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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2004
[ ] 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) IdentificationNo.)
6979 South High Tech Drive, Salt Lake City, UT 84047-3757
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (801) 256-6500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
Value $.0001
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No[X]
As of March 29, 2005, the registrant had 30,319,317 shares of its common stock,
par value $.0001, outstanding. The aggregate market value of the common stock
held by non-affiliates of the registrant as of March 29, 2005 was approximately
$11,881,000. The aggregate market value of the common stock held by
non-affiliates of the registrant as of June 30, 2004 was approximately
$13,489,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held May 21, 2005, are
incorporated by reference into Part III hereof.
CIMETRIX INCORPORATED
FORM 10-K
For the Year Ended December 31, 2004
TABLE OF CONTENTS
PART I
Item 1. Business............................................................3
Item 2. Properties.........................................................12
Item 3. Legal Proceedings..................................................12
Item 4. Submission of Matters to a Vote of Security Holders................12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................13
Item 6. Selected Financial Data............................................15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................16
Item 7A Quantitative and Qualitative Disclosures about Market Risk........27
Item 8. Financial Statements and Supplementary Data........................27
Item 9. Changes and Disagreements with Accountants on Accounting
and Financial Disclosures..........................................28
Item 9A. Controls and Procedures............................................28
PART III
Item 10. Directors and Executive Officers of the Registrant.................29
Item 11. Executive Compensation.............................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management.....29
Item 13. Certain Relationships and Related Transactions.....................29
Item 14. Principal Accountant Fees and Services.............................29
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....30
Signatures ...................................................................32
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PART I
ITEM 1. BUSINESS
Business Overview
Cimetrix designs, develops, markets and supports factory automation
software products and solutions for the global semiconductor and electronics
industries. The Company's products are tailored to meet the needs of original
equipment manufacturers (OEMs) in the areas of advanced motion control, general
purpose equipment connectivity, and specialized connectivity for 300mm
semiconductor wafer fabrication facilities. Revenues are derived from the
initial sale of software development tools, the ongoing runtime licenses that
OEMs purchase for each machine shipped with Cimetrix software, annual software
support contracts and professional services that provide solutions typically
incorporating Cimetrix software products.
In the advanced motion control market, Cimetrix markets its CODE(TM) 6
(Cimetrix Open Development Environment version 6) with Core Motion(TM). CODE 6
includes a number of advanced features, such as enhanced calibration and
simulation features, specifically targeted for machines that use vision
technology to guide motion, such as machines used in the Surface Mount
Technology (SMT) and semiconductor industries. The Core Motion technology marked
a significant technical achievement by our engineers, because it moves the
low-level motion control functions from a specialized, intelligent motion card
into Cimetrix software on the PC. This allows the OEM customer to reduce
proprietary hardware costs, protect proprietary algorithms, and provides greater
flexibility in the overall system architecture. This is accomplished by using a
network or I/O interface card together with Core Motion software in place of a
specialized motion card.
CIMConnect(TM) is designed for general purpose equipment connectivity and
enables production equipment in the electronics industries to communicate data
to the factory's host computer through the semiconductor equipment communication
standard (SECS), generic equipment model (GEM) and extensible markup language
(XML) based communication standards. CIMConnect can also support other emerging
communications standards for maximum flexibility. CIMConnect is used primarily
in the SMT and semiconductor industries.
The Company's CIMConnect connectivity product has been widely recognized as
the best technical solution by a wide range of customers in the SMT,
semiconductor wafer fab and semiconductor back-end markets that require SECS/GEM
connectivity following standards established by SEMI (Semiconductor Equipment
and Materials International). CIMConnect has enabled the Company to obtain a
number of significant design wins from OEM customers. Communications and
connectivity between the tool on the factory floor and the host system are
becoming increasingly important as mission-critical applications require these
communications for operation.
Typically used in conjunction with CIMConnect, the Company's CIM300(TM)
family is a set of standards-based software products designed specifically for
300mm semiconductor wafer fabrication facilities. CIM300 reduces total
integration time required to connect new 300mm semiconductor tools to each other
and to the host computer in a wafer fabrication facility ("fab"). The
semiconductor industry is migrating to the 300mm wafer size, and the Company
expects the market for 300mm tools to continue to grow.
During late 2003 and 2004, Cimetrix initiated a beta program for its new
CIMPortal(TM) product family. CIMPortal provides a comprehensive, fully
compliant solution for the new SEMI standard named Interface A. SEMI developed
the Interface A standards to facilitate the acquisition and improve the quality
of data from equipment on the factory floor. A consortium of leading chip makers
named International SEMATECH Manufacturing Initiative (ISMI) has reported that
Interface A is the highest manufacturing priority among its chip making members,
and that it expects its member companies to begin requiring equipment makers to
meet the new Interface A standard during 2005.
-3-
The business relationships that Cimetrix establishes with its customers go
beyond sales of its products. The Company partners with its OEM customers to
provide them with solutions that include software tools, consulting, services,
and support. Company engineers are comprised of industry leading experts in
motion control, communications, connectivity, factory automation, and associated
technologies and implementation processes. This experience and technical
knowledge provides a unique and invaluable benefit to our customers and is a
core part of our strategy to build long-term relationships with global
electronics equipment OEMs.
Key Markets
The Company serves customers in a wide variety of technology and
manufacturing industries, including SMT, semiconductor wafer fabrication,
semiconductor back-end, small parts assembly, and robotics. The Company will
continue to serve customers in all these industries and explore opportunities
for growth in industries that are challenged by the problems that the Company's
products solve.
The Company is now focused on OEM customers in two key industries:
semiconductor and SMT. Both the semiconductor and SMT industries are a natural
fit for the Company's solutions because of the demand for high-speed, motion
intensive applications with pinpoint accuracy that can communicate with host
computers throughout the process.
In general, the semiconductor and SMT industries are fast growing and
dynamic industries. Rapid industry changes require tools that are flexible and
can adapt quickly to new requirements. The Company is uniquely positioned to
meet these challenges with PC-based motion control and connectivity software
that is based on open standards and uses the latest in object-oriented design to
provide end users with the necessary flexibility and customization required to
meet industry demands.
By focusing efforts on these two industries, the Company's goal is to
obtain a leadership position for its products in these segments. This would
provide the momentum and cash flow to penetrate other industries. For financial
reporting, the Company considers the semiconductor and SMT industries as one
business segment.
Semiconductor Industry
The semiconductor industry includes the manufacturing, packaging and
testing of semiconductor wafers. It is a cyclical industry that is currently
enjoying a modest rate of capital equipment investment. The Company expects
continuing capital investment throughout 2005 and 2006. In 2000, the
semiconductor industry began the migration from building 8-inch (200 mm) wafers
to building 12-inch (300 mm) wafers. While the industry is cyclical, most of the
capital spending over the next five years is expected to be for 300mm equipment.
The Company's CIMConnect and CIM300 products are well positioned to take
advantage of increased demand for 300mm semiconductor tools. Cimetrix OEM
customers have now shipped fully automated tools to all major 300mm
manufacturing facilities throughout the world.
-4-
The new SEMI standard named Interface A creates a new opportunity for
Cimetrix, as this standard is directly applicable to Cimetrix's customer base in
the semiconductor industry. If the leading chip makers begin to require their
equipment suppliers to provide this new standard, Cimetrix is in a leading
position to supply products and solutions to the industry.
Surface Mount Technology Industry
The SMT market includes all factory equipment to produce and test printed
circuit boards. Applications involve high-speed multi-axis motion control with
very tight vision system integration. This industry has quickly adopted the use
of PCs as equipment controllers and uses very few proprietary controllers. The
Company provides software to several major suppliers in this industry. A modern
SMT line can include: a loader, screen printer, post print inspection, adhesive
dispenser, several placement machines (mounters), odd form placement, post
placement inspection, reflow soldering, post reflow inspection, unloader, and
final system test. The Company has targeted the mounter tool as a desirable
market for its CODE and CIMConnect products. The trend over the past several
years has been to move manufacturing operations to lower cost countries, such as
China, which has made it more difficult for Cimetrix to sell its products to
this industry. Some large equipment makers in this industry have been seeking
the lowest component costs for their equipment, while trying to maintain their
engineering staffs. Even though the Company believes Cimetrix software reduces
the total cost of ownership for SMT equipment makers, it does increase the cost
of purchased components. Some equipment makers consider the costs of their
engineering staffs as hidden costs, while any purchased components are
vigorously scrutinized.
Notable Achievements of 2004
The Company achieved major milestones in 2004 in the areas of financial
performance, customer satisfaction, product development and new customers.
Financial Performance
The Company was able to increase sales by 36% during 2004, while cost and
expenses increased 6% over prior year levels. The combination of these
activities resulted in net income of $164,000 and net cash provided by operating
activities of $162,000, compared to net loss of $931,000 and net cash used in
operating activities of $577,000 in 2003.
Customer Satisfaction
The Company continued to provide passionate support for its customer base,
which included assisting OEM customers achieve acceptance in end user factories,
as well as providing incremental patches and service releases for its CODE,
CIMConnect and CIM300 product families. The list of satisfied customers has been
instrumental in serving as references for the Company, which in turn facilitates
capturing new customers and enhances the reputation of Cimetrix in the
industries we serve.
Research and Development
The Company invested in incremental new releases for its current products,
and was able to invest significant R&D efforts into its new CIMPortal product
family.
-5-
Cimetrix is currently investing research money in products designed to
assist equipment suppliers better integrate their equipment into fab-based
advanced processing control (APC) systems. CIMPortal is the first set of
products to address this factory-wide need. CIMPortal enables low-cost APC with
easier integration and it can either be purchased and/or used by the integrated
circuit ("IC") maker or the OEM equipment supplier. Cimetrix believes a key
strategy to improving market share is by providing products that can be easily
consumed by the IC makers and equipment suppliers. The end-user version of this
product is currently being used at Advanced Micro Devices Inc. (AMD). Cimetrix
had several beta releases of its CIMPortal Equipment product during 2004, and
expects to have a general release available for equipment makers in 2005.
Cimetrix also formed a dedicated R&D department, which the Company expects
will develop new business opportunities for the Company to fuel future growth.
New Customers
The Company gained twelve new major OEM customers during 2004. These new
customers have enabled the Company to significantly broaden its base of major
OEM customers, which provided incremental increases in annual customer support
contracts and the software royalty revenue received from runtime licenses. As
these new customers transition their machines to use Cimetrix software, Cimetrix
expects to receive significant future software revenues.
Formation of Global Services Group
The Company made some important changes to its organization to foster
continued growth. Cimetrix formed a new Global Services group to focus on
providing complementary professional services to our OEM customer base, while
maintaining our passionate customer support. Cimetrix expects this new group to
provide additional revenue and facilitate assisting our customer base when they
need professional services.
Cimetrix Product Line
CODE
The Cimetrix Open Development Environment (CODE) is a family of open
architecture machine modeling and motion control software products designed to
control the most challenging multi-axis machine control applications. CODE 6
contains both a powerful off-line simulation development environment known as
CIMulation, and a robust, real-time motion and I/O control system called
CIMControl.
Applications written and tested using CIMulation are fully compatible with
CIMControl and can be deployed with no conversion or programming changes
required. Applications can be developed using standard computer languages such
as C++, or Visual Basic.
Core Motion
Core Motion is an integral part of CODE 6. Core Motion allows customers to
eliminate the cost and complexity of a specialized motion card. With Core
Motion, these expensive specialized motion cards are replaced through software.
Using the proven real-time extensions for Windows 2000 and NT, PC processing
power is used to move these specialized software functions from the motion card
to the PC. A network or low-cost interface card is used to interface the PC
controller to the servo hardware.
-6-
Connect Family
CIMConnect - CIMConnect is an object-oriented software toolkit for equipment
suppliers to quickly develop communication interfaces for their manufacturing
equipment. CIMConnect can support all major communication protocols, including
SECS/GEM, XML, and others. It also supports multiple host interfaces
simultaneously, which allows customers to support any legacy, custom, and GEM
interfaces.
TESTConnect - TESTConnect is a SECS/GEM host emulator used to test equipment to
ensure it complies with the SECS standards. TESTConnect simplifies the process
of testing SECS implementations through the use of an intuitive, graphical user
interface and menu-driven property screens that allow customers to construct
message sets and test them without any programming.
