SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
OR
( ) 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 0-25309
VMIC, INC
(Exact name of registrant as specified in its charter)
----------------------------
DELAWARE 63-09172
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification no.)
12090 S. Memorial Parkway Huntsville Alabama 35803-3308
(256) 880-0444
(Address, including zip code and telephone number of principal offices)
----------------------------
NO CHANGE
(Former name, address and fiscal year if changed since last report)
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
COMMON STOCK, $.10 PAR VALUE
4,551,566 SHARES OUTSTANDING ON JUNE 30, 1999
----------------------------
<PAGE>
FORM 10-Q
VMIC, Inc.
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 1999
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of June 30, 1999 (Unaudited)
and September 30, 1998..............................................2
Statements of Income for the Three and Nine Months Ended
June 30, 1999 and June 30, 1998 (Unaudited).........................3
Statements of Cash Flows for the Nine Months Ended June 30, 1999
and June 30, 1998 (Unaudited)......................................5
Notes to Condensed Financial Statements (Unaudited).................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..............................................9
Part II. OTHER INFORMATION
Signatures.........................................................14
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
VMIC, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
VMIC, Inc.
Condensed Balance Sheets
June 30, September 30,
1999 1998
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 25,878 $ 527,972
Accounts receivable (includes allowance for doubtful accounts of $408,383
and $384,383 at June 30, 1999 and September 30, 1998,
respectively) 3,947,385 4,366,330
Inventories 5,896,747 4,943,239
Prepaid expenses 162,129 250,733
Income tax receivable 106,553 573,771
Deferred income taxes 954,929 954,929
------------------ ------------------
Total current assets 11,093,621 11,616,974
Property, plant, and equipment, net 8,615,481 9,033,922
Purchased product and software costs, net 1,047,605 967,852
Software development costs 5,382,449 3,543,030
------------------ -----------------
$ 26,139,156 $ 25,161,778
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
liabilities:
Accounts payable $ 1,846,173 $ 2,367,397
Current portion of notes, mortgages, and capital leases 4,961,996 2,104,777
Accrued liabilities 1,821,174 2,421,180
------------------ ------------------
Total current liabilities 8,629,343 6,893,354
Notes, mortgages, and capital leases, less current portion above 5,683,137 5,713,086
Deferred income taxes 808,101 808,101
------------------ ------------------
Total liabilities 15,120,581 13,414,541
------------------ ------------------
Stockholders' equity:
Common stock, par value $.10 (10,000,000 shares authorized; 4,551,566 and
4,462,917 shares issued and outstanding at June 30, 1999
and September 30, 1998, respectively) 455,157 446,292
Additional paid-in capital 6,700,306 6,432,799
Retained earnings 3,863,112 4,868,146
------------------ ------------------
Total stockholders' equity 11,018,575 11,747,237
------------------ ------------------
$ 26,139,156 $ 25,161,778
================== ==================
</TABLE>
See notes to condensed financial statements.
2
<PAGE>
VMIC, Inc.
Condensed Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30, June 30,
1999 1998
<S> <C> <C>
Sales:
Hardware sales $ 5,889,997 $ 7,521,487
Software sales 225,528 240,497
----------------- ------------------
----------------- ------------------
Total sales 6,115,525 7,761,984
----------------- ------------------
Cost and expenses:
Cost of products sold 2,367,541 2,646,462
Research and development expense 1,251,995 1,559,705
Selling, general, and administrative expense 2,706,774 3,286,628
----------------- ------------------
----------------- ------------------
Operating (loss) income (210,785) 269,189
Other income (expense) (205,441) (108,893)
----------------- ------------------
(Loss) income before income taxes (416,226) 160,296
Benefit (provision) for income taxes 112,381 (51,294)
----------------- ------------------
Net (loss) income $ (303,845) $ 109,002
================= ==================
Net (loss) income per common and common equivalent share:
Basic $(0.067) $0.025
================= ==================
Diluted $(0.067) $0.024
================= ==================
Weighted average common and common equivalent shares outstanding:
Basic 4,549,591 4,433,752
================= ==================
Diluted 4,549,591 4,583,607
================= ==================
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
VMIC, Inc.
