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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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number: 0-16454
CIMETRIX INCORPORATED
(Exact name of registrant as specified in its charter)
Nevada 87-0439107
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6979 South High Tech Drive, Salt Lake City, UT 84047-3757
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (801) 256-6500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
Par Value $.0001
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 29, 1999, the registrant had 20,715,982(*) shares of its common
stock, par value $.0001, issued and outstanding. The aggregate market value of
the common stock held by non-affiliates of the registrant was approximately
$9,115,032.
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 15, 1999 are
incorporated by reference into Part III hereof.
* Assumes the completion of a March 17, 1999 agreement between the Company and
two former directors to repurchase 2,734,946 shares of the
Company's common stock.
Page 1 of 50 pages.
FORM 10-K
For the Fiscal Year Ended December 31, 1998
TABLE OF CONTENTS
PART I
Item 1. Business...........................................................3
Item 2. Properties........................................................11
Item 3. Legal Proceedings.................................................11
Item 4. Submission of Matters to a Vote of Security Holders...............11
PART II
Item 5. Market for Company's Common Stock and Related Stockholder
Matters...........................................................11
Item 6. Selected Financial Data...........................................13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................14
Item 8. Financial Statements and Supplementary Data.......................19
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosures.............................................19
PART III
Item 10. Directors and Executive Officers of the Company...................19
Item 11. Executive Compensation............................................19
Item 12. Security Ownership of Certain Beneficial Owners and Management....19
Item 13. Certain Relationships and Related Transactions....................19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...20
Signatures...................................................................22
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS.
The following Annual Report on Form 10-K contains various "forward
looking statements" within the meaning of federal securities laws. These forward
looking statements represent management's expectations or beliefs concerning
future events, including statements regarding anticipated product introductions,
changes in markets, customers and customer order rates, expenditures in research
and development, growth in revenue, taxation levels, the effects of pricing, and
the ability to continue to price foreign transactions in US currency. Investors
are cautioned that all forward-looking statements involve risks and
uncertainties and several factors could cause actual results to differ
materially from those in the forward-looking statements.
These, and other forward looking statements made by the Company, must
be evaluated in the context of a number of factors that may affect the Company's
financial condition and results of operations, including, but not limited to,
those factors contained in Exhibit 99 attached to this Form 10-K.
PART I
ITEM 1. BUSINESS
Cimetrix Incorporated ("Cimetrix" or the "Company") was incorporated
under the laws of the State of Utah on December 23, 1985. In September, 1990,
Cimetrix merged with a newly incorporated Nevada company, effectively changing
its domicile to Nevada.
In October, 1989, the Company began developing and marketing UNIX based
software products that control the motion of automated manufacturing equipment
by entering into an exclusive license agreement with Brigham Young University.
The license agreement granted the Company the rights to develop and market robot
inaccuracy compensation techniques developed in conjunction with an off-line
programming system (known as ROBLINE) and an accuracy enhancing calibration
technique (known as ROBCAL). Effective July 5, 1995, the Company purchased the
technology that was then being licensed from Brigham Young University, referred
to as ROBLINE and ROBCAL.
General
Cimetrix 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 Cimetrix Open Development
Environment (CODE(TM)) software products are based on standard computer
platforms using Microsoft's Windows NT operating system. Cimetrix believes that
manufacturing companies will increasingly demand open architecture, PC-based
controllers on the equipment that they purchase, transforming the worldwide
controller market from proprietary solutions to open architecture, PC-based
solutions.
Cimetrix software is currently operational in production installations
on a wide variety of general industrial robots and specialized electronics
industry assembly and surface mount technology (SMT) machines. Cimetrix also has
developed two additional software products, GEM Equipment Manager(TM) and
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GEM Host Manager(TM). These software products enable compliance with Generic
Equipment Model ("GEM"), which is a standard for communications between
manufacturing equipment and the factory's host computer in the electronics
industry. The GEM software products are designed to run on PCs and UNIX
workstations.
Considerable R&D investments have been made and will continue to be
made to transition the original software products to use the latest technology
from Microsoft and add new features required by the market. Management feels
confident this investment will make both the Cimetrix CODE and GEM products more
reliable, easier to deploy and feature rich.
The Industrial Motion Controller Market
The worldwide market for industrial motion control can be segmented
into single axis motion control and multiple axis motion control. Cimetrix
products are designed for the multiple axis segment and would be used in
applications such as electronics equipment, industrial robots and machine tools.
These industry segments utilize some form of computerized motion controller
technology to run automated mechanisms. Cimetrix is currently targeting the
electronics equipment and industrial robot markets.
Electronics Equipment Industry
The electronics equipment market consists of a variety of vertical
niches, including equipment for semiconductor wafer fabrication, semiconductor
back end, printed circuit board assembly (Surface Mount Technology), electronic
component assembly and disk drive assembly. The products of the companies
involved in these processes represent "leading edge" technology and many
manufacturers have had to develop specialized, proprietary equipment. Automation
equipment developed by the electronics industry is very expensive, with
individual mechanisms costing up to $500,000 each, versus $30,000 to $100,000
for general industrial robots.
The Company believes that end-users in this industry are in need of a
standard, low cost open architecture set of tools to enable them to efficiently
develop specialized control applications quickly. Responding to this, the United
States segment of the industry has formed an association known as NEMI (National
Electronics Manufacturing Initiative). One of the NEMI teams has produced and
released a specification on "Low Cost Controller APIs" aimed at defining an
industry standard for an Open Architecture Controller Application Programming
Interface ("API"). This specification was subsequently released by the IEEE
standards organization as PR1533-1998. Cimetrix has been significantly involved
in the development of this specification. As worldwide applications for computer
chip technology continue to expand, the variety and volume of automation
equipment in the electronics assembly industry is expected to continue to grow
rapidly.
Robotics Industry
Industrial robots are used for tasks that are tedious, repetitive and
exhausting for humans and typically are employed to reduce the costs and improve
the quality of highly labor-intensive tasks. Industrial robots are multi-axis
manipulators used for welding, painting and material handling applications. The
automotive industry is the primary end-user of robots. Other end-users include
the aerospace, steel, heavy equipment and electronics industries.
Nearly all robot controllers are proprietary devices manufactured by
the major industrial robot vendors, which are supplied with their own robot
systems as a complete, proprietary solution. These robot controllers are only
compatible with robots supplied by the same vendor, and in many cases, are only
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compatible with specific robot models of that vendor. These systems represent an
enormous technology investment "legacy," and are difficult and time consuming to
program, configure, implement and modify.
Machine Tool Industry (CNC Controllers)
Machine tools consist of metal cutting machines such as milling
machines, lathes, machining centers, grinders, and lasers; and metal forming
equipment such as press brakes, turret punches and tube benders. These machine
tools, which are used by a wide variety of manufacturers, utilize a computer
numerical control, or CNC type controller. Despite the PC revolution that has
taken place over the past decade, the underlying technology and software for
machine tool controllers has changed very little during the same period. Most
major machine tool manufacturers purchase proprietary controllers from several
CNC controller vendors. The interest level of tool manufacturers in open
architecture CNCs is very high. The proprietary CNC manufacturers are developing
ways to configure the graphical user interface of the CNCs so they appear to be
open. However, none of the major CNC manufacturers has developed a true open
architecture controller that runs on a PC.
The Movement Towards Open Architecture Controllers
Over the past 15 years, the primary driver for the revolution in and
proliferation of office technology was the standardization of the PC's operating
system, processors and buses. Expensive hardware components became commodities,
with powerful software applications delivering value to the system. The Company
believes this movement to standards-based systems is still in the beginning
stages in manufacturing.
Currently, the automation control industry consists of a heterogeneous,
complex environment of vendor-specific machines and proprietary control systems,
which are limited in function and expensive to use. Motion controllers were
originally developed without the benefit of the powerful PCs available today.
Robot and controller vendors were forced to develop motion controllers
internally, creating an environment in which each vendor's system remains
incompatible with the programming and interface methods of the others. As a
result, companies today have factory floors with islands of automation,
including robots, machine tools and assembly equipment, each separated by
vendor-specific hardware peripherals, operating systems and programming
languages. The proprietary nature of these systems constrains the design of
optimal workcells and prevents end-users from managing the factory floor as a
coordinated and unified technology platform. Proprietary control vendors have
responded to this challenge by introducing controllers with PC "front-ends" that
allow some level of changes primarily in the user interface. True open
architecture must occur from an open software design, which few suppliers are
willing to offer. At this point, it is unclear whether the manufacturing end
users will accept a PC front-end as a long term solution.
Enabling Technologies Drive the Solution
The current environment of multiple, vendor-specific technology
platforms emerged from the motion control industry at a time when PCs were too
slow and lacked the power and flexibility required for motion control
operations. Vendors developed motion controllers with proprietary hardware
platforms, operating systems and assembly code programming languages that often
locked end-users into older, slower processors. The software tools on these
controllers are constrained by older, legacy hardware and proprietary operating
platforms. Hardware upgrades for simple items, such as expanded memory, can cost
ten times that of equivalent PC upgrades.
o PC technology has now advanced so significantly that today's low
cost PCs have several times more processing power than many higher
cost proprietary controllers.
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o The rapid growth and acceptance of PC technology has facilitated
a similar increase in the development of software applications. o
The Microsoft Windows NT operating system has become the defacto
operating system in manufacturing. Features such as COM,
multi-tasking, multi-threading and real time capabilities have set
the stage for a common open software solution for machine motion
control.
o New and advanced motion control servo cards, machine vision
processor cards and I/O cards are now available from a variety of
vendors for use on standard hardware platforms in the industrial
environment.
The Cimetrix Solution
Cimetrix Open Development Environment (CODE) software is
the only software that currently provides all of the following
advantages:
1. Lower Hardware Costs. Because Cimetrix software products are
based on the PC computer platform and run on Microsoft's Windows
NT operating system, Cimetrix customers benefit from the
tremendous price/performance advantage of the PC platform. In
addition, the open architecture of Cimetrix software enables
Cimetrix customers to "mix and match" components to obtain the
optimal motion card, I/O subsystem and vision system for the
application.
