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 December 31, 1998
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
4,447,586 SHARES OUTSTANDING ON December 31, 1998
----------------------------
<PAGE>
FORM 10-Q
VMIC, Inc.
QUARTERLY REPORT FOR THE PERIOD ENDED DECEMBER 31, 1998
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements
Statements of Income for the Three Months Ended
December 31, 1998 and December 31, 1997 (Unaudited).............3
Balance Sheets as of December 31, 1998 (Unaudited)
and September 30, 1998..........................................4
Statements of Cash Flows for the Three Months
Ended December 31, 1998 and December 31, 1997 (Unaudited)......5
Notes to Condensed Financial Statements (Unaudited).............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................8
Part II. OTHER INFORMATION
Signatures......................................................12
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
VMIC, Inc.
Condensed Balance Sheets
December 31, December 31
1998 1998
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents
$ 527,972
Accounts receivable (includes allowance for doubtful accounts of $396,383
and $384,383 at December 31, 1998 and September 30, 1998,
respectively) $ 4,393,515 4,366,330
Inventories 5,425,108 4,943,239
Prepaid expenses 323,540 250,733
Income tax receivable 573,771 573,771
Deferred income taxes 954,929 954,929
----------------- ------------------
Total current assets 11,670,863 11,616,974
Property, plant, and equipment, net 8,732,213 9,033,922
Purchased product and software costs, net 982,079 967,852
Software development costs 4,243,540 3,543,030
----------------- ------------------
$ 25,628,695 $ 25,161,778
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
liabilities:
Accounts payable $ 2,025,260 $ 2,367,397
Bank overdraft 204,139
Current portion of notes, mortgages, and capital leases 2,394,437 2,104,777
Accrued liabilities 1,796,764 2,421,180
----------------- ------------------
Total current liabilities 6,420,600 6,893,354
Notes, mortgages, and capital leases, less current portion above 6,744,280 5,713,086
Deferred income taxes 808,101 808,101
----------------- ------------------
Total liabilities 13,972,981 13,414,541
----------------- ------------------
Stockholders' equity:
Common stock, par value $.10 (10,000,000 shares authorized; 4,528,280 and
4,462,917 shares issued and outstanding at December 31, 1998
and September 30, 1998, respectively) 452,828 446,292
Additional paid-in capital 6,625,879 6,432,799
Retained earnings 4,577,007 4,868,146
----------------- ------------------
Total stockholders' equity 11,655,714 11,747,237
----------------- ------------------
$ 25,628,695 $ 25,161,778
================= ==================
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
VMIC, Inc.
Condensed Statements of Income
(Unaudited) Three months ended
December 31, December 31,
1998 1997
<S> <C> <C>
Sales:
Hardware sales $ 7,504,586 $ 7,437,668
Software sales 200,511 146,563
----------------- ------------------
----------------- ------------------
Total sales 7,705,097 7,584,231
----------------- ------------------
Cost and expenses:
Cost of products sold 2,851,280 2,530,492
Research and development expense 1,582,253 1,478,978
Selling, general, and administrative expense 3,535,523 3,096,930
----------------- ------------------
7,969,056 7,106,400
----------------- ------------------
Operating (loss) income (263,959) 477,831
Other income (expense) (138,302) (122,304)
----------------- ------------------
(Loss) income before income taxes (402,261) 355,527
Benefit (provision) for income taxes 111,110 (113,768)
----------------- ------------------
Net (loss) income $ (291,151) $ 241,759
================= ==================
Net (loss) income per common and common equivalent share:
Basic $(0.065) $0.058
================= ==================
Diluted $(0.065) $0.056
================= ==================
Weighted average common and common equivalent shares outstanding:
Basic 4,447,586 4,135,117
================= ==================
Diluted 4,447,586 4,284,973
================= ==================
</TABLE>
See notes to condensed financial statements..
4
<PAGE>
<TABLE>
<CAPTION>
VMIC, Inc.
