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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED SEPTEMBER 30, 2000.
( ) 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 63-0917261
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
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12090 S. Memorial Parkway Huntsville Alabama 35803-3308
(256) 880-0444
(Address, including zip code and telephone number of principal offices)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
(Title of Class)
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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 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. [ ]
As of September 30, 2000, there were 4,668,403 shares outstanding of
VMIC Common Stock, $.10 par value. The aggregate value of the voting stock held
by non-affiliates of the registrant was approximately $43,182,728 based on the
price of such stock with respect to a sale transaction at $9.25 per share for
400 shares on October 19, 2000 assuming that all shares beneficially held by
officers and members of the registrant's Board of Directors are shares owned by
"affiliates," a status which each of the officers and directors individually
disclaims.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of VMIC's definitive Proxy Statement furnished to shareholders
in connection with the Annual Meeting of Shareholders to be held on February 18
2001 are incorporated by reference with respect to Part III of Form 10-K.
FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this document 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 Management's Discussion and Analysis of
Financial Condition and Results of Operations section of this Annual 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.
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PART I
ITEM 1. BUSINESS
General
VMIC (the Company) is a supplier of standard bus boards, software, and
systems products that are used in applications involving markets such as
telecommunications, medical, industrial automation, test and measurement, and
defense. VMIC also offers products for the storage area network (SAN) market and
the computer clustering/networking industry. SAN and computer clustering/
networking have wide applications throughout the computer industry.
The Company offers primarily three product lines which consist of:
o Embedded Intel(R) central processing units or CPUs/SBCs
o Communications/networking products, such as Fibre Channel, SCSI,
gigabit Ethernet, and Reflective Memory networks
o Data Acquisition and Control or Input/Output Boards and Systems
Of these three product lines, we see the highest growth in SBCs and
communications/networking products. The Company's historical niche markets,
which generate high margins, are primarily in flight simulation and training,
defense, power plant monitoring, and power plant simulation and training which
primarily utilize the Company's data acquisition and control products.
VMIC specializes in open architecture, nonproprietary, standard
computer buses, such as VMEbus, PCI bus, CompactPCI(R) (CPCI), and PMC. In
addition, the Company has expanded its product lines to include DIN Rail mount
applications. These open architecture solutions are supported by companies such
as Motorola, Intel, Hewlett-Packard, Sun, Microsoft, Dell, Compaq, and other
leaders in the industry. The Company manufactures its own products to enable it
to meet its customers' demands for high quality, responsiveness, reliability,
and low cost, while reducing time-to-market and life cycle costs. The Company's
manufacturing facility supports medium-volume, high-mix production and
high-volume production using state-of-the-art equipment. The Company markets its
products in more than 60 countries through a direct sales staff and a network of
manufacturers' representatives, international distributors, and remote offices
in Texas, the Carolinas, and Paris, France.
The Company's products are used in:
o Communications and networking of computer and computer
storage systems
o Wireless bus stations
o Telecom call servers
o Telecom firewalls
o Telecom test equipment
o High-availability fiber-optic switching
o Voice recognition systems
o Medical testing machines
o Telephone switching
o Digital television signal routing
o Rolling mills for steel and aluminum
o Textile machines
o Munitions testing
o Engine propulsion systems
o Automotive manufacturing machines
o Aircraft wheel testing systems
o Robotic arm control systems, and other applications
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The Company's SBC product line is based upon Intel architecture and
includes a broad line of VME and CPCI-based computer boards and software. We
recently have expanded the product line to include small DIN rail computer
boxes. This is a high-growth product line and has recently contributed to
substantial contract awards and revenue growth.
VMIC's communications/networking products include Reflective Memory
Networks, Fibre Channel, and gigabit Ethernet. The Company's historical focus in
this product area has been Reflective Memory Networks, which are proprietary
high-performance fiber-optic communication products designed for applications
which require low latency and deterministic operations. The Company has expanded
its focus to include industry standard communications/network products such as
Fibre Channel, SCSI, and gigabit Ethernet. The Company's focus for Fibre Channel
is primarily the embedded computer industry while most larger competitors are
focused on the server market.
The Company also offers a broad range of I/O products based upon open
architecture buses such as PCI, CPCI, VME and DIN rail mount. This family of I/O
products includes data acquisition and control boards and system-level products.
The Company plans to continue to market its products in markets such as
data acquisition and control, defense, test and measurement, industrial
automation, medical, and other markets; however, we expect substantial growth in
the telecom/datacom market. The Company has recently won significant contracts
in telecommunications/datacom, defense, medical, and the SAN markets. Orders,
backlog, sales, and profits are increasing, establishing new records of
performance.