2. Increased Software Reliability. The Cimetrix CODE products are
designed to allow our OEM and integrator customers to maximize
design and code re-use. By re-deploying standard packages over
multiple applications, reliability is greatly enhanced.
3. Reduced Application Development Time. CODE utilizes an
extensive library of APIs to access the underlying Cimetrix motion
control algorithms, which enable application developers to program
at very high levels using the programming languages of their
choice. Cimetrix customers estimate this reduces development
efforts for new applications by approximately 50%.
4. Reduced Time to Market. CODE contains two nearly identical
versions: (i) an off-line simulation version with output to a
video driver (CIMulationO), and (ii) an on-line version with
output to motion control equipment (CIMControlO). Unlike existing
systems, simulation and control are achieved with the same
application software and API set, enabling concurrent engineering
and reduced time to market. Cimetrix customers estimate the
ability to develop, test and debug an entire application in
simulation mode reduces the overall time to market by
approximately 30%.
5. Customers control their own destiny. Cimetrix software provides
all of the software source code hooks for Cimetrix customers to
implement their own custom software or algorithms. This ensures
that Cimetrix customers control their own destiny and are able to
develop specialized or proprietary software to differentiate their
products.
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PRODUCTS
The Company's main product family is called the
Cimetrix Open Development Environment (CODE). This technology has
been packaged into a set of standard products consisting of the
core products and a variety of supporting products.
o CIMulation. A version of the CIMServer in which workcell
operation is simulated on a graphical workstation. The graphical
simulation provides the programmer with an off-line, virtual
workcell, viewed as a three-dimensional solid model with fully
functional kinematics. All application programs can be directly
transported for use with CIMControl. CIMulation includes CODE
API(TM) which is a standard C/C++ library of over 400 function
calls used for automation application development. Functions are
provided for motion control, machine vision, I/O control, off-line
collision checking and other common workcell operations. In
addition to C/C++, the CODE API is provided for Visual Basic and
Borland's Delphi, two popular rapid application development
environments for Microsoft Windows NT.
o CIMControl. A version of the CIMServer which allows on-line
mechanism and I/O control through off-the-shelf servo and I/O
control cards. It turns any standards-based PC into an open
architecture controller. CIMControl also includes the CODE API.
Cimetrix has also developed supporting products aimed at shrinking
our customer's development cycle.
o CODE Support Tools(TM): A set of software tools designed to
increase the speed of deployment of systems based on CODE.
CIMTools(TM) provides a fast method to interact with the CODE
database model and tools to assist with debug. CIMCal(TM) is a
calibration tool. CODE Support Tools is included with CIMulation
or CIMControl.
o GEM Equipment Manager and GEM HOST Manager: GEM is a standard
for communications between manufacturing equipment and the
factory's host computer. Equipment builders have been reluctant to
provide GEM-compliant technology because of the difficulty in
obtaining GEM compliance. Without GEM Equipment Manager, it takes
equipment builders between six months to one year to add GEM to
their equipment. Recognizing the need to simplify this process,
one of the Company's customers urged Cimetrix to develop a
comprehensive tool set for implementing the GEM standard. The
resulting products, GEM Equipment Manager and GEM HOST Manager,
have broad application not only for CODE- based controllers but
for many other types of factory equipment. These products enable
GEM compliance in a matter of weeks. GEM Equipment Manager
provides easy-to-use, graphical tools for configuring, testing and
administering all standard requirements, including the
communication process and process state model. GEM HOST Manager
provides a standard API to link the communication process with
application programs at the host level. Both GEM products can be
used in conjunction with CODE or with other controllers.
Competition
The manufacture and sale of automation technology is a highly
competitive industry. Cimetrix believes that its competition is divided into two
groups: in-house developed controllers and open controller suppliers.
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In-house developed controllers are potentially competition, but more
importantly, they are potential customers. Robot manufacturers, CNC suppliers,
and electronics equipment suppliers all develop there own controllers, some on
PC platforms and some on proprietary hardware. They have problems hiring top
software talent that have experience with the latest Microsoft technologies.
Cimetrix offers a distinct advantage to them by increasing software quality
through our 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, UML and object technology.
Open controller suppliers are currently a small segment of the overall
controls market. They are mostly small undercapitalized companies. Steeplechase,
Nematron, Wizdom and ASAP all market PC-based controllers aimed primarily at
sequence control (I/O). Several of them have recently been purchased by larger
proprietary controller companies. They typically do not have robust motion
solutions and target different markets than Cimetrix. Hewlett Packard's Trellis
division has developed both robot and CNC PC based solutions. Management expects
to see additional competitors emerge in this group.
Management believes that most, if not all, of the Company's 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.
Sales and Marketing
During 1998, the Company's sales and marketing team targeted two
primary markets: Electronics Assembly/SMT and Robotics. The sales and marketing
team is responsible for identifying key end-user customers and the top-tier OEM
machine suppliers in each primary market. The Company's direct sales force is
coordinated by an Executive Vice President of Sales and two supporting regional
sales managers. Each salesperson is responsible for pursuing potential customer
leads in his or her territory and for qualifying customer relationships. The
Company's sales offices are located in Salt Lake City, Utah and Boston, MA.
Operations
The Company's software operations are conducted through three principal
teams: Software Development, Quality/Support, and Technical Services. These
teams are responsible for defining and developing new products, performing
initial product integration with key OEMs and all aspects of customer support
and manufacturing. 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.
The Software Development team is responsible for designing and
developing new software products. Working closely with customers and other
Company teams, they are also responsible for the deployment of software
products. This team is also responsible for product enhancements and bug fixes.
The Quality/Support team supports Cimetrix customers and development
engineers. Working closely with Software Development, Quality/Support provides
customers with twenty-four hour technical support on the entire Cimetrix product
line.
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The Technical Services team supports all Cimetrix professionals as well as
providing for fulfillment of customer software demonstration, software product,
and documentation orders. This team produces the Company's software products on
CD-rom, from supplies and materials readily available in the marketplace. This
team works closely with their counterparts in Cimetrix to support standard
operational systems and software quality systems, including a comprehensive
configuration management system, which ensures proper release methods.
Intellectual Property Rights
The open architecture controller technology upon which the Company's
software is based was developed from 1984 to 1989 by a team of Brigham Young
University engineers led by Dr. W. Edward Red. Effective July 5, 1995, Cimetrix
purchased from Brigham Young University all the rights, title, interest and
benefit from this intellectual property.
The technology purchased from Brigham Young University, along with
other technology developed internally, is proprietary in nature. The Company has
obtained two patents on certain aspects of the technology, issued in May 1989
and March 1994, respectively. In addition, the Company has registered its entire
CODE software system with the Copyright Office of the United States, and will
continue to timely register any updates to current products or any new products.
For the most part, other than the two patents 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 patents.
Major Customers and Foreign Sales
In 1998, three customers accounted for 37%, 11%, and 10% of the
Company's revenues, respectively. No other single customer accounted for more
than 10% of Company revenues in 1998. In 1997, two customers accounted for 28%
and 16% of the Company's revenues, respectively. No other single customer
accounted for more than 10% of the Company's revenues in 1997. In 1996, two
customers accounted for 34% and 14% of the Company's revenues respectively. No
other single customer accounted for more than 10% of revenues. With 58% of the
Company's revenues for 1998 coming from three major customers, the loss of any
one of the three could have a significant adverse effect on the Company's
operations.
The following table summarizes sales to major customers, as a percent of total
sales:
Year Ended December 31,
1998 1997 1996
Company A 37 0 0
Company B 11 27 34
Company C 10 16 0
Company D 0 0 14
Affiliates 8 10 0
All Others 34 47 52
During the year ended December 31, 1998, approximately 54% of the
Company's revenues were from export sales, of which 8% were to affiliates.
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The following table summarizes domestic and export sales, as a percent of total
sales:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Domestic sales 46 61 55
Export sales 54 39 45
As of December 31, 1998, the Company continues to sign support service
agreements which are estimated to generate approximately $400,000 in revenues
over the term of the agreements, principally 1999.
Personnel
As of March 29, 1999, the Company had 29 employees, 21 of whom are involved in
the technical development and support of customers and products, five in sales
and marketing, and three in administrative and clerical. 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.
Executive Officers
Paul A. Bilzerian, President, Chief Executive Officer and Director, age
48, has been involved in Cimetrix in various capacities since 1994. Mr.
Bilzerian has been involved in more than $10 billion dollars of corporate
transactions and financing. He has a B.S. Degree from Stanford University and a
Masters Degree in Business Administration from Harvard University.
David P. Faulkner, Executive Vice President of Marketing, age 43,
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 1986-1996. Mr. Faulkner has a B.S.
Degree in Electrical Engineering and a Masters Degree in Business Administration
from Rensselaer Polytechnic Institute.
Robert H. Reback, Executive Vice President of Sales, age 39, joined
Cimetrix as Vice President of Sales in January 1996 and was promoted to
Executive Vice President of Sales and Marketing in January, 1997. Mr. Reback was
the District Manager of Fanuc Robotics' West Coast business unit from 1994-1995.
From 1985-1993 he was Director of Sales/Account Executives for Thesis, Inc., a
privately-owned supplier of factory automation software and was previously a
Senior Automation Engineer for Texas Instruments. Mr. Reback has a B.S. Degree
in Mechanical Engineering and a M.S. Degree in Industrial Engineering from
Purdue University.
Michael D. Feaster, Vice President of Software Development, age 28,
joined the Company in April 1998, as Director of Customer Services. In December
1998, Mr. Feaster was promoted to Vice President of Software Development. From
1994 to 1998, Mr. Feaster was employed at Century Software, Inc., as the Vice
President of Software Development, directing 25 engineers. Century Software,
Inc., is 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 Mexico's Border
Inspection Division.
