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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 September 30, 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 November 13, 2003: Common stock, par value $.0001 - 25,512,959
CIMETRIX INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 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............24
PART II Other Information
Item 1. Legal Proceedings.....................................................25
Item 2. Changes in Securities.................................................27
Item 3. Defaults Upon Senior Securities.......................................27
Item 4. Submission of Matters to a Vote of Security Holders...................27
Item 5. Other Information.....................................................27
Item 6. Exhibits and Reports on Form 8-K......................................28
Signatures....................................................................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 Nine Months Ended
September 30, September 30,
---------------------------- -------------------------
2003 2002 2003 2002
----- ---- ---- ----
SALES
Software 200 244 1,192 987
Services and support 246 392 1,144 1,080
Total net sales $ 446 $ 636 $ 2,336 $ 2,067
---------- ---------- ----------- -----------
OPERATING EXPENSES
Cost of sales 93 163 349 470
Selling, marketing and customer support 286 435 908 1,292
Research and development 209 335 692 1,094
General and administrative 217 427 864 1,478
---------- ---------- ----------- -----------
Total operating expenses 805 1,360 2,813 4,334
---------- ---------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (359) (724) (477) (2,267)
----------- ----------- ------------ ------------
OTHER INCOME (EXPENSES)
Interest income 1 10 3 47
Interest expense (63) (71) (239) (209)
Other Gain/(Loss) (29) - (28) (49)
----------- ----------- ------------ ------------
Total other income (expense) (91) (61) (264) (211)
----------- ---------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (450) (785) (741) (2,478)
CURRENT INCOME TAX EXPENSE
(BENEFIT) - - - -
NET INCOME (LOSS) $ (450) $ (785) $ (741) $ (2,478)
=========== =========== ============ ============
BASIC INCOME (LOSS) PER
COMMON SHARE $ (.02) $ (.03) $ (.03) $ (.10)
===== ===== ===== =====
DILUTED INCOME (LOSS) PER
COMMON SHARE $ (.02) $ (.03) $ (.03) $ (.10)
===== ===== ===== =====
WEIGHTED AVERAGE SHARES
OUTSTANDING, BASIC 25,513,000 24,054,000 25,031,000 24,035,000
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING, DILUTED 25,513,000 24,054,000 25,031,000 24,035,000
========== ========== ========== ==========
See notes to consolidated condensed financial statements
-3-
CIMETRIX INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
September 30, December 31,
2003 2002
----------- -----------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 1,005 $ 1,057
Marketable Securities 233 396
Accounts receivable, net 257 484
Inventories 90 87
Prepaid expenses and other current assets 112 79
----------- -----------
Total current assets 1,697 2,103
Property and equipment, net 29 181
Technology, net 564 632
Other assets 38 52
----------- -----------
$ 2,328 $ 2,968
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 319 $ 172
Accrued expenses 178 193
Deferred revenue 277 378
Note payable -- 500
Current portion, senior notes 982 982
----------- -----------
Total current liabilities 1,756 2,225
LONG TERM DEBT, net of current portion 1,628 1,556
----------- -----------
Total Liabilities 3,384 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,25,512,959 and
24,064,833 outstanding, respectively 3 2
Additional paid-in capital 27,894 27,322
Treasury stock, at cost (49) (49)
Accumulated deficit (28,904) (28,163)
----------- -----------
Net Stockholders' Deficit (1,056) (888)
----------- -----------
$ 2,328 $ 2,968
=========== ===========
See notes to consolidated condensed financial statements
-4-
CIMETRIX INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands, except share amounts)
(Unaudited)
Nine Months Ended
September 30,
2003 2002
---- ----
Cash Flows from Operating Activities:
Net income (loss) $ (741) $ (2,478)
Adjustments to reconcile net income (loss)
to net cash (used in)
provided by operating activities:
Amortization and depreciation 237 329
(Decrease) increase in allowance for doubtful accounts (56) 272
Common stock issued for services -- 22
Options issued for services 22 43
Loss on sale of marketable securities -- 49
Bond discount related to warrants 72 5