While the total telecommunications and communications (datacom) markets
are very large, the product areas in which VMIC is focused are estimated to have
annual sales between $8 and $10 billion dollars. The Company believes that each
of these markets offers unique opportunities in that the demands of each market
are changing. The market's demand for high-speed communications/networking and
high-performance embedded PC computers focused on open architecture bus
standards and leading software operating systems such as Linux, Windows
NT(R)/2000, Solaris, VxWorks, and others present significant opportunities for
the Company.
VMIC is focused on the development, sales, and marketing of products
designed for original equipment manufacturers (OEMs) applications. OEMs provide
the Company a source of revenue growth generated from replicated sales of high
volumes of single products, which are key elements in customers' products. The
Company is focusing on hardware and software products based on Intel
processor-based embedded computers and communications/networking products and
PC-based controllers utilizing our SBCs and software for OEM applications.
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The Company's strategic vision is to offer standard bus boards,
software, and systems to high-growth markets with a focus on PC SBCs and
communications/networks. Our strategy in the SBC market is to offer leading-edge
PC computer technology for standard products and attract high-volume OEM
business through mass customization for key accounts. The Company has recently
added to its customer list companies such as Litton Data, Nuspeed/Cisco,
Paravant, Lucent, Battelle/Cytyc, and others. The strategy for growth in
communications/networking is to focus on the Fibre Channel/SCSI, high-speed
gigabit Ethernet, and Reflective Memory product lines. Our focus for these
product lines is in the embedded computer market and the broader server markets.
The Company has recently won design-ins and contracts in the SAN and computer
clustering markets with companies such as Nuspeed/CISCO, QUALCOMM, Lucent,
Concurrent, and others, and our products are seriously being considered by other
leading companies.
To effect the strategy, the Company has (1) invested in developing a
line of communications/networking products based on Fibre Channel, gigabit
Ethernet, SCSI, and enhancements of Reflective Memory Networks (RM), (2)
invested in a comprehensive line of embedded PC Intel processor-based computer
boards and joined Intel's third-party board vendor (TPBV) program, (3) invested
in PC-based control software and controller products for industrial automation
to expand the SBC revenue base into industrial automation, (4) established an
extensive worldwide network of distributors and sales representatives, (5)
implemented a sales approach wherein VMIC acts as an extension of the customers'
R&D organization for mass customization OEM opportunities, (6) penetrated the
SAN industry with an extensive line of Fibre Channel, gigabit Ethernet, and SCSI
products, (7) focused on increasing intellectual property, including patents and
close strategic partnerships for key markets and product lines, (8) leveraged
and expanded our state-of-the-art manufacturing capacity, (9) focused our
investments and marketing primarily on communications/networks and embedded PC
SBCs, (10) expanded software investments to support the Company's standard bus
board and systems product line, and (11) executed agreements with leaders in the
industry for Fibre Channel, gigabit Ethernet, and SCSI technology, and (12)
executed an agreement with a leading industrial automation company to expand
VMIC's products into industrial automation with a focus on OEM opportunities.
This agreement includes co-marketing and new product development sharing, as
well as cross product marketing. The Company has also increased partnerships
with market leaders in high-growth large markets and suppliers for hardware,
firmware, and software technology to develop new products and enhance existing
products for these markets.
Management believes that it is successfully transitioning the Company
from a niche market and niche product company to a company highly focused on
large vertical markets with products designed for OEM applications. The Company
has recently experienced four consecutive quarters of substantially improved
operating margins and profitability with substantial increases in backlog and
operating efficiencies. In addition, the Company's book-to-bill ratio for the
twelve-month period ending September 30, 2000 has been greater than 1.0 for
sixteen consecutive months.
The Company's objective is to become a leading supplier of standard bus
board-level products and software to the embedded computer and telecom/datacom
markets with a focus on high-volume OEM applications. The embedded computers are
different from general-purpose computers in that embedded computers are designed
to perform repetitive tasks, whereas other computers are more flexible in their
use and applications. Embedded computer products are used throughout markets,
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such as telecommunications, defense, medical, industrial automation, and test
and measurement. The Company differentiates itself in these markets through a
feature-rich hardware product line and supporting software that decreases the
need for customers to invest in product development and support. We also focus
on market segments that enable us to grow at reasonable rates and at attractive
margins.
The Company believes that its expertise in the embedded computer market
will provide the catalyst for the Company's success in the high-growth
communications/networking market with expanded and unique Fibre Channel, gigabit
Ethernet, new Reflective Memory, and SCSI products, in addition to SAN-enabled
PC SBCs. Interest in the Company's SBC product line has recently increased
because of the our experience and focus on the communications/networking market.