Riley G. Astill, Vice President of Finance, Chief Financial Officer, age
38, originally joined Cimetrix as Controller, in July, 1994. He remained
Controller until October, 1996, when he left the Company prior to its moving to
Tampa, Florida. Mr. Astill rejoined Cimetrix as Vice President of Finance in
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December, 1997. Mr. Astill was Controller of a privately held Salt Lake
City publisher from 1991-1994. From 1990-1991, he was a Senior Accountant for
Oryx Energy Company. From 1988-1990 he was an Accountant for Ernst & Young in
Dallas Texas. He has a B.S. Degree in Accounting from the University of Utah and
a Masters Degree in Accounting from Utah State University.
Dr. Steven K. Sorensen, Vice President and Chief Engineer, age 40, joined
the Company in 1990. Prior to joining Cimetrix, Dr. Sorensen was an Associate
Professor at Brigham Young University, where he received his Ph.D. in Mechanical
Engineering. Dr. Sorensen has been working to develop the Cimetrix technology
for the past twelve years and is one of the principal architects of many of the
Company's most important products.
ITEM 2. PROPERTIES
The Company operates in a leased facility located at 6979 South High
Tech Drive, Midvale, Utah (about six miles south of Salt Lake City). The Company
signed a five year lease beginning in March of 1997. The facility consists of
32,000 square feet, of which 20,000 square feet is office and engineering space
and 12,000 square feet is warehouse and storage space. Management intends to
sublease any excess warehouse and storage space, pursuant to their decision to
end its hardware product lines. The Company has no other offices, either owned
or leased.
In February 1999, the Company entered into a six month lease, for $930
per month, for a residential property, which it provides rent-free to the
President and other employees as temporary accommodations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings
and, to the best of its knowledge, no such proceedings by or against the Company
have been threatened. To the knowledge of management, there are no material
proceedings pending or threatened against any director or executive officer of
the Company, whose position in any such proceeding would be adverse to that of
the Company.
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, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of the Company is being quoted on the NASDAQ Bulletin
Board under the symbol "CMXX". The table below sets forth the high and low bid
prices of the Company's common stock for each quarter during the past three
fiscal years. The quotations presented reflect inter-dealer prices, without
retail markup, markdown, or commissions, and may not necessarily represent
actual transactions in the common stock.
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Common Stock
Period (Calendar Year) Price Range
1996 High Bid Low Bid
--------------------- -------- -------
First quarter $ 15.75 $ 9.75
Second quarter $ 11.25 $ 5.50
Third quarter $ 9.00 $ 4.88
Fourth quarter $ 8.38 $ 5.50
1997
First quarter $ 7.50 $ 5.50
Second quarter $ 6.25 $ 3.25
Third quarter $ 4.42 $ 1.50
Fourth quarter $ 4.13 $ 1.42
1998
First quarter $ 2.13 $ 1.44
Second quarter $ 1.97 $ 1.25
Third quarter $ 2.56 $ 1.19
Fourth quarter $ 1.50 $ .56
1999
First quarter $ 1.19 $ .31
On March 29, 1999, the closing quotation for the Company's common stock
on the NASDAQ Bulletin Board was 44(cents) per share. Potential investors should
be aware that the price of the common stock in the trading market can change
dramatically over short periods as a result of factors unrelated to the earnings
and business activities of the Company.
On March 29, 1999, there were 20,715,982 shares of common stock issued and
outstanding, held by approximately 2,500 beneficial shareholders. This number
excludes 2,734,946 shares which were repurchased on March 17, 1999 from two
former directors to be held by the Company as treasury stock.
The Company has not paid dividends with respect to its common stock.
There are no restrictions on the declaration or payment of dividends set forth
in the Articles of Incorporation of Cimetrix or any other agreement with its
shareholders. Management anticipates retaining any potential earnings for
working capital and investment in growth and expansion of the business of the
Company and does not anticipate paying dividends on the common stock in the
foreseeable future.
On December 7, 1998, pursuant to a Form S-3 Registration Statement, the
Company registered for resale under the Securities Act of 1933, 8,408,500 shares
of its common stock. Registered at that time were (i) 829,000 shares of common
stock issuable upon the exercise of 3,316 warrants, at $2.50 per share, issued
to purchasers of the Company's 10% Senior Notes; (ii) 1,299,500 options,
exercisable at $2.50 per share, which were granted under the Company's 1998
Stock Option Plan; (iii) 500,000 shares of common stock issuable pursuant to a
proposed exchange of securities with holders of Senior Notes; (iv) 5,400,000
shares of common stock pursuant to an agreement dated March 21, 1994, between
the Company and Paul A. Bilzerian, its President; (v) and 380,000 shares of
common stock issued in a sale of treasury stock, in which the Company agreed to
register the shares as a condition of the transaction.
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Subsequent to year end, on February 18, 1999, pursuant to the
settlement of all outstanding litigation between the Company and two former
Directors of the Company, 1,293,000 shares of the Company's common stock, were
returned to the Company. These shares were canceled by the Company, reducing the
total outstanding shares by that amount.
On March 17, 1999, the Company agreed to purchase 2,734,946 million shares
of its own common stock from two former Directors of the Company at 25(cents)per
share in cash. This transaction had not been completed at the filing of this
document, but completion is expected in the near future.
Treasury stock of the Company is recorded at cost and is disclosed in
the Stockholders' Equity section of the Company's financial statements. The
Company has no plan to resell its treasury shares unless it has a need for
additional working capital.
Senior Notes
On March 29, 1999, there were $2,691,000 of the Company's Senior Notes
issued and outstanding, held by 53 bondholders. The Senior Notes are due and
payable September 30, 2002. There were also 3,316 warrants related to the Senior
Notes, issued and outstanding, held by 55 warrant holders. The number of
potential shares represented by these warrants is 829,000, or 250 shares for
each warrant. The exercise price for the warrants is $2.50 per share, with the
warrants expiring October 1, 2002. On December 7, 1998, the underlying shares
from the outstanding warrants were registered with the SEC, under the Securities
Act of 1933, on a Form S-3 Registration Statement.
The Company's Senior Notes are trading at par. The Company's warrants
are trading on the NASDAQ Bulletin Board, under the symbol CMXXW.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from the Company's
audited financial statements, and should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7 of this Form 10-K and the financial statements and
notes thereto included in Item 8 of this Form 10-K.
Statements of Operations Data
Years ended December 31,
1998 1997 1996 1995 1994
(in thousands, except per share data)
Revenues $ 4,161 $ 2,195 $ 2,396 $ 664 $ 463
Operating Expenses:
Cost of revenues 454 1,057 1,342 446 297
Selling, marketing and
customer support 713 1,066 1,494 947 217
Research and development 1,479 2,008 1,179 930 198
General and administrative 1,854 2,288 1,577 1,231 1,217
Impairment loss 3,526 - - - -
Compensation - stock options 20 234 685 - -
-------- -------- --------- --------- --------
Total operating expenses 8,046 6,653 6,277 3,554 1,929
-------- -------- --------- --------- --------
-13-
Loss from operations (3,885) (4,458) (3,881) (2,890) (1,466)
-------- -------- -------- --------- --------
Net loss $ (4,070) $ (4,490) $ (3,455) $ (2,544) $ (1,145)
========= ======== ========== ========== =========
Loss per common share $ (.17) $ (.20) $ (.19) $ (.16) $ (.08)
===== ===== ===== ===== =====
Dividends per common share - - - - -
======= ======= ======== ======== ========
Balance Sheet Data
Current assets $ 2,879 $ 2,802 $ 4,220 $ 3,268 $ 3,835
Current liabilities 398 623 1,344 338 1,451
Working capital 2,481 2,179 2,876 2,930 2,384
Total assets 3,762 8,019 9,227 9,722 5,632
Total long-term debt 2,691 3,546 296 338 44
Stockholders' equity 673 3,850 7,631 9,070 3,613
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Following is a brief discussion and explanation of significant
financial data, which is presented to help the reader better understand the
results of the Company's financial performance for 1998. The information
includes discussions of revenues, expenses, capital resources and other
significant items. Generally the information is presented in a three year
comparison format using 1998, 1997 and 1996 data, making it possible to easily
compare results from year to year.
Statements of Operations Summary
The following table sets forth the percentage of costs and expenses to
net revenues derived from the Company's Statements of Operations for each of the
three preceding fiscal years.
Year Ended December 31,
1998 1997 1996
Net revenues 100.0% 100.0% 100.0%
------ ------ ------
Operating expenses:
Cost of revenues 10.9 48.2 56.0
Selling, marketing and customer support 17.1 48.6 62.3
Research and development 35.5 91.5 49.3
General and administrative 44.6 104.1 65.8
Compensation - stock options .5 10.7 28.6
Impairment Loss 84.7 0.0 0.0
----- ----- ------
Total operating expenses 193.4 303.1 262.0
----- ----- ------
Loss from operations (93.4) (203.1) (162.0)
Interest income, net of expense (5.1) (2.0) 2.3
Other income (expenses) .7 .6 15.5
----- ------ -------
Net Loss (97.8)% (204.6)% (144.2)%
==== ===== ======
Net Revenues
Net revenues for the three fiscal years ended December 31, 1998, 1997,
and 1996 were $4,161,000, $2,195,000, and $2,396,000, respectively. Net revenues
for 1998 increased $1,966,000, or 90%, from the
-14-
same period in 1997. The increase in revenues was due in part to the addition of
a significant new customer in 1998. It was also due in part to increased sales
to the Company's existing customers and sales to new customers.
Net revenues for 1998 included approximately $3 million of software
revenues, $9,000 of hardware revenues, $685,000 of applications engineering, and
the remainder from support agreements and training.
Net revenues for 1997 included approximately $1.3 million of software revenues,
$86,000 of hardware revenues, $530,000 of applications engineering revenues and
the remainder from support agreements and training. Net revenues for 1996
included approximately $1.4 million of software revenues, $680,000 of hardware
revenues and the remainder from applications engineering and support agreements.