Condensed Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
June 30, June 30,
1999 1998
<S> <C> <C>
Sales:
Hardware sales $ 19,894,646 $ 22,521,476
Software sales 597,674 513,846
----------------- ------------------
----------------- ------------------
Total sales 20,492,320 23,035,322
----------------- ------------------
Cost and expenses:
Cost of products sold 7,680,178 7,863,991
Research and development expense 4,299,620 4,500,140
Selling, general, and administrative expense 9,371,628 9,524,170
----------------- ------------------
----------------- ------------------
Operating (loss) income (859,106) 1,147,021
Other income (expense) (517,658) (342,720)
----------------- ------------------
(Loss) income before income taxes (1,376,764) 804,301
Benefit (provision) for income taxes 371,730 (257,364)
----------------- ------------------
Net (loss) income $ (1,005,034) $ 546,937
================= ==================
Net (loss) income per common and common equivalent share:
Basic $ (0.222) $ 0.124
================= ==================
Diluted $ (0.222) $ 0.120
================= ==================
Weighted average common and common equivalent shares outstanding:
Basic 4,529,263 4,394,437
================= ==================
Diluted 4,529,263 4,544,292
================= ==================
</TABLE>
See notes to condensed financial statements.
4
<PAGE>
VMIC, Inc.
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended
June 30, June 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(1,005,034) $ 546,937
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 2,247,451 1,954,113
Provision for losses on accounts receivable 24,000 67,500
Stock issued in lieu of cash compensation 115,280 112,500
Gain on disposal of property and equipment (39,957) (3,322)
Change in operating assets and liabilities:
Accounts receivable 394,945 (357,797)
Inventories (953,508) (681,120)
Prepaid expenses 88,604 (42,742)
Income tax receivable 467,218 132,376
Accounts payable (521,224) 526,022
Accrued liabilities (600,006) 351,841
--------------- --------------
Total adjustments 1,222,803 2,059,371
--------------- --------------
Net cash provided by operating activities 217,769 2,606,308
--------------- --------------
Cash flows from investing activities:
Capital expenditures (1,383,448) (2,304,480)
Software development costs and purchased product and software costs (2,364,734) (1,446,544)
Proceeds from dispositions of property, plant,
and equipment 39,957 3,322
--------------- --------------
Net cash used in investing activities (3,708,225) (3,747,702)
--------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 2,827,270 320,624
Proceeds from issuance of common stock 161,092 1,806,298
--------------- --------------
Net cash provided by financing activities 2,988,362 2,126,922
--------------- --------------
Net (decrease) increase in cash and
cash equivalents (502,094) 985,528
Cash and cash equivalents, beginning of year 527,972 339,101
--------------- --------------
Cash and cash equivalents, end of period $ 25,878 $ 1,324,629
=============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 583,000 $ 400,000
=============== ==============
Cash paid during the period for income taxes $ 0 $ 125,000
=============== ==============
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
VMIC, Inc.
Notes to Condensed Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed financial statements of VMIC, Inc.
("VMIC") have been prepared by management in accordance with generally
accepted accounting principles for interim financial information and in
conjunction with the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, all adjustments necessary for a
fair presentation of the interim condensed financial statements have been
included, and all adjustments are of a normal and recurring nature. The
condensed financial statements as of and for the interim period ended June
30, 1999 should be read in conjunction with VMIC's financial statements as
of and for the year ended September 30, 1998 included in VMIC's Form-10
filed March 29, 1999. Operating results for the three and nine months ended
June 30, 1999 are not necessarily indicative of the results that may be
expected for the year to end September 30, 1999. The September 30, 1998
balance sheet data presented herein was derived from audited financial
statements but does not include all disclosures required by generally
accepted accounting principles.