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 283 809
(Increase) decrease in inventory (3) 24
(Increase) decrease in prepaid expenses (33) 39
Increase (decrease) in accounts payable 147 11
Increase (decrease) in accrued expenses 2 (268)
Increase (decrease) in other assets -- (69)
Increase (decrease) in deferred revenue (101) 71
------ ------
Net cash flow used in operating activities (171) (1,141)
------- -------
Cash Flows from Investing Activities:
Purchase of property and equipment, net of retirements (3) (91)
Proceeds from sale of marketable securities 163 2,503
Purchase of marketable securities -- (1,805)
------- -------
Net cash flow provided
by investing activities 160 607
------- -------
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 (52) (534)
Cash and Cash Equivalents at the Beginning of Period 1,057 743
------- -------
Cash and Cash Equivalents at the End of Period $ 1,005 $ 209
======= =======
See notes to consolidated condensed financial statements
-5-
CIMETRIX INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands, except share amounts)
(Unaudited)
(CONTINUED)
Nine Months Ended
September 30,
2003 2002
------- -------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 93 $ 134
Income taxes -- 2
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 $ --
As of September 30, 2002, the Company had received -- $ 275
$275,000 in bond subscriptions for its new Senior
Notes due September 30, 2005. This cash was restricted
and therefore excluded from cash and cash equivalents
calculations.
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. 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 and nine month period ended September 30, 2003 are not
necessarily indicative of the results that can be expected for the entire year
ending December 31, 2003. The unaudited 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.
Stock Based Compensation
At September 30, 2003, the Company has stock-based employee compensation
plans, which are described more fully in Note 3. 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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
------------------ -----------------
Net (loss) income as reported $ (450) $(785) $ (741) $ (2,478)
Deduct:
Total stock-based employee
compensation expense
determined under fair value
based method for all awards (36) (35) (323) (500)
------------------ -----------------
Net (loss) income pro forma $ (486) $ (820) $(1,064) $ (2,978)
------------------ -------------------
Earnings per share:
Basic - as reported $ (.02) $ (.03) $ (.03) $ (.10)
------------------ ------------------
Basic - pro forma $ (.02) $ (.03) $ (.05) $ (.12)
------------------ ------------------
Diluted - as reported $ (.02) $ (.03) $ (.03) $ (.10)
------------------ ------------------
Diluted - pro forma $ (.02) $ (.03) $ (.05) $ (.12)
------------------ ------------------
-7-
NOTE 2 - GOING CONCERN
The accompanying consolidated condensed 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 September 30, 2003 and November 13, 2003, the Company had a
significant number of stock options and warrants outstanding representing a
potential total of 5,834,250 and 5,826,750 shares of common stock, respectively,
which are summarized in the following table with details of each in the
subsequent tables.
Strike Number Outstanding Number Outstanding
Description Price September 30, 2003 November 13, 2003
- --------------------------------------------------------------------------------
1998 Stock Option Plan $0.35-3.50 3,730,000 3,722,500
Directors Stock Option Plan $0.35-3.50 913,000 913,000
Warrants $0.35-1.00 1,191,250 1,191,250
--------- ---------
Total Options and Warrants 5,834,250 5,826,750
1998 Incentive Stock Option Plan as of September 30, 2003 and November 13, 2003
As of September 30, 2003 and November 13, 2003, respectively, there were
issued and outstanding to the Company's officers and employees options for the
purchase of 3,730,000 and 3,722,500 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 September 30, 2003 November 13, 2003
---------------------------------------------------------------------------
$0.35 1,187,500 1,180,000
$1.00 1,840,000 1,840,000
$2.50 302,500 302,500
$3.00 350,000 350,000
$3.50 50,000 50,000
------ ------
Total Options 3,730,000 3,722,500
---------------------------------------------------------------------------
A total of 4,000,000 shares of common stock have been reserved for issuance
under the plan. The outstanding options began to expire in April 2003 and will
continue to expire through January 2008.