The following table summarizes net revenues by categories, as a percent
of total net revenues:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Software revenues 73 59 58
Hardware revenues 0 4 28
Application revenues 17 24 7
Support/Training revenue 10 13 7
The above results from 1998 reflect the Company's efforts to focus on
software sales.
Cost of Revenues
The Company's cost of revenues as a percentage of net revenues for the
years ended December 31, 1998, 1997, and 1996 were approximately 11%, 48%, and
56%, respectively. The cost of revenues decreased $603,000, or 57% from
$1,057,00 in 1997. The cost of revenues decreased in 1998 because the percentage
of hardware sales to total revenues decreased from approximately 4% during 1997
to less than 1% during 1998. The cost of revenues did not decrease in direct
proportion to the decrease in hardware revenues because certain labor, contract
labor and travel costs are classified as costs of revenues, rather than as
research and development costs. In addition, certain inventory items were
written off as cost of revenues due to the decision by the Company to end its
hardware product lines.
The cost of revenues also decreased in part because the revenues from
software products as a percentage of total revenues increased from 59% of
revenues during 1997 to 73% of revenues during 1998. The cost of revenues from
software revenue was less than 2% while the cost of revenues from applications
engineering and support was approximately 8%. In 1999, the cost of revenues for
software sales should remain at approximately 2%, while the cost of revenues for
applications engineering and support should remain at approximately 8%.
Selling, Marketing and Customer Support
Selling, marketing and customer support expenses decreased $353,000, or
33%, to $713,000 in 1998, from $1,066,000 in 1997. These expenses also decreased
$428,000, or 29%, to $1,066,000 in 1997, from $1,494,000 in 1996. These
decreases, reflect the Company's efforts to concentrate sales and marketing
efforts on key target markets, thus reducing personnel and related travel and
office expenses. These cost reductions were achieved while the Company continued
to increase sales and cultivate significant new customers.
-15-
Selling, marketing and customer support expenses in 1998, 1997 and 1996
reflected the payroll and related travel expenses of full-time sales, marketing
and customer support personnel, the development of product brochures and other
marketing material, and the costs related to the Company's representation at
trade shows.
Research and Development
Research and development expenses decreased by $529,000, or 26%, to
$1,479,000 in 1998, from $2,008,000 in 1997. This decrease was attributable to
the elimination of the sales of hardware products, and efforts to better
allocate software development expenditures. During 1997, considerable amounts
were spent on the development of hardware products, including wages, product
development and product testing, which were no longer required in 1998. The
decrease in research and development expenses was also attributable to a smaller
engineering staff.
The Company's continued efforts to develop its products for Microsoft
WindowsNT and the continued development of its GEM products, represented the
majority of the research and development expenditures during 1998.
Research and development expenses include only direct costs for wages,
benefits, materials, and education of technical personnel. All indirect costs
such as rents, utilities, depreciation and amortization are reflected in general
and administrative expenses.
General and Administrative
General and administrative decreased $434,000, or 19%, to $1,854,000 in
1998, from $2,288,000 in 1997. This decrease was attributable to the elimination
of expenses to maintain an office in Tampa, Florida, which was closed in 1997.
All Company operations are now consolidated into one location, eliminating the
expenses of additional administrative and support personal and related overhead
costs. Discontinuing the sale of hardware products also eliminated the need for
additional support personnel and overhead. The decrease is also attributable to
reduced legal expenses.
General and administrative costs include all direct costs for
administrative and accounting personnel, all rents and utilities for maintaining
company offices. These costs also include all indirect costs such as
depreciation of fixed assets and amortization of intangible assets. Depreciation
and amortization expense for 1998 was $798,000, or 43% of all general and
administrative expenses, compared to $754,000 or 33% for 1997.
Impairment Loss
In the fourth quarter of 1998, and later confirmed during the audit of
the Company's financial statements and records, it was determined that certain
asset values were impaired and should be written off. These assets included
technology of $608,000, goodwill of $2,536,000, fixed assets of $278,000 and
capitalized software of $104,000.
The impairment of these assets was precipitated by an agreement with
Brigham Young University whereby the Company's note payable to Brigham Young
University for the purchase of technology was eliminated. It was agreed that the
technology that the Company purchased from Brigham Young University in 1994 did
not perform as had been represented. As a result, any asset associated with this
original technology was determined to be impaired in its value and not
recoverable through amortization or depreciation.
-16-
All of these write-offs represent a charge to income in the fourth
quarter of 1998, rather than as amortization and depreciation over the estimated
useful of the asset. The original estimated life of the technology asset and
goodwill was 15 years, which was the estimated product life of the technology
purchased from Brigham Young University. The original estimated life of the
capitalized software was five years, which was the appropriate estimated useful
life for capitalized software costs as allowed for by Generally Accepted
Accounting Principles.
The consequences of these write-offs was a loss of $3,908,000 for the
fourth quarter of 1998 and a loss of $4,070,000 for the year ended December 31,
1998.
Other Income (expenses)
Interest income increased by $10,000, or 19%, to $63,000 for 1998, from
$53,000 for 1997. Improved operating results have allowed the Company to
maintain a cash reserve, resulting in increased interest income. Cash reserves
are invested in conservative money market fund accounts.
Interest expense increased by $180,000, or 186%, to $277,000 for1998,
from $97,000 for 1997. This increase was primarily attributable to interest
expense on the Company's 10% Senior Notes. The balance outstanding on the Senior
Notes as of December 31, 1998 was $2,691,000. Interest expense is accrued
monthly and is paid semi-annually on April 1, and October 1.
Compensation - Stock Options
During 1998, the Company recorded, in accordance with APB 25, the
compensation cost related to all options granted during 1998 and any currently
outstanding options that have been previously granted to employees.
Additionally, the Company has expensed that portion of the compensation cost
related to employee services rendered during 1998. Employee services are assumed
to be rendered over the two year vesting period of the options. Compensation
expense recorded during 1998 was $20,000, for options issued to directors.
On January 23, 1998 the Company's Board of Directors adopted a stock
option plan, effective January 1, 1998, under which options may be granted to
officers, employees, directors and others. The plan received shareholder
approval at the annual meeting of shareholders held May 16, 1998. The plan is
intended to replace all prior option agreements between the Company and its
employees. A total of 2,000,000 shares of common stock have been reserved for
issuance under the 1998 plan, at an exercise price of $2.50. At December 31,
1998, 1,259,500 of the 1998 options had been issued, none of which had been
exercised. As of March 29, 1999, there were 1,273,500 of the 1998 options issued
and outstanding.
In 1995, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("FAS 123"), which was effective for the Company's fiscal year ending December
31, 1996. FAS 123 encourages, but does not require, companies to recognize
compensation expense based on the fair value of grants of stock, stock options
and other equity investments to employees. Although expense recognition for
employee stock-based compensation is not mandatory, FAS 123 requires that
companies not adopting must disclose the pro forma effect on net income and
earnings per share. The Company will continue to apply prior accounting rules
and make pro forma disclosures in 1999.
-17-
Liquidity and Capital Resources
The Company had $2,481,000 in working capital at December 31, 1998,
compared with $2,179,000 and $2,930,000 at the end of fiscal years 1997 and
1996, respectively. The availability of additional working capital at December
31, 1998 was attributable to the increase in revenues and accounts receivable.
Current liabilities also decreased substantially. Additional contributing
factors were the sale of 380,000 shares of treasury stock, and the issuance of
400,000 shares of its common stock to retire $600,000 of Senior Notes. The
Company's future liquidity will continue to be dependent on the Company's
operating cash flow and management of trade receivables. Management believes
that the Company's working capital is sufficient to maintain its current and
immediately foreseeable levels of operations.
The Company had negative cash flow from operating activities of
approximately $504,000 for fiscal year ended 1998 compared to approximately $4.1
million for fiscal year 1997 and approximately $2.0 million for fiscal year
1996. Increased revenues were primarily responsible for this improvement.
The Company anticipates that capital expenditures for fiscal year 1999,
primarily for computer equipment and software, will be approximately $120,000.
Management believes that the Company has sufficient funds to meet its capital
expenditure requirements for 1999.
The Company has not been adversely affected by inflation as
technological advances and competition within the software industry have
generally caused prices of the products sold by the Company to decline. The
Company has not been adversely affected by poor economic conditions existing in
Asia because the Company's software represents a small portion of our customers
product costs. However, there are continued economic risks inherent in foreign
trade, because sales to foreign customers account for a significant portion of
the Company's revenues.
Year 2000 Issues
The Securities and Exchange Commission and other regulatory bodies have
identified the failure of many computer systems and applications to properly
recognize and process date specific information on and after January 1, 2000 as
a significant risk to many companies. Because these "non-compliant" applications
use only two character date fields, many will, unless altered, incorrectly
identify years commencing with the year 2000 as the year 1900, or otherwise
incorrectly report date information. The Company has established a plan to
address these issues. The components of the plan include: an assessment of
internal systems vulnerability; a survey of suppliers to determine their ability
to maintain an uninterrupted supply of goods and services; and an evaluation of
year 2000 issues on Company products.
PRODUCTS. The Company is committed to ensuring that its customers will
have "date-safe" software products as they move toward, through and past the
year 2000. In keeping with this commitment, the Company has conducted a thorough
assessment of its products. The Company follows Y2K testing methodologies
published by SEMATECH. A complete list of products and their compliance with Y2K
standards can be obtained via the Company's World Wide Web site,
www.cimetrix.com. In management's opinion, Year 2000 issues will not have a
material effect on the Company's products. Those products that are not yet Y2K
compliant will be so before the end of 1999. Any changes necessary to our
software products to bring them into compliance, will be made in parallel with
normal ongoing product enhancements.
COSTS. The costs associated with the Year 2000 assessment and
corrections, if necessary, and costs anticipated to complete the evaluation are
not material and are not incremental to the Company. However, there can be no
assurance that unforeseen factors will not have a material impact on the
Company.