2. Stock Options
No options to purchase shares of common stock were granted during the
quarter to employees under the Employee Stock Option Plan. Options to
purchase 15,205 shares of common stock were exercised during the quarter.
3. Comprehensive Income
VMIC does not have any difference between net income as reported and
comprehensive income.
4. Inventories
Inventories are valued at standard cost, which approximates weighted
average cost, does not exceed market, and consists of the following
Inventory
June 30, 1999 September 30, 1998
Raw Materials 2,575,193 2,388,844
Work In Process 1,343,678 829,125
Finished Goods 1,977,876 1,725,270
Totals 5,896,747 4,943,239
6
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VMIC, Inc.
Notes to Financial Statements-(Continued)
5. Technological Feasibility of Software.
VMIC deems its software technologically feasible only after the software has:
(i) passed a series of standardized quality control tests;
(ii) operated for extended periods without failure in
simulated user environments;
(iii) has been approved for release to VMIC customers.
<TABLE>
<CAPTION>
6. Earnings Per Share
A summary of the calculation of basic and diluted earnings per share is
as follows:
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------------- ----------------- ----------------
Three months ended
June 30, 1999
<S> <C> <C> <C>
Basic EPS:
Loss available to common stockholders $ (303,845) 4,549,591 $ (0.067)
Effect of dilutive securities:
Stock Options 0
Diluted EPS $ (303,845) 4,549,591 $ (0.067)
---------------- ----------------- ---------------
Three months ended
June 30, 1998
Basic EPS:
Income available to common stockholders $ 109,002 4,433,752 $ 0.025
Effect of dilutive securities:
Stock Options 149,855
Diluted EPS $ 109,002 4,583,607 $ 0.024
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------------- ----------------- ----------------
Nine months ended
June 30, 1999
<S> <C> <C> <C>
Basic EPS:
Loss available to common stockholders $ (1,005,034) 4,529,263 $ (0.222)
Effect of dilutive securities:
Stock Options 0
Diluted EPS $ (1,005,034) 4,529,263 $ (0.222)
---------------- ----------------- ---------------
Nine months ended
June 30, 1998
Basic EPS:
Income available to common stockholders $ 546,937 4,394,437 $ 0.124
Effect of dilutive securities:
Stock Options 149,855
Diluted EPS $ 546,937 4,544,292 $ 0.120
</TABLE>
8
<PAGE>
VMIC, Inc.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS QUARTERLY REPORT
CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED IN SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. THESE RISKS AND
UNCERTAINTIES ARE DISCUSSED IN MORE DETAIL IN VMIC'S REGISTRATION ON FORM 10,
AND IN THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SECTION OF THIS QUARTERLY REPORT. THESE
FORWARD-LOOKING STATEMENTS CAN BE GENERALLY IDENTIFIED AS SUCH BECAUSE THE
CONTENT OF THE STATEMENTS WILL USUALLY CONTAIN SUCH WORDS AS VMIC OR MANAGEMENT
"BELIEVES," "ANTICIPATES," "EXPECTS," "PLANS," OR WORDS OF SIMILAR IMPORT.
SIMILARLY, STATEMENTS THAT DESCRIBE VMIC'S FUTURE PLANS, OBJECTIVES, GOALS OR
STRATEGIES ARE FORWARD-LOOKING STATEMENTS.
Overview
VMIC is a leading independent designer and manufacturer of embedded computer
solutions based upon a wide variety of open standard bus designs such as VME,
CPCI, PCI, PMC, Multibus, ISA, and special custom buses. VMIC's products are
used by original equipment manufacturers ("OEMs"), systems integrators and
end-users in various industries; including industrial automation,
telecommunications, defense and test and measurement.
VMIC markets and sells more than 200 different products worldwide, including
application-specific embedded computer subsystems, board-level modules, control
and driver software, and network products. In addition to offering standard
commercial products, VMIC is involved in the development of custom products for
high-volume applications.