-8-
Directors Stock Option Plan as of September 30, 2003 and November 13, 2003
As of September 30, 2003 and November 13, 2003, respectively, 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 Number Outstanding Number Outstanding
Price September 30, 2003 November 13, 2003
---------------------------------------------------------------------------
$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. 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 January 2008.
Warrant
The following table summarizes the quantity and exercise price of outstanding
warrants.
Number of Number of
Strike Underlying Shares Underlying Shares
Description Price September 30, 2003 November 13, 2003
- --------------------------------------------------------------------------------
2001 Series Warrants $1.00 114,250 114,250
2002 Series Warrants $0.35 1,077,000 1,077,000
---------------------------------------
Total Warrants 1,191,250 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.
-9-
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 2,154
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. In addition to the 2,154 warrants that
have been issued at the time of the filing of this report, the Company expects
to issue an additional 241 warrants in connection with the roll over of $241,000
of new Cimetrix 12% Senior Notes due 2005 (See Note 4, Senior Notes, 10% Senior
Notes due September 30, 2002).To date, none of the 2002 Series Warrants have
been exercised. The 2002 Series Warrants will expire on September 30, 2005.
NOTE 4 - SENIOR NOTES
As of September 30, 2003, and November 13, 2003, the Company had $2,667,000
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 September 30, 2003 November 13, 2003
- --------------------------------------------------------------------------------
10% Senior Notes due September 30, 2002 $982,000 $982,000
10% Senior Notes due September 30, 2004 11,000 11,000
12% Senior Notes due September 30, 2005 1,674,000 1,674,000
--------- ---------
Total Senior Notes Outstanding $2,667,000 2,667,000
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 were retired as of April 30, 2002, in exchange for new notes due
September 30, 2004 (See 10% Senior Notes due September 30, 2004 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 were 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 notes representing the $982,000, which matured on September 30, 2002,
still remain unpaid. 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, attorney's fees and costs. This complaint is discussed in Part II,
Item I, Legal Proceedings, below in this report.
-10-
The remaining $482,000 of Senior Notes due September 30, 2002 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)). Of these remaining Senior Notes, one is a $110,000 note owned by
the Receiver and the other is a $372,000 note under the Receiver's control. As
requested by the Company, the Receiver, appointed by the United States District
Court for the District of Columbia, filed a motion with the court to accept the
Company's proposal to receive 50% payment in cash with respect to the two Senior
Notes and to roll over the other 50% into new Cimetrix 12% Senior Notes due
2005. On May 13, 2003, the court approved the Receiver's motion with regards to
the 50% roll over of these two notes. Upon presentation of these two notes and
the appropriate documentation from the Receiver, the Company will pay $241,000
in cash and issue new 12% Senior Notes due 2005 for the other $241,000. At the
time of the filing of this report, the $482,000 of notes have not yet been
presented to the Company.
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
replacement 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.
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 Senior Notes had been exchanged for Senior Notes due September
30, 2004. 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 $439,000 as of April 30, 2002. 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.
-11-
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 undertook 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 were
offered to existing noteholders in exchange for their current notes, and to new
investors. The offering was made directly by the Company on a best efforts basis
and was not 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 participate in the offering. The Company
will close the new Senior Note offering once it is presented with the
appropriate documentation confirming the Receivership's participation in the
offering. (See Note 4,Senior Notes, 10% Senior notes due 2002)
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. 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 Senior Notes due September 30, 2005 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 446,000
------------
Total $ 1,674,000
------------
As of September 30, 2003, there were $1,617,000 (net of the remaining
$57,000 note discount related to warrants issued in connection with the 2002
Senior Notes) 2002 Senior Notes payable.