-18-
INTERNAL SYSTEMS. Vendors supply the vast majority of software used in
the Company's business applications. The Company has obtained documentation from
its vendors supplying software for its primary business applications confirming
year 2000 compliance. The Company has also examined the few internally developed
business applications used in operations for year 2000 compliance and intends to
make only minor modifications to these applications.
In management's opinion, Year 2000 issues will not have a material
effect on the Company's day to day business, its operations or financial
condition. The Company will disclose any material change in its year 2000
readiness in future financial reports or information releases.
Contacting Cimetrix
In an effort to make information available to shareholders and
customers, the Company has established its World Wide Web site www.cimetrix.com.
All shareholders or other interested parties are encouraged to access the
Company's web site before contacting the Company directly. We are committed to
keep the information on this site up to date. The Company's web site contains
the Company's public filings with the SEC, press releases, letters from the
president, detailed product information, customer information, and employment
opportunities.
Management has found that asking shareholders to submit questions
electronically or in writing is a much more cost effective and efficient way to
manage shareholder relations. Therefore, the Company has made it possible for
shareholders to submit questions to management via its web site or through any
e-mail provider to [email protected]. All questions will be reviewed and
those that are thought to be of interest to all shareholders will be answered
and posted to the Company web site.
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 Financial
Statements" on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None
PART III
ITEMS 10 - 13.
Pursuant to General Instruction G(3) of Form 10-K, the information required by
Items 10-13 of Form 10-K (except for the information regarding executive
officers who are not directors of the Company, which is included as a
Supplemental Item under Part I of this Report) is incorporated by reference from
the information included in the Proxy Statement under the headings "Security
Ownership Of Certain Beneficial Owners And Management", "Election of Directors",
"Executive Compensation" and "Certain Relationships And Related Transactions".
The Proxy Statement will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days after the end of the fiscal year
covered by this report.
-19-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements and Schedules
The independent auditors' report with respect to the above-listed
financial statements appears on page F2 of this report.
The financial statements of Cimetrix as set forth under Item 8 are
filed as part of this report and appear on page F4 of this report.
Financial statement schedules have been omitted since they are
either not required, not applicable, or the information is
otherwise included in the financial statements and notes thereto.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
December 31, 1998.
-20-
(c) Exhibit Listing
Exhibit No. Description
3.1 Articles of Incorporation (1)
3.2 Articles of Merger of Cimetrix (USA)
Incorporated with Cimetrix Incorporated (6)
3.3 Bylaws (1)
10.1 Proxy Agreement between Keith Seolas and
his family, and Paul Bilzerian,
transferring voting rights to Mr.
Bilzerian (4)
10.2 Consulting and option agreement between
Cimetrix and Paul A. Bilzerian
to resolve management difficulties (4)
10.3 Indemnity agreement between Cimetrix and
former officers and directors of Cimetrix
for return of shares and release from
related payables/receivables (5)
10.4 Technology Sale and Purchase Agreement
between Cimetrix and Brigham Young
University (6)
10.5 Stock Option Plan of Cimetrix
Incorporated (2)
10.6 Supplementary Consulting Agreement between
Cimetrix and Bicoastal Holding Company for
services of Paul Bilzerian (3)
27.0 Financial data schedule (7)
99.0 Forward Looking Statements Cautionary
Statement (7)
(1) Incorporated by reference to Annual Report on Form 10-K For The Fiscal
Year Ended December 31, 1993.
(2) Incorporated by reference to Annual Report on Form 10-K For The Fiscal
Year Ended December 31, 1994.
(3) Incorporated by reference to Annual Report on Form 10-K For The Fiscal
Year Ended December 31, 1995.
(4) Incorporated by reference to the Quarterly Report on Form 10-QSB For
The Quarter Ended March 31, 1994.
(5) Incorporated by reference to the Quarterly Report on Form 10-QSB For
The Quarter Ended June 30, 1994.
(6) Incorporated by reference to the Quarterly Report on Form 10-QSB For
The Quarter Ended September 30, 1995.
(7) Attached.
-21-
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 March 29,
1998.
CIMETRIX INCORPORATED
By: /S/ RILEY G. ASTILL
----------------------------------
RILEY G. ASTILL
Vice President of Finance and 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 indicated on March 29, 1998.
SIGNATURE CAPACITY
/S/ PAUL A. BILZERIAN President and Chief Executive Officer
and Director (as Director and Principal
- -------------------------------- Executive Officer)
PAUL A. BILZERIAN
/S/ BILL VAN DRUNEN Director
- --------------------------------
BILL VAN DRUNEN
/S/ DR. RONALD LUMIA Director
- --------------------------------
DR. RONALD LUMIA
/S/ RANDALL A. MACKEY Director
- --------------------------------
RANDALL A. MACKEY
/S/ DR. LOWELL K. ANDERSON Director
- --------------------------------
DR. LOWELL K. ANDERSON
-22-
EXHIBIT 99.0
FORWARD LOOKING STATEMENTS CAUTIONARY STATEMENT
Statements regarding the future prospects of the Company must be
evaluated in the context of a number of factors that may materially affect its
financial condition and results of operations. Disclosure of these factors is
intended to permit the Company to take advantage of the safe harbor provisions
of the PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Most of these factors
have been discussed in prior filings by the Company with the Securities and
Exchange Commission. Although the Company has attempted to list the factors that
it is currently aware may have an impact on its operations, other factors may in
the future prove to be important and the following list should not necessarily
be considered comprehensive.
1. EMPHASIS OF MATTER IN AUDITOR'S REPORT. The opinion rendered by
Tanner + Co., the Company's independent auditors, on the financial statements of
the Company states as of December 31, 1998 the Company incurred a net loss of
$4,070,000.The Company had an accumulated deficit of $19,103,000 at December 31,
1998.
2 LIMITED WORKING CAPITAL; Limited Operating History; Accumulated
Deficit; Anticipated Losses. As of December 31, 1998, the Company had working
capital of $2,481,000. The Company also has an accumulated deficit of
$19,103,000 as of December 31, 1998. Such losses have resulted principally from
costs incurred in connection with research and development and marketing of the
Company's CODE and GEM software product suites. CODE software was introduced
commercially in October 1995, and GEM was introduced during 1997. The likelihood
of success of the Company must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection with
the development of new products and the competitive environments in the industry
in which the Company operates. There can be no assurance that the Company will
not encounter substantial delays and unexpected expenses related to research,
development, production, marketing or other unforeseen difficulties.
3. INCOME TAXES. The Company had available at December 31, 1998, unused
tax operating loss carry forwards of approximately $18,000,000 that may be
applied against future taxable income, which begin to expire in 2004. Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes (FASB
109) requires the Company to provide a net deferred tax asset or liability equal
to the expected future tax benefit or expense of temporary reporting differences
between book and tax accounting and any available operating loss or tax credit
carry forwards. At December 31, 1998, the total of all deferred tax assets was
approximately $6,267,000 and the total of all deferred tax liabilities was
approximately $140,000. Because of the uncertainty about whether the Company
will generate sufficient future taxable income to realize the deferred tax
assets, the Company has established a valuation allowance of $6,127,000 to
offset all its deferred tax assets.
4. DEPENDENCE ON SIGNIFICANT CUSTOMERS. Customer "A" accounted for
approximately 0% and 37% of the Company's revenues in 1997 and 1998,
respectively. Customer "B" accounted for approximately 27% and 11% of the
Company's revenues in 1997 and 1998, respectively. The loss of either customer's
business could have a material adverse effect on the Company. Additionally, the
quantity of each customer's business with the Company depends substantially on
market acceptance of their products that utilizes the Company's software
products. The Company could be materially adversely
-23-
affected by a downturn in either Company's sales or their failure to meet sales
expectations. The Company will likely from time to time have other customers
that account for a significant portion of its business.
5. DEPENDENCE ON RELATIVELY NEW PRODUCTS. The Company has only recently
begun to install and implement its products with customers. The Company's CODE
software system was introduced commercially in October 1995, and its GEM
software product suite has been developed during the past three years and was
commercially introduced during 1997. As a result, the Company has only limited
history with these products, and there can be little assurance that they will
achieve market acceptance. The Company's future success will depend on sales of
these products, and the failure of these products to achieve market acceptance
would have a materially adverse effect on the Company. In addition, the Company
has limited experience with the installation, implementation and operation of
its products at customer sites. There is no assurance that the Company's
products will not require substantial modifications to satisfy performance
requirements or to fix previously undetected errors. If customers were to
experience significant problems with the Company's products, or if the Company's
customers were dissatisfied with the products' functionality, performance, or
support, the Company would be materially adversely affected.
6. PRODUCT LIFE CYCLE; NEED TO DEVELOP NEW PRODUCTS AND ENHANCEMENTS.
The markets for the Company's products are new and emerging. As such, these
markets are characterized by rapid technological change, evolving requirements,
developing industry standards, and new product introductions. The dynamic nature
of these markets can render existing products obsolete and unmarketable within a
short period of time. Accordingly, the life cycle of the Company's products is
difficult to estimate. The Company's future success will depend in large part on
its ability to enhance its products and develop and introduce, on a timely
basis, new products that keep pace with technological developments and emerging
industry standards. The success of the Company's software development efforts
will depend on various factors, including its ability to integrate these
products with third-party products. If competitor succeeds in duplicating or
surpassing the Company's technological advances, the Company's prospects might
be materially adversely affected.
7. COMPETITION. The automation technology market is extremely
competitive. Management believes that most, if not all, of the Company's
competitors currently have greater financial resources and market presence than
it does. Accordingly, these competitors may be able to compete very effectively
on pricing and to develop technology to increase the flexibility of their
products. Further, manufacturers of industrial robots, machine tools, and other
automation equipment which use their own proprietary controllers and software
have already established a share of the market for their products and may find
it easier to limit market penetration by the Company because of the natural
tie-in of their controllers and software to their mechanisms. Management is
uninformed as to whether any of these competitors are presently developing
additional technology that will directly compete with the Company's product
offerings.