CIM300 Family
CIM300 is a family of software tools for manufacturers of 300mm
semiconductor equipment that allow for quick implementation of the required
300mm Semiconductor Equipment and Materials International (SEMI) standards,
including E39, E40, E58, E87, E90, E94 and E116. Components of CIM300 include:
CIMFoundation(TM) - Provides an abstraction layer for SECS/GEM products and an
implementation of SEMI E39 Object Services. Object services are provided for the
CIM300 functional modules and user-written modules. The abstraction layer allows
the CIM300 family to work with either the state-of-the-art Cimetrix CIMConnect
product or older legacy products.
CIM87-Carrier Management(TM) - Provides carrier management functionality as
defined in SEMI E87. CIM87 provides a standardized behavior for host computer
communication with the production equipment during the coordination, execution,
and completion of automated and manual transfer of the wafer carriers to and
from the equipment.
CIM40-Process Job(TM) - Provides process job functionality as defined in SEMI
E40. CIM40 enables complex recipe to wafer mapping within a tool enabling
complex processing of multiple wafers to multiple recipes. A recipe defines all
of the parameters of what to do with a wafer. This package works seamlessly with
CIMFoundation and CIM94 Process Job or as a stand-alone package.
CIM90-Substrate Tracking(TM) - Provides substrate tracking functionality as
defined in SEMI E90. CIM90 allows the factory host computer to track substrates
(manufactured products) or batches of substrates through the individual
components of the production equipment. It is possible to connect CIM90 to CIM87
for automatic substrate lifetime control.
CIM94-Control Job(TM) - Provides control job functionality as defined in SEMI
E94. CIM94 allows the factory to run Process Jobs in a tool. It covers very
complex batch job processing and single job processing. This package works
seamlessly with CIMFoundation and CIM40 Process Job or as a stand-alone package.
CIM116-Equipment Performance Tracking(TM) - Provides equipment performance
tracking (EPT) as defined in SEMI E116. CIM116 tracks equipment performance in
an automated and consistent manner without requiring operator or host computer
input. CIM116 provides unique functions for defining specific equipment modules
and automatically manages the equipment's EPT State Model.
-7-
CIMPortal Family
CIMPortal is a new family of software tools for manufacturers of
semiconductor equipment that allow for quick implementation of the new
Semiconductor Equipment and Materials International (SEMI) standards for
Interface A, including E120, E125, E132 and E134. The CIMPortal family includes
products for equipment makers, fabs and third party application software
providers. Interface A specifies a new port on each tool that provides detailed
structured data that can be used for Advanced Process Control (APC) and
e-diagnostics. These software applications will become critical to the fabs as
shorter ramp times are required. CIMPortal Equipment is designed for the
equipment maker and is currently available for purchase. CIMPortal Equipment is
a SEMI standards compliant Interface A data collection and routing product with
high speed distributable data collection modules, equipment modeling tools, and
a rich set of rules-based security and optimization features.
Competition
The Company's main product lines face competition from other companies,
technologies, and products. These competitive threats are summarized below:
In the 300mm connectivity market, Cimetrix's main competitor is Asyst
Technologies, Inc. Asyst is a large automation company focused on hardware based
automation solutions for the semiconductor and flat panel industries. It is
unclear whether the connectivity software products are a strategic area for
Asyst. As they struggle to remain profitable in the difficult automation
hardware market, they seem to be ignoring customers in the connectivity market.
However, they have considerable engineering resources and this could change.
Currently, Cimetrix believes it can compete effectively against Asyst with
superior software technology and market focus. The Company has been winning the
majority of new 300mm factory automation software opportunities for the last
several years.
An indirect competitor is large OEMs that choose to create their own
connectivity software solutions and do not purchase third party products. There
are also a number of integration companies that offer products and/or solutions
meeting the 300mm connectivity needs for SECS/GEM, 300mm automation standards
and Interface A. All competitors have varying levels of expertise in
semiconductor fabs.
In the motion control market, the manufacture and sale of automation
technology is a highly competitive industry. The largest segment of the market
for industrial motion controls is comprised of proprietary systems from large
companies including FANUC Ltd., Rockwell Automation and Siemens. Cimetrix has
targeted the emerging market of open standards-based industrial controls, in
which competition is primarily divided between in-house developed controllers
and open controller suppliers.
In-house developed controllers are potentially competitive, but they are
also potential customers. Certain electronics equipment suppliers develop their
own controllers, some on PC platforms and some on proprietary hardware. Cimetrix
offers a distinct advantage to them by increasing software quality through its
software re-use techniques, decreasing the time to market for a new open
architecture controller, and assisting the transition of their engineering staff
to the latest technologies such as COM, unified modeling language (UML) and
object-oriented analysis and design techniques. The Company's CODE and equipment
communications software products offer these advantages.
With Core Motion technology in CODE 6, manufacturers of intelligent motion
cards can be considered competitors for part of the CODE product, although CODE
6 continues to also support a number of popular motion cards.
-8-
Management believes that most, if not all, of the Company's major
competitors currently have greater financial resources and market presence than
Cimetrix. Accordingly, these competitors may be able to compete very effectively
on pricing and to develop technology to increase the flexibility of their
products. Further, each of these competitors has already established a share of
the market for their products, and may find it easier to limit market
penetration by the Company because of the natural tie-in of their controllers
and software to their mechanisms. Management is uninformed as to whether any of
these competitors are presently developing additional technology that will
directly compete with the Company's product offerings. By focusing on the SMT
and Semiconductor markets for the short term, management believes the Company
can earn a leadership position in the face of other competitors.
Sales and Marketing
The sales and marketing staff are responsible for identifying key end-user
customers and the top-tier OEM machine suppliers in each primary market. Sales
and marketing efforts are combined into one unified force, supporting both
communications and motion control products under David P. Faulkner, executive
vice president. The Company's sales offices are located in Salt Lake City, Utah;
Boston, Massachusetts; and Archamps, France. In addition, the Company has a key
distributor and strategic partner located in Yokohama, Japan.
Global Services
The Company's professional services and support operations are conducted
under the direction of the Company's vice president of global services, Kourosh
Vahdani. His group, which includes Professional Services and Quality Customer
Support, is responsible for providing support to our customer base, maintaining
the Company's existing product lines, and delivering professional service
projects.
Research and Development
The Company's research and development, as well as quality assurance
operations are conducted under the direction of the Company's executive vice
president of research and development, Michael D. Feaster. His group is
responsible for developing new products, testing such products, and performing
quality assurance company-wide. The Company's strategy is to develop standard
software products that have been thoroughly tested and deliver/support these
products using major OEMs as the key channel to market. A comprehensive software
quality program and rigid coding standards are keys to the development process.
Expenditures for Research and Development are discussed in Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
-9-
Intellectual Property Rights
The open architecture controller technology upon which the Company's CODE
software is based was developed from 1984 to 1989 by a team of Brigham Young
University engineers led by Dr. W. Edward Red. Effective July 5, 1995, Cimetrix
purchased from Brigham Young University all the rights, title, interest in and
benefit from this intellectual property.
In December of 1999, the Company purchased the software products of
Systematic Designs International, Inc. (SDI) of Vancouver, Washington. These
products have broadened the Company's communication product line and provided
valuable inputs to the CIMConnect and CIM300 products designed by Cimetrix.
The technology purchased from Brigham Young University and SDI, along with
other technology developed internally, is proprietary in nature. The Company has
obtained a US patent on certain aspects of its technology. This patent was
issued in March 1994 and will expire in March of 2011. In addition, the Company
has registered its CODE software system with the US Copyright Office, which is
updated from time to time to register updates to current products. For the most
part, other than the one patent and the copyright registrations, the Company
relies on confidentiality and non-disclosure agreements with its employees and
customers, appropriate security measures, and the encoding of its software to
protect the proprietary nature of its technology. No cost has been capitalized
with respect to the patent.
Major Customers and Foreign Sales
During 2004, one customer accounted for 11% of the Company's total sales.
During 2003, there were no customers that accounted for 10% or more of the
Company's total sales. During 2002, one customer accounted for 14% of the
Company's total sales.
The following table summarizes domestic and export sales, as a percent of
total sales, for the three years ended 2004, 2003 and 2002:
Year Ended December 31, 2004 2003 2002
-------------------------------------------------------------------------------
Domestic sales 55% 65% 64%
Export Sales 45% 35% 36%
Through December 31, 2004, all the Company's export sales have been payable
in United States dollars.
In 2004, sales to customers in Germany and Switzerland accounted for 11%
and 12%, respectively, of total sales. In 2003, no single country accounted for
more than 10% of the Company's total sales. In 2002, sales to customers in Japan
accounted for 14% of total revenues. No other country accounted for more than
10% of the Company's sales in each of the years ended December 31, 2004, 2003
and 2002.
Personnel
As of March 15, 2005, the Company had 28 employees, 14 of whom are involved
in software development and providing software engineering s ervices, 8 of whom
are involved in sales, marketing, and customer support, and 6 of whom who are in
finance and administrative positions. None of the employees of the Company are
represented by a union or subject to a collective bargaining agreement, and the
Company considers its relations with its employees to be favorable.
-10-
Executive Officers
Robert H. Reback, President and Chief Executive Officer, age 45, joined
Cimetrix as Vice President of Sales in January 1996, was promoted to Executive
Vice President of Sales in January, 1997 and was promoted to President on June
25, 2001. Mr. Reback was the District Manager of Fanuc Robotics' West Coast
business unit from 1994 to 1995. From 1985 to 1993, he was Director of
Sales/Account Executive for Thesis, Inc., a privately owned supplier of factory
automation software, and was previously a Senior Automation Engineer for Texas
Instruments. Mr. Reback has a B.S. degree in Mechanical Engineering and a M.S.
degree in Industrial Engineering from Purdue University.
David P. Faulkner, Executive Vice President of Sales and Marketing, age 49,
joined the Company in August 1996. Mr. Faulkner was previously employed as the
Manager of PLC Marketing, Manager of Automotive Operations and District Sales
Manager for GE Fanuc Automation, a global supplier of factory automation
computer equipment specializing in programmable logic controllers, factory
software and computer numerical controls from 1986 to 1996. Mr. Faulkner has a
B.S. degree in Electrical Engineering and an MBA degree from Rensselaer
Polytechnic Institute.
Michael D. Feaster, Executive Vice President of Research and Development,
age 34, joined Cimetrix as Director of Customer Services in April 1998, was
promoted to Vice President of Software Development in December 1998 and was
promoted to Executive Vice President of Research and Development in December
2004. From 1994 to 1998, Mr. Feaster was employed at Century Software, Inc., as
the Vice President of Software Development. During that time, Century Software,
Inc. was a global supplier of PC to UNIX connectivity software, specializing in
internet access of Windows to legacy mission-critical applications. From 1988 to
1994, he served as a software engineer contractor/subcontractor for such
companies as Fidelity Investments, IAT, Inc., NASA, and Mexican Border
Inspection Division. Mr. Feaster attended Southwest Missouri University from
1987 to 1990.
Kourosh Vahdani, Vice-President of Global Services, age 43, joined Cimetrix
as Vice-President of Global Services in December 2004. Prior to joining
Cimetrix, Mr. Vahdani was a Senior Consultant performing contract services for
Xilinx, Inc. during 2004. From 1996 to 2003, he was Director of Western
Operations for TRW, Inc. Manufacturing Solutions, with responsibility for the
systems integration business serving semiconductor manufacturers worldwide. From
1987 to 1996, Mr. Vahdani worked for Advanced Micro Devices in a variety of
engineering and management positions associated with factory automation. Mr.
Vahdani has a B.S. degree in Computer Sciences from St. Edwards University in
Austin, Texas.
Dennis P. Gauger, Chief Financial Officer, age 53, joined Cimetrix as Chief
Financial Officer in April 2004. Mr. Gauger is a licensed Certified Public
Accountant in Utah and Nevada, and serves on a part-time, consulting basis. Over
the past seven years, he has served several public and private companies in a
variety of industries as a part-time, contract financial executive, corporate
troubleshooter and consultant. Previously, Mr. Gauger worked for Deloitte &
Touche LLP, an international accounting and consulting firm, for 22 years,
including 9 years as an accounting and auditing partner, where he directed
domestic and international firm interactions with senior executive management,
audit committees, and boards of directors. He has a background in SEC accounting
and reporting, mergers and acquisitions, technical accounting issues, financing
and operations. Mr. Gauger holds a B.S. degree in accounting from Brigham Young
University. He is a member of the American Institute of Certified Public
Accountants and the Utah Association of Certified Public Accountants.
