff filed
an Amended Complaint the court ruled that the Company's Motion to dismiss was
moot and denied the same.
On or about March 18, 2003, the Company received an Amended Complaint filed
by Puma and Loving Spirit, as plaintiffs. The Amended Complaint adds an
additional claim 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. Under these new claims Loving Spirit
seeks damages of $500,000 plus interest, attorney fees, costs and any other
damages and penalties recoverable under Florida law. The Company intends to
defend against these claims vigorously.
On or about March 26, 2003, the Company filed an answer to the Amended
Complaint and 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. On May 9, 2003, the Company filed a Motion for Leave to Amend its
Answer and Counterclaims against 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. The Company is currently preparing a response to plaintiffs' Motion for
Partial Summary Judgment claiming 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.
-25-
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 30, 2002, the Company entered into a convertible note purchase
agreement in the amount of $500,000, with Tsunami Network Partners Corporation,
a Japanese corporation and on October 7, 2002, the Company received the
$500,000. The terms of the agreement provided for a short- term loan with a
principal amount of $500,000 at a rate of 6 3/4 % per annum, with principal and
interest that came due on March 31, 2003. The conversion feature of the note
provided that the note would convert into fully paid, nonassessable, restricted
shares of common stock at a conversion price of $0.35 per share. On March 31,
2003, the total principal and interest of $516,219 were converted into 1,474,911
restricted shares of common stock.
The shares issued to Tsunami Network Partners Corporation have not been,
and will not be, registered with the Securities and Exchange Commission nor with
any state securities commission.The shares are restricted securities, issued
under statutory exemptions available under the Securities Act of 1933 and under
applicable state securities laws. This was an isolated transaction and not a
public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The certificates representing the balance ($982,000) owed on the 10% Senior
Notes due September 30, 2002 still remain unpaid. Puma Foundation, Ltd. has
demanded payment as to $500,000 of this balance. For a complete discussion of
the $982,000 balance, see Note 4-Senior Notes, 10% Senior Notes due September
30, 2002. See also the discussion of the Puma Foundation, Ltd. litigation in
Part II, Item 1, Legal Proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Proxy Statement
On April 16, 2003, the Company filed its Definitive Proxy Statement on
Schedule 14A, which was simultaneously mailed to its shareholders, announcing
the upcoming shareholders meeting to be held May 10, 2003, at the Company's
headquarters, beginning at 9:00 a.m. Any shareholder desiring a copy of the
Proxy Statement may do so by requesting a copy from the Company.
-26-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit listing
The following exhibits are provided with this report:
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)
99.1 Certificate of Cimetrix Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certificate of Cimetrix Chief Financial Officer 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.
-27-
(b) Reports on Form 8-K
On February 18, 2003, the Company filed a Form 8-K including Item 5. Other
Events, addressing two items relating to the future liquidity of the Company,
namely (1) $982,000 of the Company's 10% Senior Notes that matured on September
30, 2002 and (2) the contingent liability which existed as of December 31, 2002
with respect to the settlement of the Manley litigation.
-28-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGISTRANT
CIMETRIX INCORPORATED
Dated: May 8, 2003 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)
-29-
CERTIFICATIONS
I, Robert H. Reback, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cimetrix Incorporated
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 8, 2003
/s/ Robert H. Reback
President and Chief Executive Officer
-30-
I, Joe K. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cimetrix
Incorporated.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
May 8, 2003
/s/ Joe K. Johnson
Interim Chief Financial Officer