8. EXPORT SALES. Export sales accounted for approximately 45%, 39% and
53% of the Company's business in 1996, 1997 and 1998, respectively. To service
the needs of these customers, the Company must provide worldwide sales and
product support services. There are a number of risks inherent in international
expansion, including language barriers, increased risk of software piracy,
unexpected changes in regulatory requirements, tariffs and other trade barriers,
costs and risks of localizing products for foreign companies, longer account
receivable cycles and increased collection risks, potentially adverse tax
consequences, difficulty in repatriating earnings, and the burdens of complying
with a wide variety of foreign laws. Thus far, all the Company's export sales
have been payable in United States dollars.
-24-
9. DEPENDENCE ON CERTAIN INDIVIDUALS. The Company is highly dependent on
the services of its key managerial and engineering personnel, including Paul A.
Bilzerian, President and Chief Executive Officer, Michael D. Feaster, Vice
President of Software Development, David P. Faulkner, Executive Vice President
of Marketing and Robert H. Reback, Executive Vice President of Sales. Any
material change in the Company's senior management team could adversely affect
the Company's profitability and business prospects. The Company does not
maintain key man insurance for any of its key management and engineering
personnel.
10. COPYRIGHT PROTECTION AND PROPRIETARY INFORMATION. The Company's
software innovations are proprietary in nature, and the Company has obtained
copyright protection for them. It is possible, however, for infringement to
occur. Although the Company intends to prosecute diligently any infringement of
its proprietary technology, copyright litigation can be extremely expensive and
time-consuming, and the results of litigation are generally uncertain. Further,
the use by a competitor of the Company's proprietary software to create similar
software through "reverse engineering" may not constitute an infringing use. The
Company relies on confidentiality and nondisclosure agreements with employees
and customers for additional protection against infringements, and the Company's
software is encoded to further protect it from unauthorized use.
11. CONTROL. Investors in the Common Stock (through exercise of the
Options or Warrants) will be entitled to vote in the election of the Company's
directors, but will not be entitled to separate board representation. The
executive officers and directors of the Company have direct or may be deemed to
have direct ownership of approximately 25% of the outstanding shares of Common
Stock of the Company. The voting power represented by these shares, though not
an absolute majority, is probably sufficient to provide effective control over
most affairs of the Company.
12. MARKETABILITY OF COMMON STOCK.The Company's Common Stock is currently
traded through three market makers, but is not listed on any securities exchange
or quoted on an automated interdealer quotation system, which would provide
automated quotations of the stock's price. Trading through market makers tends
to limit the volume of sales and can cause wide fluctuations in a stock's price,
based on the available supply and demand for the stock at any particular time.
13. ANTI-TAKEOVER PROVISIONS. Certain provisions of the Nevada General
Corporation Law have anti-takeover effects and may inhibit a non-negotiated
merger or other business combination. These provisions are intended to encourage
any person interested in acquiring the Company to negotiate with, and to obtain
the approval of, the Company's Board of Directors in connection with such a
transaction. However, certain of these provisions may discourage a future
acquisition of the Company, including an acquisition in which the shareholders
might otherwise receive a premium for their shares. As a result, shareholders
who might desire to participate in such a transaction may not have the
opportunity to do so. See "Description of Securities -- Certain Provisions of
Nevada Law."
14. QUARTERLY FLUCTUATIONS. The Company has experienced quarterly
fluctuations in operating results and anticipates that these fluctuations will
continue. These fluctuations have been caused by various factors, including the
capital procurement practices of its customers and the electronics industry in
general, the timing and acceptance of new product introductions and
enhancements, and the timing of product shipments and marketing. Future
operating results may fluctuate as a result of these and other factors,
including the Company's ability to continue to develop innovative products, the
introduction of new products by the Company's competitors, the Company's product
and customer mix, the level of competition and overall trends in the economy.
-25-
15. POSSIBLE VOLATILITY OF STOCK PRICE. The Company believes that
factors such as the announcement of new products by the Company or its
competitors, market conditions in the electronics and precision measurement
industries in general and quarterly fluctuations in financial results could
cause the market price of the Common Stock to vary substantially. In recent
years, the stock market has experienced price and volume fluctuations that have
particularly affected the market prices for many high technology companies and
which often have been unrelated to the operating performance of such companies.
The market volatility may adversely affect the market price of the Company's
Common Stock.
-26-
CIMETRIX INCORPORATED
Financial Statements
December 31, 1998 and 1997
CIMETRIX INCORPORATED
Index to Financial Statements
- --------------------------------------------------------------------------------
Page
Report of Tanner + Co. F-2
Report of Pritchett, Siler & Hardy, P.C F-3
Balance sheet F-4
Statement of operations F-5
Statement of stockholders' equity F-6
Statement of cash flows F-8
Notes to financial statements F-9
- --------------------------------------------------------------------------------
-27- F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Cimetrix Incorporated
We have audited the balance sheet of Cimetrix Incorporated as of December 31,
1998 and 1997, and the related statements of operations, stockholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Cimetrix Incorporated as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/Tanner + Co.
Salt Lake City, Utah
February 11, 1999
-28- F-2
CIMETRIX INCORPORATED
Board of Directors
CIMETRIX INCORPORATED
We have audited the accompanying statements of operations, stockholders' equity
and cash flows of Cimetrix Incorporated for the year ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements audited by us present fairly, in all
material respects, the results of operations and cash flows of Cimetrix
Incorporated for the year ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ Pritchett, Siler & Hardy, P.C.
Salt Lake City,
Utah February 26, 1997
-29- F-3
CIMETRIX INCORPORATED
Balance Sheet
(In thousands, except share amounts)
December 31,
- ----------------------------------------------------------------------------------------------------------
Assets 1998 1997
------
-----------------------------------
Current assets:
Cash and cash equivalents $ 1,645 $ 1,927
Receivables, net 1,175 701
Inventories - 53
Prepaid expenses and other current assets 59 121
-----------------------------------
Total current assets 2,879 2,802
Property and equipment, net 716 2,274
Goodwill, net - 2,753
Other assets 167 190
-----------------------------------
$ 3,762 $ 8,019
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 159 $ 355
Accrued expenses 155 183
Deferred support revenue 84 49
Current portion of long-term debt - 36
-----------------------------------
Total current liabilities 398 623
-----------------------------------
Long-term debt 2,691 3,546
-----------------------------------
Commitments and contingencies - -
Stockholders' equity:
Common stock, $.0001 par value, 100,000,000 shares
authorized; 24,743,928 and 24,343,928 shares
issued and outstanding, in 1998 and 1997, respectively 2 2
Additional paid-in capital 19,787 19,881
Treasury stock at cost (1) (1,000)
Stock subscription receivable (12) -
Accumulated deficit (19,103) (15,033)
-----------------------------------
Total stockholders' equity 673 3,850
-----------------------------------
$ 3,762 $ 8,019
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
-30- F-4
Statement of Operations
(In thousands, except per share amounts)
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------
Net sales $ 4,161 $ 2,195 $ 2,396
-----------------------------------------------------
Operating expenses:
Cost of sales 454 1,057 1,342
General and administrative 1,854 2,288 1,577
Selling, marketing and customer support 713 1,066 1,494
Research and development 1,479 2,008 1,179
Compensation expense - stock options 20 234 685
Impairment loss 3,526 - -
-----------------------------------------------------
8,046 6,653 6,277
-----------------------------------------------------
Loss from operations (3,885) (4,458) (3,881)
-----------------------------------------------------
Other income (expense):
Interest income 63 53 108
Interest expense (277) (97) (52)
Other income 23 12 10
Gain on disposition of assets 6 - 360
-----------------------------------------------------
(185) (32) 426
-----------------------------------------------------
Loss before income taxes (4,070) (4,490) (3,455)
Benefit from income taxes - - -
-----------------------------------------------------
Net loss $ (4,070) $ (4,490) $ (3,455)
-----------------------------------------------------
Loss per common share - basic and diluted $ (.17) $ (.20) $ (.19)
-----------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
-31- F-5
CIMETRIX INCORPORATED
Statement of Stockholders' Equity
(In thousands, except share amounts)
Years Ended December 31, 1998, 1997 and 1996
- ----------------------------------------------------------------------------------------------------------
Unearned
Compen-
Additional sation on Stock
Treasury Stock Common Stock Paid-In Stock SubscriptionAccumulated
-------------------------------------
Shares Amount Shares Amount Capital Options Receivable Deficit Total
------------------------------------------------------------------------------------------
Balance,
January 1, 1996 - $ - 18,456,103 $ 2 $ 16,156 $ - $ - $ (7,088) $ 9,070
Stock
options exercised - - 340,325 - 1,081 - - - 1,081
Warrants exercised - - 125,000 - 250 - - - 250
Cancellation of
shares returned by
former directors - - (800,000) - - - - - -
Stock compensation - - - - 919 (234) - - 685
Net loss - - - - - - - (3,455) (3,455)
------------------------------------------------------------------------------------------
Balance,
December 31, 1996 - - 18,121,428 2 18,406 (234) - (10,543) 7,631
Warrants exercised - - 6,192,500 - 1,385 - - - 1,385
Purchase of
treasury stock 200,000 (1,000) - - - - - - (1,000)
Stock
options exercised - - 30,000 - 90 - - - 90
Stock compensation - - - - - 234 - - 234
Net loss - - - - - - - (4,490) (4,490)
------------------------------------------------------------------------------------------
Balance,
December 31, 1997 200,000 (1,000) 24,343,928 2 19,881 - - (15,033) 3,850
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
-32- F-6
CIMETRIX INCORPORATED
Statement of Stockholders' Equity
(In thousands, except share amounts)
Continued
Years Ended December 31, 1998, 1997 and 1996
- -----------------------------------------------------------------------------------------------------------
Unearned
Compen-
Additional sation on Stock
Treasury Stock Common Stock Paid-In Stock Subscription Accumulated
-------------------------------------
Shares Amount Shares Amount Capital Options Receivable Deficit Total
------------------------------------------------------------------------------------------
Purchase of
treasury stock 192,722 (125) - - - - - - (125)
Treasury stock
issued for:
Cash (353,091) 990 - - (617) - - - 373
Senior notes
payable (18,182) 91 - - (66) - - 25
Receivable (8,727) 43 - - (31) - (12) - -
Shares issued for
senior notes - - 400,000 - 600 - - - 600
payable
Stock compensation - - - - 20 - - - 20
Net loss - - - - - - - (4,070) (4,070)
-----------------------------------------------------------------------------------------
Balance,
December 31, 1998 12,722 $ (1) 24,743,928 $ 2 $ 19,787 $ - $ (12) $ (19,103 $ 673
-----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
-33- F-7
CIMETRIX INCORPORATED
Statement of Cash Flows
(In thousands)
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------
Cash flows from operating activities:
Net loss $ (4,070) $ (4,490) $ (3,455)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization and depreciation 798 754 635
Provision for losses on receivables 94 116 -
Gain on disposition of assets (6) - (360)
Stock compensation expense 20 234 685
Impairment loss 3,526 - -
Other (247) - -
(Increase) decrease in:
Receivables (568) (200) (549)
Inventories 53 284 86
Prepaid expenses and other current assets 62 164 (57)
Other assets 23 (190) 9
Increase (decrease) in:
Accounts payable (196) (316) 497
Accrued expenses (28) (276) 337
Deferred support revenue 35 (221) 170
------------------------------------------
Net cash used in
operating activities (504) (4,141) (2,002)
------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (42) (478) (256)
Purchase of real estate property - - (198)
Proceeds from disposal of real estate property - - 453
Payments for other assets, net - - (20)
Proceeds from disposal of property 21 - 1,174
------------------------------------------
Net cash (used in) provided by
investing activities (21) (478) 1,153
------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 373 1,475 1,331
Proceeds from long-term debt - 3,333 (22)
Payments on long-term debt (5) (47) (20)
Purchase of treasury stock (125) (1,000) -
------------------------------------------
Net cash provided by
financing activities 243 3,761 1,289
------------------------------------------
Net (decrease) increase in cash and cash equivalents (282) (858) 440
Cash and cash equivalents at beginning of year 1,927 2,785 2,345
------------------------------------------
Cash and cash equivalents at end of year $ 1,645 $ 1,927 $ 2,785
------------------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
-34- F-8
CIMETRIX INCORPORATED
Notes to Financial Statements
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
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, and electronic equipment.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which, when realized, have been within the range
of management's expectations.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such account and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Use of Estimates in the Preparation of Financial Statements The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash Equivalents
For purposes of the statement of cash flows, cash includes all cash and
investments with original maturities to the Company of three months or less.