-11-
ITEM 2. PROPERTIES
The Company's principal offices are located in a leased facility at 6979
South High Tech Drive, Midvale, Salt Lake County, Utah (about six miles south of
Salt Lake City). The Company entered into a 38-month lease beginning in October
of 2002. On February 18, 2005, the Company extended the lease for an additional
24 months, commencing December 2005. The present facility consists of
approximately 17,000 square feet. All operations of the Company are conducted
from its headquarters, with its satellite offices serving only as remote sales
and technical support offices.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved with any pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the quarter ended December 31, 2004.
-12-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The common stock of the Company is quoted on the NASD OTC Bulletin Board
under the symbol "CMXX". The table below sets forth the high and low bid prices
of the Company's common stock for each quarter during the past two fiscal years.
The quotations presented reflect inter-dealer prices, without retail markup,
markdown, or commissions, and may not necessarily represent actual transactions
in the common stock.
Period (Calendar Year) Price Range
High Low
2003 ---- -----
----
First quarter $ .20 $ .13
Second quarter $ .45 $ .09
Third quarter $ .33 $ .12
Fourth quarter $ .40 $ .20
2004
----
First quarter $ .53 $ .24
Second quarter $ .68 $ .27
Third quarter $ .78 $ .45
Fourth quarter $ .65 $ .40
On March 29, 2005 the closing bid quotation for the Company's common stock
on the NASD OTC Bulletin Board was $0.55 per share. Potential investors should
be aware that the price of the common stock in the trading market may change
dramatically over short periods as a result of factors unrelated to the earnings
and business activities of the Company.
On March 29, 2005, there were 30,319,317 shares of common stock issued and
outstanding held by approximately 650 shareholders of record, which does not
include shareholders whose stock is held through securities position listings.
To date, the Company has not paid dividends with respect to its common
stock. There is no restriction on the declaration or payment of dividends set
forth in the Articles of Incorporation of the Company or in any agreement to
which it is a party. However, management plans to retain any future earnings
that may be earned by the Company for working capital and investment in growth
and expansion of the business of the Company. Management does not anticipate
paying any dividends on the common stock in the foreseeable future.
-13-
Equity Compensation Plan Information
The following table summarizes the Company's equity compensation plans as
of December 31, 2004. Equity compensation plans consist of the 1998 Incentive
Stock Option Plan, which plan has been approved by the Company's shareholders,
and the Directors Stock Option Plan.
Number of Weighted Avg.
Securities Exercise Number of Securities
to be Issued Upon Price of Remaining Available
Exercise of Out- Outstanding for Future
Plan Category standing Options Options (1) Issuance
- --------------- ------------------- ---------------------- -------------------
Equity
compensation
plans approved
by security
holders (2) 4,195,000 $0.90 739,375
Equity
compensation
plans not approved
by security
holders (3) 1,063,000 $1.26 37,000
------------------ -------------------
Total 5,258,000 776,375
================== ===================
- --------------------------------------------------------------------------------
(1) Excludes 1,069,500 shares issuable upon the exercise of warrants issued to
purchasers of the Company's Senior Notes and 200,000 shares issuable upon the
exercise of warrants issued to consultants as they were not issued as
compensation to Company officers, directors or employees. See Warrants,
discussed below.
(2) A total of 5,000,000 shares of common stock have been reserved for issuance
under the plan. To date, a total of 65,625 options have been exercised under the
plan.
(3) A total of 1,100,000 shares of common stock have been reserved for issuance
under the plan. To date, no options have been exercised under the plan.
Directors Stock Option Plan
A total of 1,100,000 shares of common stock have been reserved for issuance
under the Company's Director Stock Option Plan, all of which are registered for
resale pursuant to a Form S-8 registration statement, which became effective on
August 27, 2004. Options issued to directors and former directors begin to
expire in May 2006, and will continue to expire through May 2009.
Under the terms of this plan, outside directors will be granted an option
each year during continuous service as a director to purchase 50,000 shares of
the Company's common stock at an exercise price not less than the current market
price of the Company's common stock. The options vest 1/12th per month during
the first year of the option period, and are exercisable for a period of five
years, unless extended by the Board of Directors of the Company.
In addition to the shares issuable under the Company's equity compensation
plans, the Company has outstanding warrants to purchase 1,269,000 shares of
common stock at a weighted average exercise price of $0.38 per share. Warrants
to purchase 1,069,000 shares are held by purchasers of the Company's Senior
Notes and warrants to purchase 200,000 shares were issued to consultants.
-14-
Recent Sales of Unregistered Securities
In January 2005, the Company sold 2,500,000 shares of its common stock at a
price of $.80 per share, for total proceeds of $2,000,000, in a private
placement with two business entities which meet the definition of "accredited
investor" as that term is defined in Rule 501 of Regulation D. No commissions or
payments were made to underwriters or agents out of the proceeds. In making
these sales, the Company relied on the exemptions from the registration
requirements of Section 5 provided by Section 4(2), Regulation D, and Regulation
S. The Company intends to use the proceeds for working capital and general
corporate purposes.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data as of and for each of
the fiscal years in the five year period ended December 31, 2004 were derived
from the Company's financial statements audited by Tanner LC, independent
registered public accountants. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in Item 7 of this Form 10-K and the
consolidated financial statements and notes thereto included in Item 8 of this
Form 10-K.
Years Ended December 31,
2004 2003 2002 2001 2000
---------------------------------------------------------------------
Results of Operations Data:
Net sales $ 4,542,000 $ 3,340,000 $2,975,000 $ 4,075,000 $ 5,900,000
Income (loss) from operations 391,000 (592,000) (3,781,000) (5,588,000) 535,000
Net income (loss) 164,000 (931,000) (4,055,000) (5,620,000) 513,000
Income (loss) per common share - diluted $0.01 $(0.04) $(0.17) $(0.23) $0.02
Dividends per common share $ - $ - $ - $ - $ -
Balance Sheet Data:
Total Assets $ 2,358,000 $ 3,032,000 $ 2,968,000 $ 6,854,000 $13,126,000
Long-term debt, net of current portion 691,000 1,865,000 1,556,000 439,000 2,704,000
Stockholders' equity (deficit) (198,000) (506,000) (888,000) 3,020,000 9,643,000
-15-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The following is a brief discussion and explanation of significant
financial data, which is presented to help the reader understand the results of
the Company's financial performance for the years ended December 31, 2004, 2003
and 2002, and the Company's financial position at December 31, 2004. The
information includes discussions of sales, expenses, capital resources and other
significant financial items.
This discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
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 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."
Company Overview
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. 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 to host computers in 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, the Company introduced CODE(TM) 6 with Core Motion. CODE 6 with
Core Motion was 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
OEM customers and positions the Company 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. The Company also introduced additional calibration
technology to its CODE 6 product, which allows faster time to market for key
Surface Mount Technology ("SMT") customers.
-16-
In 2003 and 2004, the Company began development of a new product named
CIMPortal. CIMPortal is the Company's new equipment data acquisition software
product based on the Interface A equipment communications standards from SEMI.
The Company designed, developed and installed an alpha version of CIMPortal in
an Advanced Micro Devices (AMD) production facility in August of 2003 as part of
a National Institute of Standards and Technology (NIST) program to develop
elements of e-manufacturing for the semiconductor industry. Subsequent to the
alpha release, the Company has been developing a new CIMPortal product family
and initiated a beta program in June of 2004 with participation from
semiconductor OEMs, advanced process control (APC) framework providers, and end
users. The second beta release coincided with a demonstration to the fab members
of SEMATECH. Cimetrix provided this demonstration working with a top tier
equipment maker.
The Company has also been actively engaged in promoting the new SEMI
standards for Interface A. During 2004, the Company participated in a number of
workshops on Interface A and Cimetrix's new CIMPortal product family including a
four hour tutorial during the SEMATECH sponsored AEC/APC Symposium in Denver,
Colorado, the SEMI workshop in Portland, Oregon, and the SEMI workshop in Tokyo,
Japan.
The Company sells its products to a large base of customers. However, the
Company has a primary focus to sell Software Development Kits (SDKs) to "major
OEM customers", which the Company has defined as OEM customers that purchase
either its CIM300 SDK, CIMPortal SDK, or its CODE SDK. Cimetrix sells other SDK
products to OEM customers, but since the other SDK products have lower price
points than the CIM300, CIMPortal SDK, or the CODE SDK, the Company does not
classify these customers as major OEM customers.
All operations of the Company are conducted from its headquarters in Salt
Lake City, Utah, with its satellite offices located in Boston, Massachusetts and
Archamps, France serving as remote sales offices.
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 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 professional services and 3) sales of technical support
contracts. Software sales are derived from the sale of the Company's
off-the-shelf software packages in the machine control and connectivity product
lines. Machine control products include items such as CODE 6.0, CIMControl, and
CIMulation. Communications products include items such as CIM300, CIMConnect and
CIMPortal. Professional service 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.
-17-
Before the Company recognizes revenue, the following criteria must be met:
1) Evidence of a financial arrangement or agreement must exist between
the Company and its customer. Purchase orders and signed OEM contracts
are two examples of items accepted by the Company to meet this
criterion.
2) Delivery of the products or services must have occurred. The Company
treats either physical or electronic delivery as having met this
criterion.
3) The price of the products or services is fixed and measurable. It is
the policy of the Company to provide its customers a 30-day right to
return. However, because the amount of returns has been insignificant,
the Company recognizes revenue immediately upon the sale. If the
number of returns were to increase, the Company would establish a
reserve based on a percentage of sales to account for any such
returns.
4) Collectibility of the sale is reasonably assured and receipt is
probable. Collectibility of a sale is determined on a
customer-by-customer basis. Typically the Company sells to large
corporations which have demonstrated an ability to pay. If it is
determined that a customer may not have the ability to pay, revenue is
deferred until the payment is collected.
If a sale involves a bundled package of software, support and services at a
discounted price, revenue is allocated to each element based on the respective
list price of each. Assuming all of the above criteria have been met, revenue
from the software portion of the package is recognized immediately. Revenue from
material support contracts is recognized ratably over the term of the support
contract, which is generally 12 months. Revenue from services is recognized as
services are performed. Standard payment terms for sales are net 30 (net 45 - 60
for foreign customers). On occasion, extended payment terms will be offered. If
the Company provides payment terms greater than 90 days and collection is not
assured, then revenues are generally recognized as payments become due.
Allowance for Doubtful Accounts
The Company maintains a reserve for doubtful accounts, which is for
estimated losses resulting from uncollectible accounts receivable. In addition,
if collectibility becomes doubtful on any receivable, a reserve is set up for
the entire amount of such receivable.
Long-Lived Assets
Long-lived assets held and used by the Company are reviewed for impairment
annually or whenever events or changes in circumstances indicate that their net
book value may not be recoverable. When such factors and circumstances exist,
the Company compares the projected undiscounted future cash flows associated
with the related asset or group of assets over their estimated useful lives
against their respective carrying amounts. Impairment, if any, is based on the
excess of the carrying amount over the fair value of those assets and is
recorded in the period in which the determination is made.
-18-
Operations Review
The following table sets forth the percentage of costs and expenses to net
revenues derived from the Company's Statements of Operations for each of the
three preceding fiscal years.
Year Ended December 31, 2004 2003 2002
- -------------------------------------------------------------------------------
Net sales 100% 100% 100%
---------------------------------
Costs and expenses:
Cost of sales 19 13 32
General and administrative 27 33 52
Selling, marketing and customer support 26 37 55
Research and development 21 28 36
Provision for doubtful accounts (2) (2) 11
Impairment loss - 9 41
---------------------------------
Total costs and expenses 91 118 227
---------------------------------
Income (loss) from operations 9 (18) (127)
Interest expense, net of income (6) (9) (8)
Other income (expense) 1 (1) (1)
---------------------------------
Net income (loss) 4% (28)% (136)%
=================================
Net Sales
The following table summarizes net revenues by categories, as a percent of
total net revenues:
Year Ended December 31, 2004 2003 2002
---------------------------------------------------------------------
Software revenues 63% 56% 46%
Services and support
revenues 37% 44% 54%
Total net sales for 2004 increased $1,202,000, or 36%, to $4,542,000, from
$3,340,000 in 2003. Total net sales for 2003 increased $365,000, or 12%, to
$3,340,000, from $2,975,000 in 2002. Software revenues in 2004 increased
$986,000, or 53%, to $2,841,000, from $1,855,000 in 2003. In 2004, software
sales included approximately $300,000 in a one-time customer license purchase.