Recent Events
VMIC's strategy for IOWorks has changed. Although the software only market for
PC-Based Control Systems is not growing as rapidly as anticipated,VMIC believes
that it is achieving positive results by marketing hardware systems that rely on
IOWorks. While the soft logic software market is still promising, the industrial
automation market is projected to generate more than $16 billion in annual
revenues by 2001 according to the market research firm Frost and Sullivan. In
response to this anticipated market growth, VMIC has expanded its systems
products to include CompactPCI and PCI solutions and will soon enter the
distributed input and output("I/O") product market with a low-cost
private-labeled I/O product line. VMIC expects to begin volume shipments of many
of its new CompactPCI products in October 1999.
VMIC recently expanded its communications/networking products to include Fibre
Channel and FireWire, which are industry standards. In addition, VMIC's
Reflective Memory products are beginning to obtain recognition outside of the
defense industry in both the telecommunications and medical industries.
The Fibre Channel board market is projected to be over $6 billion annually by
2003. VMIC's Fibre Channel products are primarily adapter boards that are used
to network computers and communicate with high speed peripherals. For some
applications, Fibre Channel products provide higher performance at a lower cost
than Reflective Memory products.
VMIC is currently planning its marketing strategy for its FireWire product line.
FireWire is a high-performance serial bus ideal for interconnecting the
components of modular real time systems. FireWire supports low cost and
9
<PAGE>
deterministic communications. FireWire peripherals such as hard disks, Digital
Audio Tape (DAT), Digital Video Disks (DVD), digital video and audio equipment
are available now. The FireWire specification was designed to replace older
peripheral communication technology. VMIC believes that there exists marketing
opportunities for this technology in traffic control systems.
VMIC has expanded its CompactPCI product line to include Fibre Channel,
FireWire, Reflective Memory, Pentium Single-Board Computers, I/O boards, and I/O
systems including IOWorks personal computer-Based Control Software. The
CompactPCI market is projected to grow from $100 million annually to $1.9
billion annually by 2003 according to market research by Electronic Trend
publications.
VMIC has focused significant resources on growing its telecommunications
business by developing Compact PCI Pentium central processing units ("CPUs"),
Reflective Memory, and Fibre Channel specifically for this market. A major
leading telecommunication corporation has selected VMIC's Pentium CPUs for
speech recognition and switching applications. VMIC is also negotiating the use
of Reflective Memory and VMIC's Fibre Channel products with a leading
telecommunications company. Another leading telecommunication company is
evaluating VMIC's Reflective Memory for new CompactPCI telecommunication
switching applications and VMIC's has received CPCI Pentium CPUs for digital
television signal switching applications and Internet functions.
Comparison of Operating Results for the Three and Nine Month Periods Ending
June 30, 1998 and June 30, 1999
SALES. Sales for the nine months ending June 30, 1999 were $20.5 million as
compared to $23 million for the same period in 1998. Sales decreased 21.2
percent to $6.12 million for the three month period ending June 30, 1999 from
$7.76 million for the period ending June 30, 1998. VMIC believes that the
decrease in sales for the nine month period and the three month period ending in
June 30, 1999 was attributable to technology changes in defense simulation and
training, delayed projects from several customers, reductions in spending by
nuclear power plants for simulation and training and power plant monitoring I/O
systems. In particular, I/O systems sales decreased 35 percent to $4.64 million
for the nine month period ending June 30, 1999 as compared to $7.14 million for
the nine month period ending June 30, 1998. I/O systems sales for the three
month period ending June 30, 1998 decreased 45.9 percent to $1.24 million as
compared to $2.29 million for the three month period ending June 30, 1998. This
decrease in I/O systems sales was the primary reason for our sales decrease for
the nine month period ending June 30, 1999.