Inventories
Inventories consist of parts and supplies and are recorded at the lower of cost
or market, cost being determined on a first-in, first-out (FIFO) method.
- --------------------------------------------------------------------------------
-35- F-9
CIMETRIX INCORPORATED
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies Continued
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation and amortization on capital leases and property and equipment is
determined using the straight-line method over the estimated useful lives of the
assets or terms of the lease. Expenditures for maintenance and repairs are
expensed when incurred and betterments are capitalized. Gains and losses on sale
of property and equipment are reflected in operations.
Software Development Costs
Certain software development costs are capitalized when incurred in accordance
with Financial Accounting Standards Board Statement No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" (SFAS 86).
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 judgement 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 net of
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 as required by
SFAS No. 86.
- --------------------------------------------------------------------------------
-36- F-10
CIMETRIX INCORPORATED
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies Continued
Goodwill
Goodwill reflects the excess of the costs of purchasing the minority interest of
Cimetrix (USA) Incorporated over the fair value of the related net assets at the
date of acquisition, and is being amortized on the straight line basis over 15
years. During the year ended December 31, 1998 the unamortized portion of the
goodwill was written off (see note 8). Amortization expense charged to
operations for 1998, 1997, and 1996 was approximately (in thousands) $217, $218,
and $218, respectively.
Technology
The Company has purchased technology that is referred to as ROBLINE and ROBCAL.
ROBLINE and ROBCAL, together with other technology developed by the Company,
have enabled the Company to develop the Cimetrix Open Development Environment
("CODE") which includes "open architecture" standards-based, operating systems
software and controller hardware that allow manufacturing engineers to replace
cumbersome proprietary systems with open systems when designing automated
workcells. The Company purchased all rights, title, interest, and benefit in and
to the intellectual property for cash payments of $50,000 per year for ten
years, plus 120,000 shares of restricted common stock of the Company valued at
$3.75 per share. The cash payments were discounted using an incremental
borrowing rate of 9.5% and recorded as a note payable of approximately $344,000.
During the year ended December 31, 1998 the unamortized portion of the
technology was written off (see note 8). Amortization expense charged to
operations for 1998, 1997, and 1996 was approximately (in thousands) $53 per
year.
Patents and Copyrights
The Company has obtained two patents related to certain technology. In addition,
the Company has registered its entire CODE 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. For the most part, other than
the two patents 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 patents.
- --------------------------------------------------------------------------------
-37- F-11
CIMETRIX INCORPORATED
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies Continued
Income Taxes
Deferred income taxes are provided in amounts sufficient to give effect to
temporary differences between financial and tax reporting, principally related
to depreciation.
Earnings per Share
The computation of basic earnings per common share is based on the weighted
average number of shares outstanding during each year.
The computation of diluted earnings per common share is based on the weighted
average number of shares outstanding during the year plus the common stock
equivalents which would arise from the exercise of stock options and warrants
outstanding using the treasury stock method and the average market price per
share during the year.
Revenue Recognition
Revenue is recognized upon shipment of product or performance of services.
2. Receivables
December 31,
------------------------------------
1998 1997
------------------------------------
Receivables (in thousands):
Trade receivables $ 1,355 $ 797
Other receivables 30 20
------------------------------------
1,385 817
Less allowance for doubtful
accounts (210) (116)
------------------------------------
$ 1,175 $ 701
------------------------------------
- --------------------------------------------------------------------------------
-38- F-12
CIMETRIX INCORPORATED
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Property and Equipment
Property and equipment consists of the following (in thousands):
December 31,
-----------------------------------
1998 1997
-----------------------------------
Software development costs $ 464 $ 984
Technology - 794
Equipment 351 977
Office equipment and software 304 455
Furniture and fixtures 214 267
Leasehold improvements 83 83
Automobiles - 13
-----------------------------------
1,416 3,573
Accumulated depreciation and
amortization (700) (1,299)
-----------------------------------
$ 716 $ 2,274
-----------------------------------
- --------------------------------------------------------------------------------
-39- F-13
CIMETRIX INCORPORATED
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Long-Term Debt
Long-term debt is comprised of the following (in thousands):
December 31,
-----------------------------------
1998 1997
-----------------------------------
Unsecured 10% senior notes, due 2002,
with interest payable semiannually
on April 1 and October 1 of each year,
(see note 6) $ 2,691 $ 3,316
Note payable to a university in annual
installments of $50,000, including
imputed interest at 9.5%, secured by
technology - 248
Capital lease obligations (see note 5) - 18
-----------------------------------
2,691 3,582
Less current portion - (36)
-----------------------------------
$ 2,691 $ 3,546
-----------------------------------
5. Lease Obligations
The Company leased certain office equipment under noncancellable capital leases
during 1997. Assets held under capital leases were included in property and
equipment during 1997 as follows (in thousands):
Office equipment $ 84
Accumulated amortization (44)
-----------------
$ 40
-----------------
Amortization expense on capital leases for the years ended December 31, 1997 and
1996 were (in thousands) $15 and $13, respectively.
- --------------------------------------------------------------------------------
-40- F-14
CIMETRIX INCORPORATED
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
5. Lease Obligations Continued
The Company leases certain office space, vehicles, and residential apartments
under noncancellable operating lease agreements. Future minimum lease payments
required under operating leases are as follows (in thousands):
Year Amount
------------------
1999 $ 248
2000 245
2001 245
2002 63
------------------
$ 801
------------------
Rental expense for the years ended December 31, 1998, 1997, and 1996 on
operating leases was (in thousands) $273, $269, and $43, respectively.
6. Senior Notes Payable
During the year ended December 31, 1997, the Company sold $3,316,000 of its 10%
unsecured Senior Notes Due 2002 (Senior Notes) in a public offering. Interest on
the Senior Notes is payable semiannually on April 1 and October 1 of each year
and mature on September 30, 2002.
Each purchaser of a Senior Note also received, for no additional consideration,
one common stock purchase warrant (a Warrant) for each $1,000 principal amount
of Senior Notes purchased. Each Warrant entitles the holder to purchase 250
shares of the Company's common stock (Common Stock) for $2.50 per share. The
Warrants are exercisable any time after October 31, 1998, and on or before
September 30, 2002, as a whole, in part, or increments, but only if the shares
of Common Stock issuable upon exercise of the 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 Warrant holders reside. During the year ended December
31, 1998, the Company registered the common stock issuable upon exercise of the
warrants. The exercise price of the Warrants is payable at the holder's option,
either in cash or by the surrender of Senior Notes at their face amount plus
accrued interest. The Warrants will be immediately transferable separately from
the Senior Notes.
- --------------------------------------------------------------------------------
-41- F-15
CIMETRIX INCORPORATED
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Senior Notes Payable Continued
The Senior Notes are not redeemable by the Company before October 1, 1999.
Beginning October 1, 1999, the Senior Notes will be redeemable at the Company's
option, as a whole or in part, in increments of $1,000, at any time or from time
to time, at the redemption prices stated below plus accrued interest, upon not
fewer than 30 or more than 60 days advance notice. The redemption prices
(expressed in percentages of principal amount) for the 12-month period
commencing on October 1 of each year indicated are as follows:
Redemption
Period Price
----------
1999 105%
2000 103%
2001 101%
Under certain circumstances related to a change in ownership control, the
Company may be required to repurchase the Senior Notes prior to the maturity
date.