Services and support revenues increased $216,000 in 2004, or 15%, to $1,701,000,
from $1,485,000 in 2003. By comparison, software revenues in 2003 increased
$495,000, or 36%, to $1,855,000, from $1,360,000 in 2002. Services and support
revenues in 2003 decreased $130,000, or 8%, to $1,485,000, from $1,615,000 in
2002.
Though the Company's software revenues were negatively impacted by an
economic slowdown in the semiconductor industry during 2001, 2002 and 2003,
management believes that the general economic conditions of the SMT and
semiconductor markets, the primary markets served by the Company, began to
recover during the fourth quarter of 2003 and continued to have modest growth in
2004.
-19-
For the past several years, the Company's sales strategy has been focused
on the acquisition of new major OEM customers. The increase in software revenues
in 2004 and 2003 reflects the success of the Company in acquiring 12 new major
OEM design wins during 2004 and 8 major OEM design wins during 2003, combined
with the modest recovery of the capital equipment markets in the semiconductor
and SMT industries. Each new OEM customer results in another equipment
manufacturer integrating Cimetrix software into the tools that it sells to
factories around the world. This yields additional revenues for Cimetrix in
several ways, including software revenues from the initial software license
purchase and recurring "runtime" revenue associated with the shipment of each
piece of equipment by the OEM to its customers, as well as ongoing support and
maintenance contracts.
While the Company's focus has been on the sale of software products, the
Company also provides application and integration services to its customers that
want to purchase a complete turnkey system and other special engineering service
projects. The Company did experience a 15% growth in services and support
revenues during 2004, after an 8% decrease in these revenues during 2003,
primarily through responding to new customer requests for support and
assistance. In January of 2005, Cimetrix formed a new Global Services group and
the Company will start to proactively market professional engineering services
as a complementary business to Cimetrix's product lines.
The Company expects continuing sales growth despite industry analyst
predictions of flat to declining revenue in the semiconductor industry and a 5
to 10 percent decline in semiconductor capital equipment spending during 2005.
While the Company cannot predict market or economic conditions for subsequent
years, it believes it has added sufficient new customers to achieve critical
mass in support of worldwide sales growth. In addition, the Company will
continue its strategy of trying to win new OEM customers, making timely new
product introductions, and growing a complementary professional services
business.
Cost of Sales
The Company's cost of sales as a percentage of net sales for the years
ended December 31, 2004, 2003, and 2002 was 19%, 13% and 32%, respectively. Cost
of sales increased $409,000, or 94%, to $844,000 for 2004, from $435,000 for
2003. This increase was attributed to an increased number of application and
integration service projects that the Company provided to its customers during
2004, as well as an increase in the use of contract labor in performing
engineering services. The Company's cost of sales as a percentage of net sales
increased during 2004 compared to 2003 as the Company invested employee and
other resources in the development of major OEM customer relationships. Cost of
sales as a percentage of net sales will vary from year to year depending on the
type of service projects completed, the pricing strategy for the projects, the
extent of utilization of outside resources, and other factors.
While the Company's focus is on the sale of software products, it also
provides application and integration services to its customers that want to
purchase a complete turnkey system. These services are performed both internally
by the Company and externally through resources outside the Company. The costs
related to the sale of services performed through external resources are also
accounted for as cost of sales.
Cost of sales decreased $517,000, or 54%, to $435,000 for 2003, from
$952,000 for 2002. This decrease was attributable to a reduction in the use of
contract labor in performing engineering services. During 2003, such services
were provided at a lower cost primarily by employees of the Company.
-20-
Selling, Marketing and Customer Support
Selling, marketing and customer support expenses decreased $39,000, or 3%,
to $1,182,000 in 2004, from $1,221,000 in 2003. Selling, marketing and customer
support expenses decreased $404,000 or 25%, to $1,221,000 in 2003, from
$1,625,000 in 2002. These decreases were attributable to a reduction in the
number of sales and marketing personnel, including a reduction in personnel and
operating costs associated with the Company's office located in Archamps,
France.
Selling, marketing and customer support expenses for 2004, 2003, and 2002
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 materials, press releases, and the costs related to the Company's
representation at industry trade shows.
Research and Development
Research and development expenses remained somewhat consistent with levels
incurred in 2003, increasing $45,000, or 5%, to $978,000 in 2004, from $933,000
in 2003. Research and development expenses decreased by $141,000, or 13%, to
$933,000 in 2003, from $1,074,000 in 2002.
As the capital equipment markets improved during 2004, the Company began
investing in more research and development activities. The Company's efforts to
develop its new CIMPortal product line represented the majority of the research
and development expenditures during 2004.
Research and development expenses included only direct costs for wages,
benefits, materials, and education of technical personnel. All indirect costs
such as rents, utilities, depreciation and amortization were reflected in
general and administrative expenses, discussed below.
General and Administrative
General and administrative expenses increased $160,000, or 15%, to
$1,247,000 in 2004, from $1,087,000 in 2003. These increases resulted primarily
from an increase in consulting fees, and administrative and accounting
personnel. General and administrative expenses decreased $457,000, or 30%, to
$1,087,000 in 2003, from $1,544,000 in 2002. These decreases resulted from a
reduction in depreciation, amortization, rent, legal and other operating
expenses. The decrease in amortization expense was due primarily to a partial
write-off in 2002 of $1,224,000 of the Company's intangible assets relating to
the SDI technology acquisition (see discussion under "Impairment Loss below").
General and administrative costs include all direct costs for
administrative and accounting personnel, and all rents and utilities for
maintaining Company offices. These costs also include all indirect costs such as
depreciation of fixed assets and amortization of intangible assets. Depreciation
and amortization expense for 2004 decreased $77,000, or 37%, to $133,000, from
$210,000 in 2003. Depreciation and amortization expense for 2003 decreased
$224,000, or 52%, to $210,000, from $434,000 in 2002. Depreciation and
amortization expense represented 11%, 19% and 28% of all general and
administrative expenses in 2004, 2003 and 2002, respectively.
-21-
Provision for Doubtful Accounts
The Company reduced its allowance for doubtful accounts in 2004 and 2003
due to improved collections of accounts receivable, resulting in credits to the
provision for doubtful accounts of $100,000 and $57,000, respectively.
Impairment Loss
During 2004 the Company did not incur any impairment losses. The Company
incurred an impairment loss of $265,000 in 2003. This loss consisted of the
partial write-off of its intangible asset relating to the SDI technology
acquired in 1999 for approximately $2,580,000. Due to poor economic conditions
worldwide, along with a decrease in projected future cash flows resulting
directly from sales relating to this technology, management determined that a
significant portion of the technology was not recoverable. This asset is
currently being amortized over a period of 10 years. Based on future sales
estimates over the remaining useful life of this asset, management believes that
the Company has the ability to recover the remaining carrying value of this
asset of $229,000 as of December 31, 2004.
Also in 2003, the Company impaired $78,000 of its inventory due to
decreases in sales of certain products. Of the $78,000, $48,000 was recorded as
impairment expense while $30,000 was recorded as research and development costs.
The Company incurred an impairment loss of $1,224,000 in 2002. This loss
consisted of the partial write-off of its intangible asset relating to the SDI
technology acquired in 1999. At December 31, 2004, the net book value of this
technology was $229,000.
Other Income (Expense)
Interest income increased by $8,000, or 200%, to $12,000 in 2004, from
$4,000 in 2003. These increases resulted primarily from the Company earning a
higher rate of return on its cash reserves during 2004. Interest income
decreased by $51,000, or 93%, to $4,000 in 2003, from $55,000 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 decreased $47,000, or 15%, to $269,000, in 2004, compared
to $316,000 in 2003. This decrease was attributable to a reduction in the
outstanding principal balance of the Company's Senior Notes.
Interest expense increased $19,000, or 6%, to $316,000, in 2003, compared
to $297,000 in 2002. This increase was attributable to the Company's 12% Senior
Notes and the attached warrants, as well as accrued interest on a note payable
issued in October 2002.
Liquidity and Capital Resources
As of December 31, 2004, the Company had $1,648,000 of Senior Notes
outstanding, $1,596,000 net of discount. In September 2004, the Company
completed an exchange offer with the holders of the Senior Notes, offering three
options: 1) surrender Senior Notes and related warrants for early retirement of
the Senior notes at 90% of the principal amount of the Senior Notes on October
1, 2004; 2) extend the due date of the Senior Notes and expiration date of
related warrants from September 30, 2005 to September 30, 2006, with the
interest rate on the Senior Notes reduced from 12% to 8% during the last year;
and 3) elect to hold the Senior Notes and related warrants with no change in
terms. Holders of $508,000 of Senior Notes elected option 1, holders of $703,000
of Senior Notes elected option 2 and holders of $704,000 of Senior Notes elected
option 3.
-22-
Of the holders of Senior Notes electing early retirement under option 1,
holders of $267,000 of Senior Notes were repaid by the Company on October 1,
2004. The holder of $241,000 of Senior Notes electing early retirement under
option 1 is required to obtain court approval of its decision before this debt
can be retired. The Company recorded a gain on early extinguishment of debt of
$22,000 in September 2004, net of unamortized discount related to warrants of
$5,000 with respect to the Senior Notes paid October 1, 2004.
After the completion of the exchange offer and as of December 31, 2004, the
Senior Notes of the Company are comprised of the following:
Current Portion:
12% Senior Notes to be repaid upon court approval $ 241,000
12% Senior Notes due September 30, 2005 704,000
Senior Note discount (40,000)
--------------------
905,000
--------------------
Long-Term Portion:
12% - 8% Senior Notes due September 30, 2006 703,000
Senior Note discount (12,000)
--------------------
691,000
--------------------
Total Debt at December 31, 2004 $ 1,596,000
====================
As a direct result of the Exchange Offer, the Company improved its
liquidity and financial position by extending the due date of $703,000 of Senior
Notes from September 30, 2005 to September 30, 2006, reducing the principal
amount of Senior Notes to be paid effective as of October 1, 2004 by
approximately $51,000, and eliminating interest expense for the twelve months
ending September 30, 2005 on $508,000 of Senior Notes. The early redemption of
$241,000 in Senior Notes is subject to the holder obtaining the necessary court
approval.
The Company further improved its liquidity and financial position in
January 2005, through the sale of 2,500,000 shares of its common stock at a
price of $.80 per share, for total cash proceeds of $2,000,000, in a private
placement with two accredited investors. The shares were sold through officers
and directors of the Company who did not receive any commissions or other
remuneration for selling the shares. The Company intends to use the proceeds for
working capital and general corporate purposes.
At December 31, 2004, the Company had cash and other current assets of
$2,033,000 and current liabilities of $1,865,000, resulting in working capital
of $168,000, compared to working capital of $966,000 at December 31, 2003. This
decrease in working capital of $798,000 was attributable primarily to the
reclassification of Senior Notes due September 30, 2005 to current portion of
long-term debt during 2004.
-23-
Historically, the Company has incurred net losses and negative cash flows
from operations. As of December 31, 2004, the Company had an accumulated
operating deficit of $28,930,000 and a stockholders' deficit of $198,000. The
Company has improved the results of its operations during the year ended
December 31, 2004, reporting net income of $164,000, as discussed above, and net
cash provided by operating activities of $162,000. Management believes that the
improvement in operations and operating cash flows, recent sales of the
Company's common stock, and a more favorable debt reduction schedule for the
Senior Notes will be sufficient to assure continuation of the Company's
operations through 2005. However, there can be no assurance that operations and
operating cash flows will remain at current levels or continue to improve in the
near future. If the Company is unable to sustain profitable operations and
positive operating cash flows and meet scheduled debt obligations, it may be
unable to continue development of its products and may be required to curtail
operations.
The Company also believes that continued improved operations and a stronger
working capital position will eventually allow the Company to obtain a line of
credit or other bank financing secured by accounts receivable or assets other
than cash, and will allow for increased borrowing capacity.
The Company believes that it will have sufficient funds to pay the
remaining Senior Notes when due in September 2005 and 2006 from the funds
received from recent sales of common stock in private placement transactions, as
well as from improved operations.
Net cash provided by operating activities for the year ended December 31,
2004 was $162,000 compared to net cash used in operating activities of $577,000
for the same period in 2003. The improvement in operating cash flows resulted
primarily from the improvement of net income in 2004 as detailed above.