-12-
NOTE 5 - EARNINGS PER SHARE
A reconciliation of the shares used in the computation of the Company's
basic and diluted earnings per common shares is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
----- ----- ----- -----
Weighted average common shares
Outstanding 25,513 24,054 25,031 24,035
Dilutive effect of :
Stock options -- -- -- --
Warrants -- -- -- --
------ ------ ------ ------
Weighted average common shares
outstanding, assuming dilution 25,513 24,054 25,031 24,035
------ ------ ------ ------
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 and nine months ended
September 30, 2003 and 2002, stock options and warrants to exercise 5,834,250
and 4,003,250 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.
NOTE 6 - LEASE OBLIGATIONS
The Company leases certain office space, office equipment, and one vehicle
under non-cancelable operating lease agreements. The Company's significant
non-cancelable operating lease obligations as of September 30, 2003 are as
follows:
Operating
Year Ending December 31: (1) Leases
-----------------------------------------------------------------
2003..................................................... $29,070
2004.....................................................$108,050
2005..................................................... $92,700
-----------------------------------------------------------------
$229,810
========
(1) The amounts for the year ending December 31, 2003 include only payments
to be made after September 30, 2003
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 third quarter of 2003. 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 third quarter data of 2003 and 2002.
-13-
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's Consolidated
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 Surface Mount
Technology (SMT) customers.
-14-
Critical Accounting Policies
Management's discussion and analysis of the Company's financial condition
and results of operations are based upon financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP). 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
criteria.
2) Delivery of the products or services must have occurred. We treat
either physical or electronic delivery as having met this criteria.
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. Standard terms for sales are payments are
due net 30 (net 60 for foreign customers). On occasion extended payment terms
will be offered. Any revenues from sales with terms greater than 12 months are
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 and nine months ended, September 30, 2003 and 2002, respectively:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
NET SALES 100% 100% 100% 100%
---- ---- ---- ----
OPERATING EXPENSES
Cost of sales 21 26 15 23
Selling, marketing and
customer support 64 68 39 63
Research and development 47 53 30 53
General and administrative 49 67 37 72
---- ---- ---- ----
Total operating expenses 181 214 121 211
---- ---- ---- ----
INCOME (LOSS) FROM OPERATIONS (81) (114) (21) (111)
Interest income -- 2 -- 2
Interest expense (14) (11) (10) (10)
Other gain/loss (7) - (1) (2)
---- ---- ---- ----
NET INCOME (LOSS) (102)% (123)% (32)% (121)%
------ ------ ------ ------
-16-
Results of Operations
Three and Nine Months Ended September 30, 2003 Compared to the Three and
Nine Months Ended September 30, 2002
Net Sales
Net sales decreased by $190,000, or 30%, to $446,000, for the three months
ended September 30, 2003, from $636,000, for the three months ended September
30, 2002. Net sales for the three months ended September 30, 2003, consisted of
sales of software (45%), engineering services (15%), and support and training
(40%). Net sales for the same period in 2002 consisted of sales of software
(38%), engineering services (37%), and support and training (25%).
The decrease in third quarter sales was primarily the result of a drop in
software revenues. Sales to the Company's OEM customers in the robot, SMT and
semiconductor markets continue to be negatively impacted by the current economic
slowdown. During the third quarter ended September 30, 2003, the Company did not
add any new major OEM customers.
Net sales increased by $269,000, or 13%, to $2,336,000 for the nine months
ended September 30, 2003, from $2,067,000 for the nine months ended September
30, 2002. Net sales for the nine months ended September 30, 2003, consisted of
sales of software (51%), engineering services (25%), and support and training
(24%). Net sales for the same period in 2002 consisted of sales of software
(48%), engineering services (29%), and support and training (23%).
The increase in year-to-date sales was primarily the result of an increase
in software revenues generated during the first two quarters of 2003. The
addition of new major OEM customers during the first two quarters of 2003, along
with the increase of OEM customers in 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 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.
While the Company cannot predict market conditions for subsequent quarters,
it continues to market its products aggressively in order to broaden its
customer base.