7. Income Taxes
The benefit for income taxes is different than amounts which would be provided
by applying the statutory federal income tax rate to loss before income taxes
for the following reasons (in thousands):
Years Ended
December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
Federal income tax
benefit at statutory rate $ 1,384 $ 1,527 $ 1,175
Life insurance and meals (3) (15) -
Change in valuation allowance (1,381) (1,512) (1,175)
-------------------------------------------
$ - $ - $ -
-------------------------------------------
- --------------------------------------------------------------------------------
-42- F-16
CIMETRIX INCORPORATED
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Income Taxes Continued
Deferred tax assets (liabilities) are comprised of the following (in thousands):
December 31,
-----------------------------------
1998 1997
-----------------------------------
Net operating loss carryforwards $ 6,149 $ 4,984
Depreciation (140) (316)
Allowance for doubtful accounts 71 39
Accrued vacation 18 22
Deferred income 29 17
-----------------------------------
6,127 4,746
Less valuation allowance (6,127) (4,746)
-----------------------------------
$ - $ -
-----------------------------------
At December 31, 1998, the Company has a net operating loss carryforward
available to offset future taxable income of approximately (in thousands)
$18,000 which will begin to expire in 2004. If substantial changes in the
Company's ownership should occur, there would also be an annual limitation of
the amount of NOL carryforwards which could be utilized.
8. Impairment Loss
During 1998, the Company settled ongoing litigation associated with the purchase
of technology and a related subsidiary. Management also determined that the
related assets (i.e. goodwill, software development costs, and technology) had
been impaired. Consequently, the following adjustments were recorded to
write-down these assets to their estimated realizable values (in thousands):
Goodwill $ 2,536
Technology 608
Software development costs 104
Fixed assets 278
-----------------
$ 3,526
-----------------
- --------------------------------------------------------------------------------
-43- F-17
CIMETRIX INCORPORATED
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Supplemental Cash Flow Information
During the year ended December 31, 1998 (in thousands):
o The Company retired $625 senior notes payable through the issuance of
common stock.
o The Company satisfied a capital lease obligation through decreasing
property and equipment and long-term debt by $14.
o The Company issued common stock in exchange for a stock subscription
receivable of $12.
During the year ended December 31, 1997 (in thousands):
o The Company received $100 of equipment as customer deposits.
o The Company reclassified $196 of inventory to property and equipment.
During the year ended December 31, 1996, compensation expense of approximately
(in thousands) $685 was recognized for all currently outstanding and unexercised
options.
Actual amounts paid for interest and income taxes are as follows (in thousands):
Years Ended
December 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
Interest $ 274 $ 35 $ 52
--------------------------------------------
Income taxes $ - $ - $ -
--------------------------------------------
- --------------------------------------------------------------------------------
-44- F-18
CIMETRIX INCORPORATED
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Major Customers
Sales to major customers which exceeded 10 percent of net sales are
approximately as follows (in thousands):
Years Ended
December 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
Company A $ 1,530 $ - $ -
Company B $ 438 $ 603 $ 815
Company C $ 429 $ 355 $ -
Company D $ - $ - $ 335
Export sales to unaffiliated customers were approximately (in thousands) $1,913,
$653, and $1,080, in 1998, 1997, and 1996, respectively. All major export sales
were made to Germany and Japan.
11. 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 15% of their gross wages.
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, 1998, 1997, and 1996,
the Company contributed approximately (in thousands) $25, $19, and $19,
respectively, to the plan.
12. Related Party Transactions
During the year ended December 31, 1998, 1997, and 1996, the Company incurred
consulting fees of approximately (in thousands) $120, $90, and $50,
respectively, to a corporation controlled by the current President of the
Company.
The Company has an investment in an entity. The investment is accounted for at
the lower of cost or market and is included in other assets. During the year
ended December 31, 1998, the Company recognized sales of approximately (in
thousands) $331 to this entity and as of December 31, 1998, had receivables of
approximately (in thousands) $237.
- --------------------------------------------------------------------------------
-45- F-19
CIMETRIX INCORPORATED
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Stock Options and Warrants
The Company has a stock option plan (the Option Plan), which allows a maximum of
2,000,000 options 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 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.
Information regarding the stock options and warrants is summarized below:
Number of Weighted
Options Average
and Exercise
Warrants Price
-----------------------------------
Outstanding at January 1, 1996 8,493,166 $ 1.03
Granted 669,500 7.83
Exercised (465,325) 2.86
Forfeited (593,953) 3.36
-----------------------------------
Outstanding at December 31, 1996 8,103,388 1.32
Granted 1,533,500 6.00
Exercised (6,222,500) .24
Forfeited (832,500) 5.93
-----------------------------------
Outstanding at December 31, 1997 2,581,888 4.42
Granted 1,554,500 2.50
Forfeited (1,565,888) 4.48
-----------------------------------
Outstanding at December 31, 1998 2,570,500 $ 2.50
-----------------------------------
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-46- F-20
CIMETRIX INCORPORATED
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Stock Options and Warrants Continued
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation expense has been recognized for stock options
granted to employees. Had compensation expense for the Company's stock options
been determined based on the fair value at the grant date for awards in 1998,
1997, and 1996 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 (in thousands):
Years Ended
December 31,
----------------------------------------------
1998 1997 1996
----------------------------------------------
Net loss - as reported $ (4,070 $ (4,490 $ (3,455)
Net loss - pro forma $ (4,438 $ (4,490 $ (3,514)
Loss per share - as reported $ (.17) $ (.20) $ (.19)
Loss per share - pro forma $ (.18) $ (.20) $ (.19)
----------------------------------------------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
December 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
Expected dividend yield $ - $ - $ -
Expected stock price volatility 148% 69% 89%
Risk-free interest rate 5.5% 5.5% 6.0%
Expected life of options 5 years 2-5 years 5 years
--------------------------------------------
The weighted average fair value of options granted during 1998, 1997, and 1996
are $1.26, $3.39, and $.73, respectively.
- --------------------------------------------------------------------------------
-47- F-21
CIMETRIX INCORPORATED
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
13. Stock Options and Warrants Continued
The following table summarizes information about stock options and warrants
outstanding at December 31, 1998:
Outstanding Exercisable
- --------------------------------------------------------------------------------
Weighted
Average
Remaining Number
Number Contractual Weighted Exercisable Weighted
Exercise Outstanding at Life Average at Average
Price 12/31/98 (Years) Exercise Price 12/31/98 Exercise Price
- --------------------------------------------------------------------------------
$ 2.50 2,570,500 3.94 $ 2.50 1,254,100 $ 2.50
- --------------------------------------------------------------------------------
14. Earnings Per Share
Financial accounting standards requires companies to present basic earnings per
share (EPS) and diluted earnings per share along with additional informational
disclosures. Information related to earnings per share is as follows (in
thousands, except per share amounts):
Years Ended
December 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
Basic and Diluted EPS:
Net loss available to common
stockholders $ (4,070 $ (4,490) $ (3,455)
-----------------------------------------
Weighted average common shares 24,433 22,185 18,517
-----------------------------------------
Net loss per share $ (.17) $ (.20) $ (.19)
-----------------------------------------
- --------------------------------------------------------------------------------
-48- F-22
CIMETRIX INCORPORATED
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
15. Fair Value of Financial Instruments
None of the Company's financial instruments are held for trading purposes. The
Company estimates that the fair value of all financial instruments at December
31, 1998, does not differ materially from the aggregate carrying values of its
financial instruments recorded in the accompanying balance sheet. The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. Considerable judgement is
necessarily required in interpreting market data to develop the estimates of
fair value, and, accordingly, the estimates are not necessarily indicative of
the amounts that the Company could realize in a current market exchange.
16. Continuing Operations
During its existence, the Company has incurred operating losses each year from
inception, including (in thousands) $4,070, $4,490, and $3,455, during the years
ended December 31, 1998, 1997, and 1996, respectively. Net cash used by
operations amounted to approximately (in thousands) $504, $4,141, $2,002, during
the same periods.
Historically, the Company has raised the required financing for its activities
through the sale of the Company's common shares and from short-term borrowing.
The Company has also taken steps to decrease general and administrative
expenses. Management of the Company believes that at December 31, 1998, the
Company is capable of financially meeting the demands inherent as normal sales
continue to develop during 1999.
Because of the cash position of the Company at December 31, 1998, changes in
operating costs, and increases in sales activity, the accompanying financial
statements do not contain any adjustments relating to the recoverability and
classification of recorded asset amounts or the amount and classification of
liabilities that might be necessary, should the Company be unable to achieve
profitable operations and generate sufficient working capital to fund operations
and pay or refinance its current obligations.
- --------------------------------------------------------------------------------
-49- F-23
CIMETRIX INCORPORATED
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
17. Commitments and Contingencies
License Agreement
The Company entered into a license/royalty agreement with a provider of
real-time development licenses, which allowed the Company to resell real-time
development licenses to its customers. The Company has prepaid licenses, which
is being amortized until licenses and services from the provider have been
consumed. At December 31, 1998, 1997, and 1996, the amortized prepayment was
approximately (in thousands) $-0-, $73, and $130, respectively, and is included
in prepaid expenses and other current assets on the Company's balance sheet.
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, 1998, 1997, and 1996, no provision for warranty claims has been
established since the Company has not incurred substantial sales from which to
develop reliable estimates. Also, no refund has been paid to any customer as of
December 31, 1998. Management believes that any allowance for warranty would be
currently immaterial to the financial condition of the Company.
Litigation
The Company may become or is subject to investigations, claims or lawsuits
ensuing out of the conduct of its business, including those related to
environmental safety and health, product liability, commercial transactions etc.
The Company is currently not aware of any such items which it believes could
have a material adverse effect on its financial position.
- --------------------------------------------------------------------------------
-50- F-24