Net cash provided by investing activities for the year ended December 31,
2004 was $169,000, compared to net cash provided by investing activities of
$159,000 for the same period in 2003. This increase resulted primarily from
increased sales of marketable securities held for investment, net of purchases
of property and equipment.
Net cash used in financing activities for the year ended December 31, 2004
was $852,000 compared to net cash provided by financing activities of $750,000
for the same period in 2003. The increase in cash used in financing activities
for the year ended December 31, 2004 resulted from the payment of $992,000 of
the Company's Senior Notes, offset by the proceeds from the June private
placement of common stock of $140,000.
The Company has not been adversely affected by inflation. However, there
are potential economic risks inherent in foreign trade. Sales to foreign
customers increased during 2004 to $2,044,000, representing 45% of the Company's
net sales, compared to $1,160,000, or 35%, of net sales in 2003. To minimize the
risk from changes in foreign currency exchange rates, the Company's export sales
are transacted in United States dollars.
The Company considers its cash resources sufficient to meet the operating
needs of its current level of business for the next twelve months.
Factors Affecting Future Results
Net sales for 2004 increased 36% compared to the prior year, meeting the
Company's target revenue. Over the three years prior to 2003, the economic
slowdown led to significant delays in the placement of orders by the Company's
OEM customers. As the end-user customers cut back on capital equipment
expenditures, the Company's OEM customers also cut back on their orders for the
Company's software products. In late 2003 and continuing through 2004, it
appeared that the semiconductor and electronics assembly industries, the primary
markets the Company serves, began an economic recovery with corresponding
increases in capital equipment expenditures. In general, increases in capital
equipment expenditures for the semiconductor and electronics assembly industries
should correlate to increases in software license revenue for the Company. In
addition, the Company continues to focus on incrementally expanding its customer
base and product line in order to increase revenues. Management believes that
its expanded customer base, combined with increases in capital equipment
expenditures in the semiconductor and electronics assembly industries, which
should lead to additional sales of the Company's products, will provide the
needed revenue to maintain a profitable level of operations.
-24-
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 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 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 Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. In addition to the factors discussed
elsewhere in this report, these are important factors that could cause actual
results or events to differ materially from those contained in any
forward-looking statements made by or on behalf of the Company. Although the
Company has attempted to list the factors that it is currently aware may have an
impact on its operations, other factors may in the future prove to be important
and the following list should not be considered comprehensive.
Operating Losses, Accumulated Deficit and Lack of Liquidity
The Company has an accumulated operating deficit of $28,930,000 at December
31, 2004 and $1,596,000 of Senior Notes outstanding, net of discount. The
Company's future liquidity is dependent on sustaining positive cash flows from
operations, and, to the extent necessary, obtaining external financing through
the issuance of debt or equity securities. See "Liquidity and Capital
Resources". If the Company is unable to generate the cash flow necessary to
sustain future operations, retire its outstanding debt, or meet its research and
development needs, its future operations would be materially adversely affected.
-25-
Highly Competitive Industry
The Company is engaged in a highly competitive industry involving rapidly
changing products. 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.
Dependence Upon Customers
The Company sells its products principally to OEMs, which have the
relationships with the end users. The quantity of each customer's business with
the Company depends substantially on that customer's relationships with end
users, market acceptance of the customer's products that utilize the Company's
software products and the development cycle of the customer's products. The
Company could be materially adversely affected by a downturn in either
customer's sales or their failure to meet sales expectations. The Company will
likely from time to time have customers that account for a significant portion
of its business and any adverse developments on such customers' business would
adversely affect the Company. During 2004, the Company had one customer that
accounted for 11% of the Company's net sales. During 2003, there were no
customers that accounted for 10% or more of the Company's net sales.
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 to develop and
introduce, on a timely basis, new products that keep pace with technological
developments and emerging industry standards and gain a competitive advantage.
-26-
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, Executive Vice President of Research and
Development, and Kourosh Vahdani, Vice President of Global Services. 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.
Contacting Cimetrix
In an effort to make information available to shareholders and customers,
the Company has established its World Wide Web site at www.cimetrix.com. All
shareholders or other interested parties are encouraged to access the Company's
web site before contacting the Company directly. The Company is committed to
keeping the information on this site up to date. The Company's web site contains
links to the Company's public filings with the SEC, press releases, detailed
product information, customer information, and employment opportunities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A significant portion of the Company's cash equivalents bear variable
interest rates that are adjusted to market conditions. Changes in market rates
will affect interest earned on these instruments, and potentially the carrying
value of the investments. The Company does not utilize derivative instruments to
offset the exposure to interest rates. Significant changes in interest rates
would not materially impact the Company's consolidated financial position and
results of operations.
The Company is subject to potential economic risks inherent in foreign
trade. Sales to foreign customers increased during 2004 to $2,044,000,
representing 45% of the Company's net sales, compared to $1,160,000, or 35%, of
net sales in 2003. To minimize the risk from changes in foreign currency
exchange rates, the Company's export sales are transacted in United States
dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of the Company called for by this item are
contained in a separate section of this report. See "Index to Consolidated
Financial Statements" on Page F-1.
-27-
The following table presents selected unaudited quarterly financial data
for each of the four quarters in 2004 and 2003. The selected quarterly financial
data reflects, in the opinion of management, all adjustments necessary to fairly
present the results of operations for such periods. Results of any one or more
quarters are not necessarily indicative of continuing trends.
2004 2003
----------------------------------------------------- -------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-- -- -- -- -- -- -- --
Revenues $1,065,000 $ 999,000 $1,213,000 $1,265,000 $ 909,000 $ 981,000 $ 446,000 $1,004,000
Net income (loss) 20,000 22,000 101,000 21,000 (126,000) (165,000) (450,000) (190,000)
Income (loss) per
common share
- diluted
$- $- $0.01 $- $- $(0.01) $(0.02) $(0.01)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Based on their evaluations as of December 31, 2004, 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 Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC.
(b) Changes in internal controls
There were no significant changes in the Company's internal controls over
financial reporting or in other factors that could significantly affect these
internal controls subsequent to the date of their most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
-28-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item, other than the information regarding
executive officers which is contained in Part I of this report, is incorporated
by reference from the information in the Company's Proxy Statement for the 2005
Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the
information in the Company's Proxy Statement for the 2005 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference from the
information in the Company's Proxy Statement for the 2005 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the
information in the Company's Proxy Statement for the 2005 Annual Meeting of
Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item is incorporated by reference from the
information in the Company's Proxy Statement for the 2005 Annual Meeting of
Stockholders.
-29-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements and Schedules
The audited consolidated financial statements of the Company and the report
of independent registered public accountants required in Part II, Item 8
are included beginning on page F-1. See the Index to Consolidated Financial
Statements on page F-1.
Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise included in the
consolidated financial statements and notes thereto.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of 2004.
(c) Exhibits
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 1998 Incentive Stock Option Plan (4)
10.2 Amendment 1 to 1998 Incentive Stock Option Plan (5)
10.3 Amendment 2 to 1998 Incentive Stock Option Plan (6
10.4 2004 Amendment to 1998 Incentive Stock Option Plan (7)
10.5 Employment Agreement with Robert H. Reback, President and Chief
Executive Officer (8)
10.6 Amendment to Employment Agreement with Robert H. Reback,
President and Chief Executive Officer (9)
10.7 Employment Agreement with David P. Faulkner, Executive
Vice President and Managing Director of Machine Control
Products(8)
10.8 Amendment to Employment Agreement with David P. Faulkner,
Executive Vice President of Sales and Marketing (9)
10.9 Employment Agreement with Michael D. Feaster, Vice President
of Software Development (8)
10.10 Amendment to Employment Agreement with Michael D. Feaster, Vice
President of Software Development (9)
10.11 Independent Contractor Agreement with Dennis P. Gauger, Chief
Financial Officer (7)
10.12 Form of Indemnification Agreement with directors and officers (9)
11 Statement re Computation of Per Share Earnings (10)
14 Special Obligations of Certain Officers (7)
21 List of Subsidiaries (10)
23 Independent Auditors' Consent (this filing)
31.1 Certification of Principal Executive Officer pursuant to Rule
13a-15(e) of the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(this filing)
31.2 Certification of Principal Financial Officer pursuant to Rule
13a-15(e) of the Securities Exchange Act of 1934, as amended,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (this filing).
-30-
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (this filing)
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (this filing)
99.1 Press release dated March 31, 2005 (this filing)
--------------------------------------
(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 to Proxy Statement on Schedule 14A
dated April 20, 1998.
(5) Incorporated by reference to Proxy Statement on Schedule 14A
dated April 30, 2001.
(6) Incorporated by reference to Proxy Statement on Schedule 14A
dated April 30, 2002.
(7) Incorporated by reference to Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004.
(8) Incorporated by reference to Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002.
(9) Incorporated by reference to Annual Report on Form 10-K for the
fiscal year ended December 31, 2003.
(10) Included in Notes to Consolidated Financial Statements contained
in this filing.
-31-
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 30th
day of March, 2005.
REGISTRANT
CIMETRIX INCORPORATED
By: /S/ Robert H. Reback
-------------------------
Robert H. Reback
President and Chief Executive Officer
(Principal Executive Officer)
By: /S/ Dennis P. Gauger
-------------------------
Dennis P. Gauger
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/S/Robert H.Reback President, Chief Executive Officer and March 30, 2005
- -------------------- Director (Principal Executive Officer)
Robert H. Reback
/S/Dennis P. Gauger Interim Chief Financial Officer and March 30, 2005
- ------------------ Director(Principal Financial and
Dennis P. Gauger Accounting Officer)
/S/Scott C. Chandler Director March 30, 2005
- ---------------------
Scott C. Chandler
/S/C. Alan Weber Director March 30, 2005
- ----------------------
C. Alan Weber
/S/Michael B. Thompson Director March 30, 2005
- ----------------------
Michael B. Thompson
-32-
CIMETRIX INCORPORATED
Index to Consolidated Financial Statements
Page
-----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Deficit F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Cimetrix Incorporated
We have audited the consolidated balance sheets of Cimetrix Incorporated as of
December 31, 2004 and 2003, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the years ended December
31, 2004, 2003 and 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cimetrix
Incorporated as of December 31, 2004 and 2003, and the results of its operations
and its cash flows for the years ended December 31, 2004, 2003 and 2002, in
conformity with accounting principles generally accepted in the United States of
America.