Hardware sales accounted for approximately $5.9 million while software sales
accounted for approximately $225 thousand for the three month period ending June
30, 1999. Hardware sales accounted for approximately $7.5 million while software
sales accounted for approximately $241 thousand for the three month period
ending June 1998. Sales of VMIC's Reflective memory products accounted for
approximately $1.5 million or 25 percent of VMIC's hardware sales for the three
month period ended June 30, 1999, compared to $1.65 million or 21.2 percent of
sales during the same period in 1998.
Hardware sales accounted for approximately $20 million of VMIC's sales for the
nine- month period ended June 30, 1999, compared to 23 million during the same
period in 1998. Software sales increased to $0.6 million for the nine month
period ended June 30, 1999, from $0.5 million for the same period in 1998. Of
the hardware sales, sales of VMIC's reflective Memory products accounted for
$5.6 million, or 27.4 percent of VMIC's sales for the nine month period ended
June 30, 1999, compared to $6.0 million , or 26.2 percent for the same period in
1998.
COST OF SALES. Cost of Sales as a percentage of sales increased from 34.1
percent for the three month period ending June 30, 1998 to 38.7 percent for the
same period ending June 30, 1999. Total cost of sales decreased from $2.7
million for the three month period ending June 30, 1999 as compared to $2.4
million for the same period ending June 30, 1999. For the nine month period
ended June 30, 1999 Cost of sales decreased to $7.7 million from $7.9 million
for the nine month period ended June 30, 1998. Cost of Sales increased as a
percentage of sales increased from 34.1 percent for the nine month period
10
<PAGE>
ending June 30, 1998 to 37.4 percent for the same period ending June 30, 1999.
Cost of sales decreased because of the decrease in revenues. Cost of sales as a
percentage of total sales increased because of increased sales of lower margin
products such as single board computers and higher production overhead.
GROSS MARGINS. VMIC's average gross margin decreased from 65.9 percent in the
three month period ended June 30, 1998 to 61.3 percent in the three month period
ended June 30, 1999. During this period the gross margin for hardware decreased
from 66.5 percent to 62.8 percent. The gross margin for software was 21.8
percent for the three month period ending June 30, 1999 as compared to 48.1
percent for the same period in 1998. VMIC's average gross margin decreased from
62.5 percent in the nine month period ended June 30, 1998 to 62.5 percent in the
nine month period ended June 30, 1999. During this period the gross margin for
hardware decreased from 66.3 percent to 63.8 percent and the software margin
decreased to 19.1 percent from 46.7 percent. The reduced software margins are
due to increasing depreciation expenses resulting from VMIC's continued R&D
investment in software. The decrease in hardware margins are primarily due to
increased sales of products with lower gross margins such as single-board
computers and the increase in production overhead because of lower overall
sales.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative expenses decreased approximately 17.6 percent from $3.3 million
for the period ending June 30, 1998 to $2.7 million for the period ending June
30, 1999. Selling, General, and Administrative expenses decreased approximately
1.6 percent from $9.5 million for the nine month period ended June 30, 1998 to
$9.4 million for the nine month period ended June 30, 1999. The decrease in
Selling, General and Administrative expenses resulted primarily from a reduction
of staff from 251 employees as of June 30, 1998 to 214 employees as of June 30,
1999. Sales commissions decreased substantially because of lower sales for the
three month period ending June 30, 1999 as compared to the period ending June
30, 1998.
RESEARCH AND DEVELOPMENT EXPENSE. Research and Development expenses decreased
19.9 percent from $1.6 million for the three month period ending June 30, 1998
to $1.3 million for the three month period ending June 30, 1999. Research and
Development expenses decreased 4.5 percent from $4.5 million for the nine month
period ending June 30, 1998 to $4.3 million for the nine month period ending
June 30, 1999. The reduction in Research and Development expense is mainly
attributable to a reduction in staffing levels from 90 employees as of June 30,
1998 to 86 employees as of June 30, 1999.