Condensed Statements of Cash Flows
Three months ended
December, 31 December, 31
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (291,151) $ 241,759
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 733,112 616,045
Provision for losses on accounts receivable 12,000 22,500
Stock issued in lieu of cash compensation 20,700 37,500
Gain on disposal of property and equipment (24,854) -
Change in operating assets and liabilities:
Accounts receivable (39,185) (31,684)
Inventories (481,869) (61,984)
Prepaid expenses (72,807) (38,974)
Income tax receivable (111,110) 13,768
Accounts payable (342,145) 621,440
Accrued liabilities (513,306) 115,991
---------------- ----------------
Total adjustments (819,464) 1,294,602
---------------- ----------------
Net cash (used in) provided by operating activities (1,110,615) 1,536,361
---------------- ----------------
Cash flows from investing activities:
Capital expenditures (299,959) (672,894)
Software development costs and purchased product and software costs (846,161) (443,057)
Proceeds from dispositions of property, plant,
and equipment 24,854 0
---------------- ----------------
Net cash used in investing activities (1,121,266) (1,115,951)
---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,320,854 0
Principal payments on long-term debt 0 (606,413)
Increase in bank overdraft 204,139 0
Proceeds from issuance of common stock 178,916 1,801,708
---------------- ----------------
Net cash provided by financing activities 1,703,909 1,195,295
---------------- ----------------
Net (decrease) increase in cash and
cash equivalents (527,972) 1,615,705
Cash and cash equivalents, beginning of year 527,972 339,101
---------------- ----------------
Cash and cash equivalents, end of period $ 0 $ 1,954,806
================ ================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 170,000 $ 138,000
================ ================
Cash paid during the period for income taxes $ 0 $ 125,000
================ ================
See notes to condensed financial statements.
</TABLE>
5
<PAGE>
VMIC, Inc.
Notes to Condensed Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed financial statements of VMIC, Inc. (the
Company) 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 December 31, 1998 should be read in
conjunction with the Company's financial statements as of and for the year
ended September 30, 1998 included in the Company's Form-10 filed March 29,
1999. Operating results for the three months ended December 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
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. Also, options to purchase 57,363
shares of common stock were exercised during the quarter.
3. Comprehensive Income
The Company does not have any difference between net income as reported
and comprehensive income.
6
<PAGE>
<TABLE>
<CAPTION>
VMIC, Inc.
Notes to Financial Statements-(Continued)
4. 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
December 31, 1998
<S> <C> <C> <C>
Basic EPS:
Loss available to common stockholders $ (291,151) 4,447,586 $ (0.065)
Effect of dilutive securities:
Stock Options 0
Diluted EPS $ (291,151) 4,447,586 $ (0.065)
---------------- ----------------- ---------------
Three months ended
December 31, 1997
Basic EPS:
Income available to common stockholders $ 241,759 4,135,117 $ 0.058
Effect of dilutive securities:
Stock Options 149,856
Diluted EPS $ 241,759 4,284,973 $ 0.056
</TABLE>
7
<PAGE>
FORM 10-Q
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 THE COMPANY'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 THE COMPANY OR
MANAGEMENT "BELIEVES," "ANTICIPATES," "EXPECTS," "PLANS," OR WORDS OF SIMILAR
IMPORT. SIMILARLY, STATEMENTS THAT DESCRIBE THE COMPANY'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. The Company's
products are used by original equipment manufacturers ("OEMs"), systems
integrators and end-users in various industries; including manufacturing
automation, Telecommunications, Simulation and Training, environmental
monitoring, and Test and Measurement.
The Company 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, the Company is involved in
the development of custom products for high-volume applications.
VMIC continues to invest heavily in new and enhanced technology,
including software, and has focused its attention on highly vertical markets to
support faster growth, more consistent profitability, and enhanced shareholder
value.
COMPARISON OF OPERATING RESULTS FOR FISCAL FIRST QUARTER 1999
WITH FISCAL FIRST QUARTER 1998
SALES. Sales increased 1.6 % to $7.70 million for the three-month
period ended December 31, 1998, from $7.58 million for the three-month period
ended December 31, 1997. Hardware sales accounted for approximately $7.5 million
or 97 % of the Company's sales for the three-month period ended December 31,
1998, compared to $7.4 million or 98 % of sales during the same period in 1997.