/S/TANNER LC
Salt Lake City, Utah
March 15, 2005
F-2
CIMETRIX INCORPORATED
Consolidated Balance Sheets
December 31,
2004 2003
-------------------- ---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 868,000 $ 1,389,000
Marketable securities - 234,000
Accounts receivable, net 1,081,000 920,000
Prepaid expenses and other current assets 84,000 96,000
-------------------- ---------------------
Total current assets 2,033,000 2,639,000
Technology, net 229,000 276,000
Property and equipment, net 82,000 84,000
Other assets 14,000 33,000
-------------------- ---------------------
$ 2,358,000 $ 3,032,000
==================== =====================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 114,000 $ 167,000
Accrued expenses 298,000 192,000
Deferred revenue 548,000 562,000
Current portion of long-term debt 905,000 752,000
-------------------- ---------------------
Total current liabilities 1,865,000 1,673,000
Long-term debt, net of current portion 691,000 1,865,000
-------------------- ---------------------
Total liabilities 2,556,000 3,538,000
-------------------- ---------------------
Commitments and contingencies
Stockholders' deficit:
Common stock; $.0001 par value, 100,000,000 shares
authorized, 27,844,317 and 27,652,246 shares issued 3,000 3,000
Additional paid-in capital 28,778,000 28,634,000
Treasury stock, at cost (49,000) (49,000)
Accumulated deficit (28,930,000) (29,094,000)
-------------------- ---------------------
Total stockholders' deficit (198,000) (506,000)
-------------------- ---------------------
$ 2,358,000 $ 3,032,000
==================== =====================
See accompanying notes to consolidated financial statements
F-3
CIMETRIX INCORPORATED
Consolidated Statements of Operations
Years Ended December 31,
2004 2003 2002
------------------- -------------------- -----------------
Sales:
Software $ 2,631,000 $ 1,809,000 $ 936,000
Services and support 1,701,000 1,485,000 1,615,000
Related party 210,000 46,000 424,000
------------------- -------------------- -----------------
Total net sales 4,542,000 3,340,000 2,975,000
------------------- -------------------- -----------------
Costs and expenses:
Cost of sales 844,000 435,000 952,000
General and administrative 1,247,000 1,087,000 1,544,000
Selling, marketing and customer support 1,182,000 1,221,000 1,625,000
Research and development 978,000 933,000 1,074,000
Provision for doubtful accounts (100,000) (57,000) 337,000
Impairment loss - 313,000 1,224,000
------------------- -------------------- -----------------
Total costs and expenses 4,151,000 3,932,000 6,756,000
------------------- -------------------- -----------------
Income (loss) from operations 391,000 (592,000) (3,781,000)
------------------- -------------------- -----------------
Other income (expense):
Interest income 12,000 4,000 55,000
Interest expense (269,000) (316,000) (297,000)
Other income (expense) 30,000 (27,000) (29,000)
------------------- -------------------- -----------------
Total other expense (227,000) (339,000) (271,000)
------------------- -------------------- -----------------
Income (loss) before income taxes 164,000 (931,000) (4,052,000)
Provision for income taxes - - (3,000)
------------------- -------------------- -----------------
Net income (loss) $ 164,000 $ (931,000) $(4,055,000)
=================== ==================== =================
Income (loss) per common share:
Basic $ 0.01 $ (0.04) $ (0.17)
=================== ==================== =================
Diluted $ 0.01 $ (0.04) $ (0.17)
=================== ==================== =================
Weighted average number of shares outstanding:
Basic 27,730,000 25,186,000 24,488,000
Diluted 28,311,000 25,186,000 24,488,000
See accompanying notes to consolidated financial statements
F-4
CIMETRIX INCORPORATED
Consolidated Statements of Stockholders' Deficit
Years Ended December 31, 2004, 2003 and 2002
Treasury Stock Common Stock
-------------------------- ------------------------ Additional
Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------------ ------------- ------------ ----------- ---------------- ---------------- -------------
Balance, January 1, 2002 431,722 $(800,000) 24,457,690 $2,000 $27,926,000 $(24,108,000) $3,020,000
Common stock issued for
services - - 92,079 - 22,000 - 22,000
Options and warrants issued
for services - - - - 43,000 - 43,000
Issuance of common stock
warrants attached to
senior notes - - - - 82,000 - 82,000
Purchase of treasury shares 53,214 (149,000) - - 149,000 - -
Cancellation of treasury
shares (459,936) 900,000 (459,936) - (900,000) - -
Net loss - - - - - (4,055,000) (4,055,000)
------------ ------------- ------------ ----------- ---------------- ---------------- -------------
Balance, December 31,
2002 25,000 (49,000) 24,089,833 2,000 27,322,000 (28,163,000) (888,000)
Purchase and cancellation
of treasury stock - - (26,786) - 34,000 - 34,000
Options and warrants issued
for services - - - - 22,000 - 22,000
Common stock issue for
debt and accrued interest - - 1,474,911 - 517,000 - 517,000
Common stock issued for
cash - - 2,114,288 1,000 739,000 - 740,000
Net loss - - - - - (931,000) (931,000)
------------ ------------- ------------ ----------- ---------------- ---------------- -------------
Balance, December 31,
2003 25,000 (49,000) 27,652,246 3,000 28,634,000 (29,094,000) (506,000)
Common stock issued for
cash - - 400,000 - 140,000 - 140,000
Common stock issued upon
exercise of stock options - - 11,446 - 6,000 - 6,000
Purchase and cancellation
of treasury stock - - (219,375) - (77,000) - (77,000)
Issuance of common stock
warrants attached to
senior notes - - - - 46,000 - 46,000
Warrants issued for services - - - - 15,000 - 15,000
Other - - - - 14,000 - 14,000
Net income - - - - - 164,000 164,000
------------ ------------- ------------ ----------- ---------------- ---------------- -------------
Balance, December 31,
2004 25,000 $(49,000) 27,844,317 $3,000 $28,778,000 $(28,930,000) $(198,000)
============ ============= ============ =========== ================ ================ =============
See accompanying notes to consolidated financial statements
F-5
CIMETRIX INCORPORATED
Consolidated Statements of Cash Flows
Years Ended December 31,
2004 2003 2002
----------------- ---------------- -----------------
Cash flows from operating activities:
Net income (loss) $ 164,000 $ (931,000) $ (4,055,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in)operating activities:
Depreciation and amortization 147,000 210,000 434,000
Provision for doubtful accounts (100,000) (57,000) 337,000
Stock compensation expense - - 22,000
Option and warrant compensation expense 21,000 22,000 43,000
Impairment loss on technology - 265,000 1,224,000
Impairment loss on inventory - 78,000 -
Interest expense from bond discount 39,000 28,000 22,000
Gain on extinguishment of debt (22,000) - -
(Increase) decrease in:
Accounts receivable (138,000) (379,000) 891,000
Inventories 7,000 2,000 69,000
Prepaid expenses and other current assets 5,000 (10,000) 4,000
Other assets - - (56,000)
Increase (decrease in):
Accounts payable (53,000) (5,000) (90,000)
Accrued expenses 106,000 16,000 (311,000)
Deferred revenue (14,000) 184,000 197,000
----------------- ---------------- -----------------
Net cash provided by (used in) operating activities 162,000 (577,000) (1,269,000)
----------------- ---------------- -----------------
Cash flows from investing activities:
Net sales (purchases) of marketable securities 234,000 162,000 1,389,000
Purchase of property and equipment (65,000) (3,000) -
Purchase of technology - - (92,000)
----------------- ---------------- -----------------
Net cash provided by investing activities 169,000 159,000 1,297,000
----------------- ---------------- -----------------
Cash flows from financing activities:
Proceeds from the sale of common stock 140,000 740,000 -
Proceeds from the issuance of debt - 51,000 895,000
Payments of debt (992,000) - (580,000)
Purchase and cancellation of treasury stock - (41,000) (29,000)
----------------- ---------------- -----------------
Net cash provided by (used in) financing activities (852,000) 750,000 286,000
----------------- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents (521,000) 332,000 314,000
Cash and cash equivalents, beginning of year 1,389,000 1,057,000 743,000
----------------- ---------------- -----------------
Cash and cash equivalents, end of year $ 868,000 $1,389,000 $1,057,000
================= ================ =================
See accompanying notes to consolidated financial statements
F-6
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Note 1: Organization and Significant Accounting Policies
Organization - Cimetrix Incorporated (Cimetrix or the Company) is primarily
engaged in the development and sale of open architecture, standards-based,
personal computer software for controlling machine tools, robots, electronic
equipment, and communication products that allow communication between equipment
on the factory floor and host systems, and semiconductor connectivity products
that connect new semiconductor tools to each other and host systems.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Cimetrix Europe,
Inc. All significant inter-company accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents - For purposes of the consolidated statements of
cash flows, cash and cash equivalents includes all cash and investments with
original maturities to the Company of three months or less.
Marketable Securities - The Company classifies its marketable debt and
equity securities as "held to maturity" if it has the positive intent and
ability to hold the securities to maturity. All other marketable debt and equity
securities are classified as "available for sale." Securities classified as
"available for sale" are carried in the financial statements at fair value.
Realized gains and losses, determined using the specific identification method,
are included in earnings; unrealized holding gains and losses are reported as
accumulated other comprehensive income which is a separate component of
stockholders' equity. Securities classified as held to maturity are carried at
amortized cost.
For both categories of securities, declines in fair value below amortized
cost that are other than temporary are included in earnings.
At December 31, 2004, the Company had no marketable securities classified
as "available for sale". At December 31, 2003, the Company had an investment in
a mutual fund that was classified as a marketable security "available for sale."
The fair market value of the Company's investment at December 31, 2003 was
$234,000, which also was the cost basis of the investment. Because the fair
market value and cost of the investment were the same, no unrealized holding
gain or loss has been recorded as a separate component of stockholders' equity.
Accounts Receivable - Trade receivables are carried at original invoice
amount less an estimate made for doubtful accounts. Management determines the
allowance for doubtful accounts by identifying potential troubled accounts and
by using historical experience and future expectations applied to an aging of
accounts. Trade receivables are written off when deemed uncollectible.
Recoveries of trade receivables previously written off are recorded when
received.
Technology - Technology consists of the costs to obtain the Company's AART
and SDI SECS/GEM technology (see Note 3). The technology is being amortized on
the straight-line method over ten years.
F-7
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statement
December 31, 2004, 2003 and 2002
(Continued)
Software Development Costs - Certain software development costs are
capitalized when incurred. Capitalization of software development costs begins
upon the establishment of technological feasibility. Costs incurred prior to the
establishment of technological feasibility are expensed as incurred. The Company
also expenses hardware design and prototype expenses as incurred as research and
development costs. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized software development costs
requires considerable judgment by management with respect to certain external
factors, including, but not limited to, technological feasibility, anticipated
future gross revenues, estimated economic life and changes in software and
hardware technologies.
Amortization of capitalized software development costs is provided on a
product-by-product basis at the greater of the amount computed using (a) the
ratio of current gross revenues for a product to the total of current and
anticipated future gross revenues or (b) the straight-line method over the
remaining estimated economic life of the product. Software costs are carried at
the unamortized cost or net realizable value. Net realizable value is reviewed
on an annual basis after assessing potential sales of the product in that the
unamortized capitalized cost relating to each product is compared to the net
realizable value of that product and any excess is written off.
Patents and Copyrights - The Company has obtained a patent related to
certain technology. In addition, the Company has registered much of its software
system products with the Copyright Office of the United States, and will
continue to timely register any updates to current products or any new products.
Generally, other than the patent and the copyright registrations, the Company
relies on confidentiality and nondisclosure agreements with its employees and
customers, appropriate security measures, and the encoding of its software in
order to protect the proprietary nature of its technology. No cost has been
capitalized with respect to the patent.
Property and Equipment - Property and equipment are recorded at cost, less
accumulated depreciation. Depreciation and amortization on property and
equipment is determined using the straight-line method over the estimated useful
lives of the assets or terms of the lease. Expenditures for maintenance and
repairs are expensed when incurred and betterments are capitalized. Gains and
losses on sale of property and equipment are reflected in operations.
Revenue Recognition - The software component of the Company's products is
an integral part of its functionality. As such, the Company applies the
provisions of the American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" as modified
by SOP 98-9.
The Company's products are fully functional at the time of shipment. The
software components of the Company's products do not require significant
production, modification or customization. As such, revenue from product sales
is recognized upon shipment provided that (1) a purchase order has been received
or a contract has been executed; (2) title has transferred; (3) the fee is fixed
and determinable; and (4) collectibility is deemed probable.
The Company also may provide application, training, and support services to
its customers. Revenue related to services is recognized as services are
performed if there is not an extended contract related to such services. If the
services are provided pursuant to a contract that extends over a period of time,
the revenue from services is recorded ratably over the contract period. If the
service contract is sold in connection with the sale of software, the portion of
the sale related to the service contract, which is determined based on the sales
price of such contract on a stand-alone basis, is deferred and recognized
ratably over the contract term.
F-8
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statement
December 31, 2004, 2003 and 2002
(Continued)
Income Taxes - Deferred income taxes are provided in amounts sufficient to
give effect to temporary differences between financial and tax reporting,
principally related to depreciation, asset impairment, and accrued liabilities.
Stock-Based Compensation - At December 31, 2004, the Company has
stock-based employee compensation plans, which are described more fully in Note
14. The Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations, and has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. Accordingly, no compensation cost has been recognized
in the financial statements, as all options granted under those plans had an
exercise price equal to or greater than the market value of the underlying
common stock on the date of grant. Had compensation expense for the Company's
stock options been determined based on the fair value at the grant date
consistent with the provisions of SFAS No. 123, the Company's results of
operations would have been reduced to the pro forma amounts indicated below:
Years Ended
December 31,
---------------------------------------------
2004 2003 2002
---------------------------------------------
Net income (loss) as reported $ 164,000 $ (931,000) $ (4,055,000)
Deduct:
Total stock-based employee
compensation expense
determined under fair value
based method for all awards (294,000) (478,000) (706,000)
---------------------------------------------
Net loss pro forma $ (130,000) $ (1,409,000) $ (4,761,000)
=============================================
Income (loss) per share:
Basic - as reported $ .01 $ (.04) $ (.17)
=============================================
Basic - pro forma $ - $ (.06) $ (.19)
=============================================
Diluted - as reported $ .01 $ (.04) $ (.17)
=============================================
Diluted - pro forma $ - $ (.06) $ (.19)
=============================================
F-9
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statement
December 31, 2004, 2003 and 2002
(Continued)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
Years Ended December 31,
2004 2003 2002
---------------- ----------------- --------------
Expected dividend yield - - -
Expected stock price volatility 96% 87% 99%
Risk free interest rate 3.41% 3.35% 4.00%
Expected life of options 5 years 5 years 5 years
The weighted average fair value of options granted during 2004, 2003, and
2002, was $.30, $.11, and $.14, respectively.