Major Customers
Sales to one non-affiliated customer accounted for 12% of the Company's
revenues for the three months ended September 30, 2003. Sales to two different
non-affiliated customers accounted for 17% and 13%, respectively, of the
Company's revenues for the three months ended September 30, 2002. No other
single non-affiliated customer accounted for 10% or more of the Company's
revenues for the three months ended September 30, 2003 and 2002, respectively.
-17-
Sales to two non-affiliated customers accounted for 12% and 10% of the
Company's revenues for the nine months ended September 30, 2003, respectively.
No other single non-affiliated customer accounted for 10% or more of the
Company's revenues for the nine months ended September 30, 2003 and 2002,
respectively.
Sales to the Company's former Japanese affiliate in which the Company had
an equity interest, accounted for 0% and 3% of the Company's revenues for the
three months ended September 30, 2003 and 2002, respectively. Sales to this same
former affiliate accounted for 0% and 9% of the Company's revenues for the nine
months ended September 30, 2003 and 2002, respectively.
Export sales were approximately 42% and 34% of the Company's revenues for
the three months ended September 30, 2003 and 2002, respectively. Export sales
were approximately 42% and 37% for the nine months ended September 30, 2003 and
2002, respectively. All export sales were made in US dollars.
Export sales to countries that exceeded 10% of net sales were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------------ ------------------
Japan 14% 12% 10% 18%
Switzerland * * 12% *
---------------
* Less than 10%
Cost of Sales
Cost of sales decreased by $70,000, or 43%, to $93,000 for the three months
ended September 30, 2003, from $163,000 for the comparable period in 2002. Cost
of sales decreased by $121,000, or 26%, to $349,000 for the nine months ended
September 30, 2003, from $470,000 for the comparable period in 2002. This
decrease was attributable to a reduction in the use of contract labor in
performing engineering services. During the quarter ended September 30, 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.
-18-
Selling, Marketing and Customer Support
Selling, marketing and customer support costs decreased by $149,000, or
34%, to $286,000 for the three months ended September 30, 2003, from $435,000
for the comparable period in 2002. This decrease was due to the reduction in the
number of sales and marketing personnel. The same expenses decreased by
$384,000, or 30%, to $908,000 for the nine months ended September 30, 2003, from
$1,292,000 for the comparable period in 2002. These decreases were 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 $126,000, or 38%, to
$209,000 for the three months ended September 30, 2003, from $335,000 for the
comparable period in 2002. These same expenses also decreased by $402,000, or
37%, to $692,000 for the nine months ended September 30, 2003, from $1,094,000
for the comparable period in 2002. These decreases were 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 $210,000, or 49%, to
$217,000 for the three months ended September 30, 2003, from $427,000 for the
comparable period in 2002. These same expenses also decreased by $614,000, or
42%, to $864,000 for the nine months ended September 30, 2003, from $1,478,000
for the comparable period in 2002. These decreases resulted from a reduction in
depreciation, amortization, and rent, as well as a reduction in bad debt
expense.
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 nine months ended September 30, 2003 was
approximately $237,000, or 27%, of all general and administrative expenses,
compared to $329,000, or 22%, for the same period in 2002. This decrease was
attributable to the impairment of technology assets at December 31, 2002. All
other general and administrative expenses, taken as a whole, decreased slightly
for the year, and are considered within normal operating fluctuations.
-19-
Other Income (Expenses)
Interest income decreased by $9,000, or 90%, to less than $1,000 for the
three months ended September 30, 2003, from $10,000 for the comparable period in
2002. Interest income also decreased by $44,000, or 94%, to $3,000 for the nine
months ended September 30, 2003, from $47,000 for the comparable period in 2002.
These decreases were 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 decreased by $8,000, or 11%, to $63,000 for the three
months ended September 30, 2003, from $71,000 for the comparable period in 2002.
Interest expense increased $30,000, or 14%, to $239,000 for the nine months
ended September 2003, from $209,000 for the comparable period in 2002. The
overall increase in interest expense for the nine months ended September 30,
2003 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.) Interest expense on the Company's Senior Notes is accrued
monthly and is payable April 1 and October 1 of each year.