Of the hardware sales, sales of the Company's reflective Memory products
accounted for approximately $2.17 million or 28 % of the Company's sales for the
three-month period ended December 31, 1998, compared to $2.20 million or 29 % of
sales during the same period in 1997. The Company's software sales of IOWorks
accounted for approximately $201 thousand or 3 % of the Company's sales for the
three-month period ended December 31, 1998, compared to $147 thousand or 2 % of
sales during the same period in 1997. International sales increased 53.6 % to
$2.06 million for the three-month period ended December 31, 1998, from $1.34
million for the three-month period ended December 31, 1997.
8
<PAGE>
GROSS MARGINS. The Company's average gross margin decreased from 66.6 % in
the three-month period ended December 31, 1997 to 63.0 % in the three-month
period ended December 31, 1998. During this period the gross margin for hardware
decreased from 67.5 % to 63.8 %and software margins decreased from 54.6 % to
34.5 %. This increase is attributed to increased sales of lower-margin
single-board PC computers, increased warranty expense and the amortization
associated with the Company's capitalized software product investment
COST OF SALES. Cost of sales increased 12.6% from $2.53 million for the
three-month period ended December 31, 1997 to $2.85 million for the three-month
period ended December 31, 1998. This increase is attributed to increased sales
of lower-margin single-board PC computers, increased warranty expense and the
amortization associated with the Company's capitalized software product
investment.
GROSS PROFIT. For the three-month period ended December 31, 1998, gross
profit decreased 4 % to $4.85 million, from $5.05 million for the three-month
period ended December 31, 1997. This decrease is attributed to increased sales
of lower-margin single-board PC computers, increased warranty expense and the
amortization associated with the Company's capitalized software product
investment.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. For the three-month
period ended December 31, 1998, selling, general, and administrative (SG&A)
expenses increased approximately 14 %, from $3.10 million for the three-month
period ended December 31, 1997 to $3.50 million for the three-month period ended
December 31, 1998. This increase is primarily attributed the growth of the
Company's sales organization. During the first quarter, the Company addressed
its increasing SG&A expenses by reducing its administrative work force. The
Company believes that SG&A cost reductions will be realized commencing in the
second quarter of the 1999 fiscal year.
RESEARCH AND DEVELOPMENT EXPENSE. For the three-month period ended
December 31, 1998, research and development (R&D) expenses increased 6.7 %, from
$1.48 million for the three-month period ended December 31, 1997 to $1.58
million for the three-month period ended December 31, 1998. R&D expense as a
percentage of sales increased to 20.5 for the three-month period ended December
31, 1998 from 19.5 % in the three-month period ended December 31, 1997. The
Company's increased R&D expenses resulted from increased investments in software
development. During the first quarter, the Company addressed its increasing R&D
expenses by reducing its R&D work force.
INTEREST EXPENSE. Interest expenses increased 23.2 %, from $138
thousand for the three-month period ended December 31, 1997 to $170 thousand for
the three-month period ended December 31, 1998. This increase is attributed to
the construction loans for the new sales building, increases in capital
investments for machinery and computers, and interest on the Company's line of
credit.
INCOME TAXES. Income taxes as a percentage of income before taxes was 27.6
% in the three-month period ended December 31, 1997 as compared to 32.0 % in the
three-month period ended December 31, 1997.