INCOME TAXES. Income taxes as a percentage of income before taxes was 27 percent
in the three month period ended June 30, 1999, compared to 32 percent in the
three month period ended June 30, 1998. Income taxes as a percentage of income
before taxes was 27 percent in the nine month period ended June 30, 1999,
compared to 32 percent in the nine month period ended June 30, 1998.
EARNINGS PER SHARE. For the three month period ended June 30, 1999 net loss per
weighted average common and common equivalent share was $0.067 per basic share
compared to net income of $0.025 per basic share for the three month period
ended June 30, 1998. For the three month period ended June 30, 1999, net loss
per weighted average common and common equivalent share, assuming dilution, was
$0.067 per diluted share compared to net income of $0.024 per diluted share for
the three month period ended June 30, 1998. For the nine month period ended June
30, 1999, net loss per weighted average common and common equivalent share was
$0.222 per basic share compared to net income of $0.124 per basic share for the
nine month period ended June 30, 1998. For the nine month period ended June 30,
1999, net loss per weighted average common and common equivalent share, assuming
dilution, was $0.222 per diluted share compared to net income of $0.120 per
diluted share for the nine month period ended June 30, 1998.
11
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CAPITALIZED SOFTWARE DEVELOPMENT COSTS. At June 30, 1999 VMIC had three
categories of software products under development. These were:
Software Product Capitalized Amount
---------------- -------------------
IOWorks..........................................$ 4,830,000
Reflective Memory................................$ 369,000
CPU related......................................$ 251,000
EFFECTS OF INFLATION.
Substantially all contracts awarded to VMIC have been based on proposals which
reflect estimated cost increases due to inflation. Historically, inflation has
not been a significant impact on VMIC.
LIQUIDITY AND CAPITAL RESOURCES.
Historically, VMIC's cash flow from operations and available credit facilities
have provided adequate liquidity and working capital to fully fund VMIC's
operational needs. As of June 30, 1999, VMIC's variable line of credit for
working capital was $6.1 million, of which $2.6 million was used. VMIC's $2
million equipment line of credit availability was $1.4 million.
Working Capital was $4.7 million at September 30, 1998 and $2.5 million at June
30, 1999 respectively. Included in working capital are cash and cash equivalents
of $26 thousand at June 30, 1998 compared to $0.5 million at September 30, 1998.
This decrease occurred as a result of the net loss experienced for the quarter
ended June 30, 1999 and changes in operating assets and liabilities. Current
Liabilities was $8,629,343 at June 30, 1999 compared to $6,893,354 million at
September 30, 1998. This increase was primarily the result of VMIC's increased
use of its credit line to fund Working Capital requirements. Operating
activities for the nine month period ending June 30, 1999 provided $0.2 million
of cash. Cash used for investing activities was $3.7 million for the nine months
ended June 30, 1999, of which $1.4 million was used for capital expenditures.
Cash provided by financing activities was $2.1 million and $3.0 million for the
nine months ended June 30, 1998 and 1999, respectively.
Inventory turnover for the nine months ended June 30, 1999 was approximately 212
days compared to approximately 164 days for the same period in 1998. This
increase was attributable to increased component inventory levels which allow
for faster filling of customer purchase orders and better response times for
warranty returns and replacements. Accounts receivable from customers were
outstanding on average approximately 52 days for the nine months ended June, 30
1998, compared to approximately 49 days in for the same period in 1998. This
increase is mainly attributable to one negotiated account which is scheduled to
be collected in July, 1999.
VMIC believes that its financial resources, including its internally generated
funds and debt capacity, will be sufficient to finance its current operations
and capital expenditures for the next 12 months. However, management is
examining several options to raise working capital to pay down its revolving
line of credit.
YEAR 2000 READINESS DISCLOSURE
OVERVIEW. Historically, certain computerized systems have had two digits rather
than four digits to define the applicable year, which could result in
recognizing a date using "00" as the year 1900 rather than the year 2000. This
could cause significant software failures or miscalculations and is generally
referred to as the "Year 2000" problem.