Earnings (Loss) Per Common Share - The computation of basic earnings (loss)
per common share is based on the weighted average number of shares outstanding
during each year.
The computation of diluted earnings per common share is based on the
weighted average number of shares outstanding during the year plus the common
stock equivalents which would arise from the exercise of stock options and
warrants outstanding using the treasury stock method and the average market
price per share during the year. Options and warrants to purchase 6,527,000,
5,821,750, and 4,754,750 shares of common stock at prices ranging from $.35 to
$3.50 per share were outstanding at December 31, 2004, 2003, and 2002,
respectively. The 2004 computation of weighted average number of shares included
the dilutive effect of 580,000 options and warrants. No options and warrants
were included in the 2003 and 2002 computation of weighted average number of
shares because the effect would have been antidilutive.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of trade
receivables. In the normal course of business, the Company provides credit terms
to its customers. Accordingly, the Company performs ongoing credit evaluations
of its customers and maintains allowances for possible losses which, when
realized, have been within the range of management's expectations.
The Company maintains its cash in bank deposit accounts and brokerage
investment accounts. At times, the bank deposits may exceed federally insured
limits and the brokerage investment accounts are not insured. The Company has
not experienced any losses in such accounts and believes it is not exposed to
any significant credit risk in its cash deposits.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-10
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statement
December 31, 2004, 2003 and 2002
(Continued)
Recent Accounting Pronouncements - In December 2004, the Financial
Accounting Standards Board ("FASB") issued Financial Accounting Standard ("FAS")
No. 123(R), Share-Based Payment, an amendment of FASB Statements No. 123 and 95.
FAS No. 123(R) replaces FAS No. 123, Accounting for Stock-Based Compensation,
and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
This statement requires companies to recognize the fair value of stock options
and other stock-based compensation to employees prospectively beginning with
fiscal periods beginning after June 15, 2005. This means that the Company will
be required to implement FAS No. 123(R) no later than the quarter beginning July
1, 2005. The Company currently measures stock-based compensation in accordance
with APB Opinion No. 25 as discussed above. The Company anticipates adopting the
modified prospective method of FAS No. 123(R) on July 1, 2005. The impact on the
Company's financial condition or results of operations will depend on the number
and terms of stock options outstanding on the date of change, as well as future
options that may be granted. However, the Company believes the adoption of FAS
No. 123(R) may have a material effect on the Company's financial position and
results of operations.
In December 2004, the FASB issued FAS 153, Exchanges of Nonmonetary Assets.
This Statement amends the guidance in APB Opinion No. 29, Accounting for
Nonmonetary Transactions. That statement is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. This Statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The Company has not historically entered into a significant
level of nonmonetary transactions, and therefore does not expect that this
standard will materially impact its consolidated financial position or results
of operations.
In December 2003, the FASB issued Interpretation No. 46 ("FIN 46R")
(revised December 2003), Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 ("ARB 51"), which
addresses how a business enterprise should evaluate whether it has a controlling
interest in an entity though means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (FIN
46), which was issued in January 2003. Before concluding that it is appropriate
to apply ARB 51 voting interest consolidation model to an entity, an enterprise
must first determine that the entity is not a variable interest entity (VIE). As
of the effective date of FIN 46R, an enterprise must evaluate its involvement
with all entities or legal structures created before February 1, 2003, to
determine whether consolidation requirements of FIN 46R apply to those entities.
There is no grandfathering of existing entities. Public companies must apply
either FIN 46 or FIN 46R immediately to entities created after January 31, 2003
and no later than the end of the first reporting period that ends after March
15, 2004. The adoption of FIN 46 had no effect on the Company's consolidated
financial position, results of operations or cash flows.
In December 2003, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 revises or
rescinds portions of the interpretive guidance included in Topic 13 of the
codification of staff accounting bulletins in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. The adoption of SAB 104 did not have a material
effect on the Company's results of operations or financial position.
F-11
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statement
December 31, 2004, 2003 and 2002
(Continued)
Reclassifications - Certain amounts in the prior years' financial
statements have been reclassified to conform to the current year presentation.
Note 2: Accounts Receivable
Accounts receivable consist of the following:
December 31
2004 2003
--------------------- ---------------------
Trade receivables $ 1,141,000 $ 1,101,000
Less allowance for doubtful accounts (60,000) (181,000)
--------------------- ---------------------
$ 1,081,000 $ 920,000
===================== =====================
Note 3: Technology
During the year ended December 31, 1999, the Company purchased all rights,
title, interest, and benefit in and to the technology that is referred to as the
sdiStationTM. This technology is used in the semiconductor and electronics
industries.
During the fourth quarters of 2003 and 2002, due to decreased projected
future cash flows relating to this technology, management determined that a
significant portion of the technology was not recoverable, and accordingly
recorded impairment losses of $265,000 and $1,224,000, respectively.
At December 31, 2004 and 2003, the net book value of the sdiStationTM
technology was $229,000 and $276,000, respectively. Amortization of technology
costs for 2004, 2003 and 2002 was approximately $47,000, $91,000 and $264,000,
respectively. Accumulated amortization of technology was $863,000 and 1,080,000
as of December 31, 2004 and 2003, respectively.
F-12
Note 4: Property and Equipment
Property and equipment consist of the following:
December 31
2004 2003
--------------------- ---------------------
Software development costs $ 464,000 $ 464,000
Equipment 383,000 365,000
Office equipment and software 374,000 346,000
Furniture and fixtures 187,000 170,000
Leasehold improvements 85,000 83,000
--------------------- ---------------------
1,493,000 1,428,000
Less accumulated depreciation (1,411,000) (1,344,000)
--------------------- ---------------------
$ 82,000 $ 84,000
===================== =====================
Note 5: Accrued Expenses
Accrued expenses consist of the following:
December 31
2004 2003
--------------------- ---------------------
Accrued salaries and wages $ 162,000 $ 25,000
Accrued vacation 65,000 80,000
Accrued payroll taxes 24,000 13,000
Accrued interest payable 42,000 70,000
Other 5,000 4,000
--------------------- ---------------------
$ 298,000 $ 192,000
===================== =====================
Note 6: Lease Obligations
The Company leases certain office space under noncancelable operating
lease agreements. Future minimum lease payments required under operating leases
are as follows:
Year ending December 31,
2005 $ 118,000
2006 127,000
2007 116,000
--------------
$ 361,000
==============
Rental expense for the years ended December 31, 2004, 2003 and 2002 on
operating leases was $111,000, $121,000, $249,000, respectively.
F-13
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statement
December 31, 2004, 2003 and 2002
(Continued)
Note 7: Note Payable
During the year ended December 31, 2002, the Company issued a convertible
note payable in the amount of $500,000 to a company, bearing interest at a rate
of 6.75% per annum, with principal and interest due on March 31, 2003. The
conversion feature of the note provided the note would be convertible into fully
paid, nonassessable, restricted shares of common stock at a conversion price of
$0.35 per share. On March 31, 2003 the Company converted the note into 1,474,911
restricted shares of common stock as payment of the $500,000 principal amount of
the note and payment of $17,000 of accrued interest.
Note 8: Senior Notes Payable
The Company's Senior Notes Payable consist of the following:
December 31
2004 2003
------------- ------------
------------- ------------
1997 Senior Notes, unsecured, with interest at 10%
payable semiannually on April 1 and October 1 of
each year, maturing September 30, 2002 $ - $ 982,000
2001 Senior Notes, unsecured, with interest at 10%
payable semiannually on April 1 and October 1 of
each year, maturing September 30, 2004 - 11,000
2002 Senior Notes, unsecured, with interest at 12%
payable semiannually on April 1 and October 1 of
each year, maturing September 30, 2005 945,000 1,674,000
2004 Senior Notes, unsecured, with interest at 12%
payable semiannually on April 1 and October 1 of
2005 and 8% payable semiannually on April 1, and
September 30, 2006, maturing September 30, 2006 703,000 -
------------ ------------
1,648,000 2,667,000
Less discount (52,000) (50,000)
------------ ------------
Total 1,596,000 2,617,000
Less current portion 905,000 752,000
------------ ------------
Long-term portion $ 691,000 $ 1,865,000
============ ============
F-14
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statement
December 31, 2004, 2003 and 2002
(Continued)
During 2002, in accordance with a Private Placement Memorandum, the Company
issued $1,503,000 of 12% unsecured Senior Notes ("2002 Senior Notes") with
interest payable semiannually on April 1 and October 1 of each year, and the
principal maturing on September 30, 2005. Of the 2002 Senior Notes issued,
$755,000 was converted from Senior Notes issued in 1997 ("1997 Senior Notes"),
$353,000 was converted from Senior Notes issued in 2001 ("2001 Senior Notes")
and $395,000 was attributed to new Senior Notes issued for cash. In addition, in
connection with the settlement of litigation, the Company issued an additional
$120,000 of 2002 Senior Notes.
In February 2004, the Company paid the holder of $482,000 1997 Senior Notes
$241,000 cash and exchanged $241,000 of the 1997 Senior Notes for new 2002
Senior Notes.
During 2004, the Company paid cash to retire the remaining $500,000 of 1997
Senior Notes and $11,000 of 2001 Senior Notes.
In September 2004, the Company completed an exchange offer with the holders
of the Senior Notes, offering three options: 1) surrender Senior Notes and
related warrants for early retirement of the Senior notes at 90% of the
principal amount of the Senior Notes on October 1, 2004; 2) extend the due date
of the Senior Notes and expiration date of related warrants from September 30,
2005 to September 30, 2006, with the interest rate on the Senior Notes reduced
from 12% to 8% during the last year; and 3) elect to hold the Senior Notes and
related warrants with no change in terms. Holders of $508,000 of Senior Notes
elected option 1, holders of $703,000 of Senior Notes elected option 2 and
holders of $704,000 of Senior Notes elected option 3.
Of the holders of Senior Notes electing early retirement under option 1,
holders of $267,000 of Senior Notes were repaid by the Company on October 1,
2004. The decision of one holder of $241,000 of Senior Notes electing early
retirement under option 1 is subject to court approval and will not be completed
until the holder obtains such approval. The Company recorded a gain on early
extinguishment of debt of $22,000 in September 2004, net of unamortized discount
related to warrants of $5,000 with respect to the Senior Notes paid October 1,
2004.
In February 2004, the Company issued 241 warrants in connection with the
rollover of certain 1997 Senior Notes to 2002 Senior Notes. Each warrant
entitles the holder to purchase 500 shares of the Company's common stock on or
before September 30, 2005 at $.35 per share. The value of these warrants was
estimated by the Company at $26,000, using the Black-Scholes pricing model with
the following assumptions:
Expected dividend yield $ -
Expected stock price volatility 96%
Risk-free interest rate 1.75%
Expected life of warrants 1.66 years
The value of the warrants was recorded as a reduction of the principal
amount of the Senior Notes and an increase to additional paid-in capital. This
additional discount will be accreted and recognized as interest expense over the
remaining life of the related Senior Notes. The holder of these Senior Notes and
warrants elected early redemption under option 1 of the Exchange Offer described
above, but must obtain court approval of its decision before the early
redemption is finalized.
F-15
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statement
December 31, 2004, 2003 and 2002
(Continued)
In connection with the extension of the due date of $703,000 of Senior
Notes and the expiration date of related warrants to September 30, 2006, an
additional value attributed to the warrants was estimated by the Company at
$20,000 using the Black-Scholes pricing model with the following assumptions:
Expected dividend yield $ -
Expected stock price volatility 96%
Risk-free interest rate 2.60%
Expected life of warrants 2.0 years
The value of the warrants was recorded as a reduction of the principal
amount of the Senior Notes and an increase to additional paid in capital in
September 2004. This additional discount will be accreted and recognized as
interest expense over the remaining life of the related Senior Notes.