EARNINGS PER SHARE. For the three-month period ended December 31, 1998,
net loss per weighted average common and common equivalent share was $(0.065)
per basic share compared to net income of $0.058 per basic share for the
three-month period ended December 31, 1997. For the three-month period ended
December 31, 1998, net loss per weighted average common and common equivalent
share, assuming dilution, was $(0.065) per diluted share compared to net income
of $0.056 per diluted share for the three-month period ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's cash flow from operations and available credit
facilities have provided adequate liquidity and working capital to fully fund
the Company's operational needs. As of December 31, 1998, the Company's $7
million working line of credit availability was $5.83 million, and its $2
million equipment line of credit availability was $890,000
9
<PAGE>
Working capital was $4.7 million and $5.3 million at September 30, 1998
and December 31, 1998, respectively. Cash used in operating activities was$(1.1)
million for the three months ended December 31, 1998 as compared to cash
provided by operating activities of $1.5 million for the three months ended
December 31, 1997 this decrease occurred as a result of the net loss experienced
for the quarter ended December 31, 1998 and changes in operating assets and
liabilities. Cash used for investing activities was $(1.1) million for both the
three months ended December 31, 1998 and 1997. Cash provided by financing
activities was $1.7 million and $1.2 million for the three months ended December
31, 1998 and 1997, respectively.
The Company believes that its financial resources, including its internally
generated funds and debt capacity, will be sufficient to finance the Company's
current operations and capital expenditures for the next 12 months.
EFFECTS OF INFLATION
Substantially all contracts awarded to the Company have been based on
proposals which reflect estimated cost increases due to inflation. Historically,
inflation has not had a significant impact on the Company.
YEAR 2000
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.
The Company 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 systems of customers and suppliers.
The Year 2000 problem is being addressed by a team within the Company and
progress is reported periodically to management. The Company 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. The Company 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. The Company's internal information systems
utilize hardware and software from several commercial suppliers. The Company 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 the Company's operations will be Year 2000 compliant.
This effort will continue throughout 1998 and 1999.
THIRD PARTIES. The Company has had initial communications with certain of
its significant suppliers and customers to evaluate their Year 2000 compliance
plans, state of readiness and to determine the extent to which the Company's
systems may be affected by the failure of others to remedy their own Year 2000
issues. VMIC is conducting a Year 2000 certification program with all of its
critical suppliers, which will be completed by the end of 1998. In addition,
Year 2000 compliance is a prerequisite to new supplier relationships. VMIC is
also in the process of distributing a Year 2000 assessment form to other parties
in order to provide VMIC with further information as to their Year 2000
conversion progress. However, the Company has received only preliminary
responses from such parties and has not independently confirmed all of the
information received from other parties with respect to the Year 2000 issues. As
such, there can be no assurance that such other parties will complete their Year
2000 conversion in a timely fashion or will not suffer a Year 2000 business
disruption that may adversely affect the Company's business, financial condition
or results of operations.
CONTINGENCY PLANS. Because the Company's Year 2000 conversions are
expected to be completed prior to any potential disruption to the Company's
business, VMIC has not yet completed the development of a comprehensive Year
2000 specific contingency plan. If VMIC determines that its business is at
material risk of disruption due to the Year 2000 problem, or anticipates that
its Year 2000 conversion will not be completed in a timely fashion, the Company
will work to enhance its contingency plan.
10
<PAGE>
COST FOR YEAR 2000 COMPLIANCE. The Company believes that the total cost
of Year 2000 compliance activity will not be material to the Company's
operations, liquidity and capital resources. VMIC estimates that the total cost
for its Year 2000 compliance will be approximately $55,600, which represents 833
hours of internal analysis, modification and testing and $15,000 for hardware
and software upgrades. As of December 31, 1998, the Company had completed 450
hours of Year 2000 compliance work at a cost of $21,600.
YEAR 2000 RISKS FACED BY VMIC. Although the Company believes that its
Year 2000 compliance program is comprehensive, the Company 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 the
Company's business financial condition or results of operation.
11
<PAGE>
FORM 10-Q
VMIC, Inc.
PART II - OTHER INFORMATION
SIGNATURES
MANAGEMENT REPRESENTATION
The accompanying unaudited Balance Sheets at December 31, 1998, and
December 31, 1997 as well as the Statements of Income, Statements of Changes in
Stockholders' Equity and Statements of Cash Flows for the three months December
31, 1998, and 1997, 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.
June 22, 1999
By:Gordon Hubbert
Date
Gordon Hubbert
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.
June 22, 1999 By:Carroll E. Williams
Date Carroll E. Williams
President and Chief
Executive Officer
VMIC, Inc.
12