12
<PAGE>
VMIC recognizes that the impact of the Year 2000 problem extends beyond its
computer hardware and software and may affect utility and telecommunication
services, as well as the system of customers and suppliers. The Year 2000
problem is being addressed by a team within VMIC and progress is reported
periodically to management. VMIC has committed resources to conduct extensive
risk assessments and to take corrective action, where appropriate, within each
of the following areas:
VMIC PRODUCTS. VMIC has initiated extensive internal Year 2000 testing and
analysis of its products. VMIC believes that a majority of its products are Year
2000 compliant and VMIC anticipates maintaining compliance in future revisions
of any product that is currently compliant.
INTERNAL INFORMATION SYSTEMS. VMIC's internal information systems utilize
hardware and software from several commercial suppliers. VMIC has investigated
its internal information systems for Year 2000 compliance, and certain
modifications have already been identified and corrected on critical systems to
ensure that VMIC's operations will be Year 2000 compliant. VMIC's most critical
system, MRPII, has been upgraded and is certified Year 2000 compliant. The phone
system is scheduled for immediate upgrade. Several of the network servers will
require upgrading, however, because the vendor continues to upgrade their
products for Year 2000 compliance, VMIC has elected to delay upgrading these
servers until the period ending September 30, 1999.
THIRD PARTIES. VMIC has surveyed all of its internal systems and software for
Year 2000 compliance and has received Year 2000 compliance certification from
the suppliers of the systems and software that are compliant. Non-compliant
systems and software have been or will be upgraded or replaced to achieve
compliance. It is VMIC's intention to become Year 2000 compliant; however,
uncertainties exist about the thoroughness of how other companies, vendors,
customers and other service providers that VMIC does business with will be
successful at also becoming Year 2000 compliant. These other companies,
regardless of the dollar volume transacted with VMIC, may significantly affect
either directly or indirectly the operations of VMIC. Where practicable, VMIC
will attempt to mitigate its risks with respect to the failure of suppliers to
be Year 2000 compliant. In the event that suppliers are not Year 2000 compliant,
VMIC will seek alternative sources of supplies. However, such failures remain a
possibility and could have an adverse impact on VMIC's results of operations or
financial condition.
COST FOR YEAR 2000 COMPLIANCE. VMIC believes that the total cost of Year 2000
compliance activity will not be material to VMIC's operations, liquidity and
capital resources. VMIC estimates that the total cost for its Year 2000
compliance will be approximately $55,000, which represents 833 hours of internal
analysis, modification and testing and $15,000 for hardware and software
upgrades. As of June 30, 1999, VMIC had completed its software and hardware
upgrades and approximately 772 of hours of Year 2000 analysis, modification and
testing at a cost of approximately $52,000.
YEAR 2000 RISKS FACED BY VMIC. Although VMIC believes that its Year 2000
compliance program is comprehensive, VMIC may not be able to identify,
successfully remedy or assess all date-handling problems in its business systems
or operations or those of its customers and suppliers. As a result, the Year
2000 problem could have a materially adverse affect on VMIC's business financial
condition or results of operation.
13
<PAGE>
PART II - OTHER INFORMATION
Signatures
MANAGEMENT REPRESENTATION. The accompanying unaudited Balance Sheet
at June 30, 1999, and Balance Sheet at September 30, 1998 as well as the
unaudited Statements of Income for the three and nine months ended June 30,
1999, and 1998, and the Statements of Cash Flows for the nine months ended June
30, 1999, and 1998 have been prepared in accordance with instructions to Form
10-Q and do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, consisting only of normal recurring
accruals, considered necessary for a fair presentation have been included.
Gordon Hubbert
--------------
August 13, 1999 By: Gordon Hubbert
Date
Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VMIC, Inc.
Carroll E. Williams
-------------------
August 13, 1999
By: Carroll E. Williams
Date
President and Chief
Executive Officer
14