Other losses decreased $21,000, or 43%, to $28,000 for the nine months
ended September 30, 2003, from a loss of $49,000 for the comparable periods in
2002. Changes to other gains and losses typically come from the sale of the
Company's marketable securities. These securities are held in conservative bond
funds and can fluctuate in value from time to time. Differences between the cost
and fair market value of the Company's bond funds have not been material.
Other Items
The Company was involved in two legal actions during the third quarter of
the fiscal year ending December 31, 2003. These legal actions 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. 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 report.
-20-
The remaining $482,000 of Senior Notes due September 30, 2002 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)). Of these remaining Senior Notes, one is a $110,000 note owned by
the Receiver and the other is a $372,000 note under the Receiver's control. As
requested by the Company, the Receiver, appointed by the United States District
Court for the District of Columbia, filed a motion with the court to accept the
Company's proposal to receive 50% payment in cash with respect to the two Senior
Notes and to roll over the other 50% into new Cimetrix 12% Senior Notes due
2005. On May 13, 2003, the court approved the Receiver's motion with regards to
the 50% roll over of these two notes. Upon presentation of these two notes and
the appropriate documentation from the Receiver, the Company will pay $241,000
in cash and issue new 12% Senior Notes due 2005 for the other $241,000. At the
time of the filing of this report, the $482,000 of notes have not yet been
presented to the Company.
While management believes that the Company does have sufficient working
capital to maintain its current level of operations for fiscal 2003, it may 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 then may not be
able to continue operations.
As of September 30, 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. It is
critical to the Company's cash flow that the Company succeed in negotiating the
remaining $982,000 balance of its 10% Senior Notes. This would free up working
capital that is needed to fund operations if the Company's operating results do
not improve.
At September 30, 2003, the Company had cash and other current assets of
$1,697,000, and current liabilities of $1,756,000, resulting in a working
capital deficit of $59,000, as compared to a working capital deficit of $122,000
at December 31, 2002. This increase in working capital of $63,000 was
attributable to factors which include the following: the $500,000 note payable
to Tsunami Network Partners Corporation which was converted to common stock on
March 31,2003, a reduction in bad debt expense for the nine months ended
September 30, 2003, a reduction in marketable securities as well as an increase
in accrued interest for the nine months ended September 30, 2003.
Cash used in operating activities for the nine months ended September 30,
2003 was $171,000, compared to cash used in operating activities of $1,141,000,
for the same period in 2002. The negative cash flow year to date resulted
primarily from the net loss from operations of $ 741,000. The Company's net
trade receivables decreased by $227,000 to $257,000 for the nine months ended
September 30, 2003, from $484,000 at December 31, 2002, due to improved
collections of accounts receivable and a decrease in sales volume. The Company's
average days sales outstanding in accounts receivable improved from 89 days at
December 31, 2002 to 51 days at September 30, 2003.
-21-
Cash provided by investing activities for the period ended September 30,
2003 was $160,000, compared to cash provided by investing activities of $607,000
for the same period in 2002. This increase in cash used resulted from the sale
of a smaller amount of marketable securities held for investment.
Cash used in financing activities for the nine month period ended September
30, 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
redeemable common stock.
The Company leases certain office space, office equipment, and one vehicle
under non-cancelable operating lease agreements. The Company's significant
non-cancelable operating lease obligations as of September 30, 2003 are as
follows:
Operating
Year Ending December 31: (1) Leases
-----------------------------------------------------------------
2003..................................................... $29,070
2004.....................................................$108,050
2005..................................................... $92,700
-----------------------------------------------------------------
$229,810
========
(1) The amounts for the year ending December 31, 2003 include only payments
to be made after September 30, 2003
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 42% and 34% of
the Company's net sales for the three months ended September 30, 2003 and 2002,
respectively.
Factors Affecting Future Results
Third quarter revenues decreased 30% compared to the third quarter of
fiscal year ended 2002, falling below the Company's target revenue of $950,000
for the quarter. 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. 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.