Each purchaser of each 2002 Senior Note also received, for no additional
consideration, one common stock purchase warrant (2002 Warrant) for each $1
principal amount of 2002 Senior Notes purchased. Each 2002 Warrant will entitle
the holder to purchase 500 shares of the Company's common stock for $.35 per
share. The 2002 Warrants are exercisable any time before September 30, 2005
(September 30, 2006 for those holders who elected to extend the due date of the
Senior Notes to September 30, 2006), as a whole, in part, or increments, but
only if the shares of common stock issuable upon exercise of the 2002 Warrants
are registered with the Securities and Exchange Commission pursuant to a current
and effective registration statement and qualified for sale under the securities
laws of the various states where the 2002 Warrant holders resided. The exercise
price of the 2002 Warrants is payable at the holder's option, either in cash or
by the surrender of 2002 Senior Notes at their face amount plus accrued
interest. The 2002 Warrants will be transferable separately from the 2002 Senior
Notes. At December 31, 2004, warrants to purchase 1,069,000 shares were
outstanding, of which 727,250 expire September 30, 2005 and 341,750 expire
September 30, 2006.
Note 9: Income Taxes
The benefit (provision) for income taxes is different than amounts
which would be provided by applying the statutory federal income tax rate to
(loss) income before income taxes for the following reasons:
Years Ended December 31
2004 2003 2002
-------------------------------------------
Income tax benefit (provision) at
statutory rate $ (62,000) $ 348,000 $ 1,511,000
Life insurance and meals (5,000) (9,000) (11,000)
Other (1,000) (13,000) (26,000)
Change in valuation allowance 68,000 (326,000) (1,477,000)
-------------------------------------------
$ - $ - $ (3,000)
===========================================
F-16
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statement
December 31, 2004, 2003 and 2002
(Continued)
Deferred tax assets (liabilities) are comprised of the following:
December 31
2004 2003
------------------- ---------------
Deferred tax assets:
Net operating loss carryforwards $ 7,795,000 $ 7,559,000
Asset impairment 1,908,000 2,134,000
Depreciation and amortization 349,000 371,000
Allowance for doubtful accounts 22,000 68,000
Accrued vacation and bonus 24,000 30,000
Deferred income 204,000 210,000
Inventory reserve 49,000 47,000
Capital loss carryover 108,000 108,000
Research and development credit 338,000 338,000
------------------- ---------------
10,797,000 10,865,000
Less valuation allowance (10,797,000) (10,865,000)
------------------- ---------------
$ - $ -
=================== ===============
At December 31, 2004, the Company has a net operating loss carryforward
available to offset future taxable income of approximately $21,000,000, which
will begin to expire in 2005. If substantial changes in the Company's ownership
should occur, there would also be an annual limitation of the amount of NOL
carryforward, which could be utilized.
Note 10: Impairment Loss
During the fourth quarter 2003 and 2002, due to decreased projected future
cash flows relating to the sdiStationTM technology, management determined that a
significant portion of the technology was not recoverable, and accordingly has
recorded an impairment loss of $265,000 and $1,224,000 respectively (see Note
3).
During 2003, the Company recorded an impairment of a significant portion of
its inventory due to decreases in sales of these products. Of the total
impairment of $78,000 $48,000 was recorded as impairment expense and $30,000 was
recorded as research and development costs as the unsalable inventory was used
in the Company's research and development activities.
Note 11: Supplemental Cash Flow Information
During the year ended December 31, 2004:
- The Company purchased and cancelled 219,375 shares of common
stock valued at $77,000 through a reduction of accounts
receivable.
- The Company recorded a discount for warrants attached to senior
notes in the amount of $46,000.
- The Company recorded deferred compensation, as a reduction of
additional paid-in capital, for warrants in the amount of
$19,000.
- The Company wrote off accounts receivable of $21,000 against the
allowance for doubtful accounts.
F-17
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statement
December 31, 2004, 2003 and 2002
(Continued)
During the year ended December 31,2003:
- The Company issued 1,474,911 shares of common stock as payment of
notes payable and accrued interest of $517,000.
- The Company purchased and cancelled 26,786 shares of redeemable
common stock valued at $75,000 by paying $41,000 of cash. The
remaining $34,000 was recorded as additional paid-in capital.
During the year ended December 31, 2002:
- The Company redeemed common stock in exchange for senior notes of
$120,000.
- The Company recorded a discount for warrants attached to senior
notes in the amount of $82,000.
- The Company cancelled 459,936 shares of treasury stock in the
amount of $900,000.
Actual amounts paid for interest and income taxes are as follows:
Years Ended December 31
2004 2003 2002
--------------------- ------------------ -------------------
Interest $ 222,000 $ 288,000 $ 297,000
===================== ================== ===================
Income taxes $ - $ - $ 3,000
===================== ================== ===================
Note 12: Major Customers
During 2004, one customer accounted for $489,000, or 11%, of the Company's
total sales. In 2003, there were no customers that accounted for 10% or more of
the Company's total sales. During 2002, one customer accounted for $411,000, or
14%, of the Company's total sales.
Export sales to unaffiliated customers were approximately $2,044,000,
$1,160,000, and $884,000 in 2004, 2003 and 2002, respectively.
F-18
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statement
December 31, 2004, 2003 and 2002
(Continued)
Export sales to countries which exceeded 10% of net sales were as follows:
Years Ended December 31
2004 2003 2002
--------------------- ------------------ -------------------
Japan 9% 9% 14%
Germany 11% 7% 6%
Switzerland 12% 9% 6%
Note 13: Employee Benefit Plan
The Company has a defined contribution retirement savings plan, which is
qualified under Section 401(K) of the Internal Revenue Code. The plan provides
retirement benefits for employees meeting minimum age and service requirements.
Participants may contribute up to the maximum amounts allowed under the Internal
Revenue Code.
The Company will match 50% of the employees' contribution up to a maximum
of 2% of the employees' annual pay. Participants vest in the employers'
contribution over a five-year period. For the years ended December 31, 2004,
2003 and 2002, the Company contributed approximately $31,000, $31,000, and
$37,000, respectively, to the plan.
Note 14: Stock Options and Warrants
The Company has a stock option plan (Incentive Option Plan), which allows a
maximum of 5,000,000 options which may be granted to purchase common stock at
prices generally not less than the fair market value of common stock at the date
of grant. Under the Incentive Option Plan, grants of options may be made to
selected officers and key employees without regard to any performance measures.
The options may be immediately exercisable or may vest over time as determined
by the Board of Directors. However, the maximum term of an option may not exceed
five years.
The Company has a stock option plan (Directors Option Plan), which allows a
maximum of 1,100,000 shares of common stock to be granted at prices not less
than the fair market value at the date of grant. Under the Directors Option
Plan, directors will receive options to purchase 50,000 shares of common stock
annually, or amounts as determined by the board of directors, on each
anniversary date during the term of this plan.
F-19
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statement
December 31, 2004, 2003 and 2002
(Continued)
Information regarding stock options and warrants is summarized below:
Number of Weighted
Options and Average
Warrants Exercise Price
--------------------- ---------------------
Outstanding at January 1, 2002 5,114,250 $1.91
Granted 1,288,000 .29
Exercised - -
Expired / forfeited (1,647,500) 2.60
--------------------- ---------------------
Outstanding at December 31, 2002 4,754,750 1.26
Granted 1,380,500 .35
Exercised - -
Expired / forfeited (313,500) 1.46
--------------------- ----------------------
Outstanding at December 31, 2003 5,821,750 1.03
Granted 2,014,750 .42
Exercised (38,125) .35
Expired / forfeited (1,271,375) .99
--------------------- ----------------------
Outstanding at December 31, 2004 6,527,000 $.85
===================== ======================
The following table summarizes information about stock options outstanding
at December 31, 2004:
Options Outstanding Options Exercisable
Weighted
Average Weighted Number Weighted
Number Remaining Average Exercisable Average
Range of Outstanding at Contractual Exercise At December 31, Exercise
Exercise Prices December 31, 2004 Life (Years) Price 2004 Price
- ------------------- ------------------ ------------------ ------------------ ------------------- ------------------
$.35 2,951,500 2.54 $.35 1,739,500 $.35
$.36 - $.75 1,030,000 4.48 $.48 237,500 $.51
$1.00 1,750,000 2.03 $1.00 1,731,250 $1.00
$2.50 - $3.50 795,500 1.13 $2.89 782,375 $2.90
Note 15: Fair Value of Financial Instruments
The Company's financial instruments consist of cash, marketable securities,
receivables, payables, and notes payable. The carrying amount of cash,
marketable securities, receivables and payables approximates fair value because
of the short-term nature of these items. The carrying amount of the notes
payable approximates fair value as the individual borrowings bear interest at
market interest rates.
F-20
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statement
December 31, 2004, 2003 and 2002
(Continued)
Note 16: Commitments and Contingencies
Employment Agreements
The Company entered into employment agreements with certain employees,
which require payments of $486,000 in 2005.
Product Warranties
The Company provides certain product warranties to customers including
repayment or replacement for defect in materials and workmanship of hardware
products. The Company also warrants that software and firmware products will
conform to published specifications and not fail to execute the Company's
programming instructions due to defects in materials and workmanship. In
addition, if the Company is unable to repair or replace any product to a
condition warranted, within a reasonable time, the Company will provide a refund
to the customer. As of December 31, 2004, 2003, and 2002, no provision for
warranty claims has been established since historically any amounts expended in
connection with warranties has not been material. Management believes that any
allowance for warranty would be immaterial to the financial condition of the
Company.
Litigation with Puma Foundation, Ltd. and Loving Spirit Foundation
On April 8, 2004, a judgment was entered by the United States District
Court for the Middle District of Florida in favor of Puma Foundation, Ltd., a
Bermuda limited liability company ("Puma"), and against the Company, in the
amount of $200,826 plus interest at the rate of 1.23% per annum, costs and
attorney's fees. The judgment resulted from a lawsuit that Puma brought against
the Company to obtain payment on a $500,000 10% Senior Note due September 30,
2002. The note was originally issued by the Company to Loving Spirit Foundation,
a Florida foundation ("Loving Spirit"), which subsequently transferred the note
to Puma. The President of Puma and Loving Spirit is Terri Steffen, the wife of
Paul A. Bilzerian, the former President and Chief Executive Officer of the
Company.
Puma had brought a complaint against the Company on January 16, 2003 for
payment of the $500,000 10% Senior Note, plus accrued interest thereon.
Thereafter Loving Spirit was added to the lawsuit and claimed that the Company
also violated Florida Securities laws when the 10% Senior Note was issued to
Loving Spirit. The Company's position was that the note was not a valid 10%
Senior Note and, as a result, the Company was obligated to repay $500,000 with
interest to Puma, but the interest should be at the legal rate rather than 10%
per annum, the rate payable on the 10% Senior Notes. Prior to trial, the Company
tendered payment in the amount of $376,674 to Puma, $250,000 of which had been
previously set-aside in a trust account to be held for payment on the $500,000
10% Senior Note held by Puma. Also prior to trial, Loving Spirit dismissed its
securities violation claim against the Company.
On April 26, 2004, the Company tendered payment to Puma in the amount of
$199,098 to be applied toward the judgment amount, thereby paying in full the
$500,000 principal balance and all accrued interest. As of September 30, 2004,
the Company accrued an obligation for costs and attorneys' fees of $79,246 which
amount was determined by the court on September 13, 2004. The determined legal
fees were paid on October 1, 2004 and the Company has no further obligation to
Puma or Loving Spirit.
The Company is not currently involved with any other litigation.
F-21
CIMETRIX INCORPORATED
Notes to Consolidated Financial Statement
December 31, 2004, 2003 and 2002
(Continued)
Note 17: Related Party Transactions
During the years ended December 31, 2004, 2003 and 2002, the Company had
net sales of $210,000, $40,000 and $234,000, respectively, to a corporation that
is a stockholder of the Company. The Company had net accounts receivable from
this corporation of $37,000 and $146,000 at December 31, 2004 and 2003,
respectively.
During the years ended December 31, 2003 and 2002, the Company had net
sales of $6,000 and $190,000 to an entity in which the Company had an
investment. The investment in this entity was written off in 2001. At December
31, 2003, the Company had net accounts receivable from this entity of $29,000.
Note 18: Subsequent Events
In January 2005, the Company sold 2,500,000 shares of its common stock in a
private placement to two business entities at a price of $.80 per share, for
total proceeds of $2,000,000. No commissions or payments were made to
underwriters or agents out of the proceeds.
F-22