-22-
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 $500,000 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 as of September 30, 2003 reflect a
net loss of $741,000, and an accumulated deficit of $28,904,000. As of that
date, the Company had a working capital deficit of $59,000. 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.
-23-
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 a small number of
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.
-24-
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Based on their evaluations as 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-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 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 alleged 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 were 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.
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. 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 and Reback thereafter filed a motion
to dismiss the fraud, negligent misrepresentation, breach of privacy,
negligence, shareholder derivative and unfair competition claims in the amended
complaint. By way of order dated July 23, 2003, the court dismissed the
negligent misrepresentation, breach of privacy and shareholder derivative claims
without leave to amend, and dismissed the fraud claim with leave to amend,
dismissed the negligence claim with leave to amend to allege a common law
misrepresentation claim and also dismissed the unfair competition claim with
leave to amend. On August 1, 2003, Plaintiff's Hausle and Axcient filed a second
amended complaint relative to the claims wherein the court permitted amendment
as set forth above. A further motion was filed. However, court-ordered mediation
took place thereafter and the case was settled and dismissed.
-25-
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. The
defendants filed a motion to transfer, stay or dismiss the action in light of
the Hausle case in California. As part of the mediation in California, this case
was also settled and dismissed.
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 a 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.
-26-
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 June 26, 2003 the Court granted the
Company's motion for leave to amend and declared the Company's amended answer
and counterclaims filed as of that date.
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. A hearing on plaintiffs' motion
for partial summary judgment and the Company's motion for partial summary
judgment was held on August 11, 2003. The court requested the submission of
additional memorandum before the court would rule on the cross motions for
partial summary judgment. The additional memorandums have been submitted but no
new court date has been set on the cross motions for partial summary judgment.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
-27-
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 (3)
10.1 Lease with Capitol Properties Four, L.C. (4)
10.2 1998 Incentive Stock Option Plan (5)
10.3 Security Agreement with Michael and Barbara Feaster (6)
10.4 Employment Agreement with Robert H. Reback, President and
Chief Executive Officer (7)
10.5 Employment Agreement with David P. Faulkner, Executive Vice
President and Managing Director of Machine Control Products (7)
10.6 Employment Agreement with Michael D. Feaster, Vice
President of Software Development (7)
10.7 Employment Agreement with Steven K. Sorensen, Vice President and
Chief Technical Officer (7)
10.8 Amendment 1 to 1998 Incentive Stock Option Plan (8)
10.9 Amendment 2 to 1998 Incentive Stock Option Plan (9)
10.10 Form of Indemnification Agreement with directors and
officers(10)
10.11 Settlement Agreement and Mutual Release with Peter Manley
and Jana Manley (10)
10.12 Convertible Note Purchase Agreement and Convertible Note with
Tsunami Network Partners Corporation (11)
31.1 Certificate of Cimetrix Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Cimetrix Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certificate of Cimetrix Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 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 to Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001.
(4) Incorporated by reference from the Registration Statement on Form S-2,
File No. 333-60, as filed on July 2, 1997.
(5) Incorporated by reference to Proxy Statement on Schedule 14A dated
April 20, 1998.
(6) Incorporated by reference to Annual Report on Form 10-K for the fiscal
year ended December 31, 2000, filed April 2, 2001.
(7) Incorporated by reference to Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002, filed May 15, 2002.
(8) Incorporated by reference to Proxy Statement on Schedule 14A dated
April 30, 2001, as filed on May 14, 2001.
(9) Incorporated by reference to Proxy Statement on Schedule 14A dated
April 30, 2002, as filed on April 30, 2002.
(10) Incorporated by reference to Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002, as filed on August 14, 2002. (10)
(11) Incorporated by reference to Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002, as filed on November 14, 2002.
-28-
(b) Reports on Form 8-K
No Current Report on Form 8-K was filed by Cimetrix, Incorporated during
the quarter ended September 30, 2003
-29-
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: November 14, 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)
-30-