The Company has recently signed contracts with LSI and QLogic to enhance their
product lines with state-of-the-art Fibre Channel hardware and software.
The Company is experiencing significant growth in its Intel
processor-based SBC product lines with design-ins and contracts in
telecommunications, medical, industrial automation, and defense. We are also
experiencing significant interest in the mass customization SBC market where
potential customers are showing significant interest in SBCs designed with
on-board Fibre Channel and/or gigabit Ethernet networks. We recently expanded
our SBC product lines to include DIN rail mount, very small PC boxes highly
focused on the industrial automation market. We recently received approval from
GE Fanuc to offer a PLC alternative for its 90/70 product line based upon our
SBC and PC-based controller software.
Throughout the year ending September 30, 2000, VMIC has won over 26
design-ins throughout markets such as telecom/datacom, defense, industrial
automation, medical, and SAN. The Company characterizes a design win as a
project estimated to produce $500,000 or more in revenue per year when in
production. Although these projects ramp into production volume over time
intervals which range from 3 to 9 months after the award, a variety of risks can
affect these programs before the start of production, such as schedule delays,
changes in customer markets, and customer product sales volumes.
VMIC, headquartered in Huntsville, Alabama, is a 15-year-old company
with 230 employees, and operates from more than 76,000 square feet of
production, research and development, and administrative space.
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Industry Background
Unlike general-purpose computers, embedded computers are incorporated
into systems and equipment to perform a single or limited number of complex
applications. Embedded computers are used in such markets as telecommunications,
industrial automation, medical, test and measurement, data acquisition, and
defense. Some applications include production testing of electrical components,
fiber-optic cable manufacturing, film manufacturing, automotive manufacturing
and development, jet and rocket engine development, environmental monitoring,
steel and aluminum rolling mill control, telecommunications and switch gear,
real-time communications and networking, robotics, and machine control.
Standard bus solutions include such buses as VME, CPCI, PMC, PCI, and
others. Standard buses are nonproprietary, which means that the bus technology
is available to any company and product designer. Currently, the primary
standard bus used in PCs and computer workstations is PCI. Most leading
industrial computer manufacturers include PCI buses in their machines for
enhanced computer connectivity. CPCI is an embedded computer version of PCI.
CPCI capitalizes on the combination of the Eurocard form factor, already
popularized by VME, and the PCI bus characteristics. The wide acceptance of the
PCI bus in the desktop market has created an abundance of inexpensive
components. CPCI has certain advantages in applications that require fast
transfers of large amounts of data.
CPCI architecture is preferred for high-performance applications with
moderate I/O requirements that utilize less than eight slots. VME, because of
its superior bus arbitration and distributed interrupt handling characteristics,
is preferred for larger applications where processes and I/O are partitioned
across as many as 20 boards in the backplane.
The telecommunications market recently adopted CPCI as its architecture
of choice for telephone switching, speech recognition, and Internet
applications. Other markets such as defense, medical, and industrial automation
are also beginning to utilize this technology. The telecommunications market is
now configuring dual-redundant systems and is demanding PC CPCI-based computers,
high-speed communications, and higher reliability. The telecommunications market
is outsourcing designs and sourcing embedded computers as technology within the
market changes more rapidly.
The SAN market is a broad market involving the simultaneous networking
and interconnecting of storage devices such as discs, tapes, and computers
utilizing fiber optics and very high gigabit transfer rates. Fibre Channel is
the technology of choice and gigabit Ethernet has a significant growing interest
and a wide range of companies have entered the market with a vast array of
products that support the configuration of a wide variety of expandable systems
designed for high reliability using high-speed data transfers based on a
cost-effective scalable architecture. Gigabit Ethernet and Fibre Channel also
have applications in computer clustering and computer-to-computer
communications/networking. Fibre Channel is a scalable solution and has become
an industry standard supported by such companies as Hewlett-Packard, Seagate,
Sun, IBM, Compaq, and others. Fibre Channel and gigabit Ethernet are now the
choice for computer clustering, storage interfacing, and networking.
The server industry leaders such as Compaq, Dell, Sun, Motorola,
Hewlett-Packard, and others have selected the CPCI architecture as the platform
of choice for internet server farms where multiple processors and/or high
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reliability is required. The market is moving towards SBCs based on Intel
architecture where customers are requiring the integration of
communication/network functions such as Fibre Channel and/or gigabit Ethernet
with the processor board.
Data acquisition refers to the process of collecting what is commonly
referred to as real-world phenomena information such as light, pressure,
temperature, humidity, force, and flow. A data acquisition system (which is
comprised of a collection of measuring instruments, a computer, and control
devices) is used to collect, document, and analyze that information. Real-world
information, commonly represented by analog signals, originates from sensors or
transducers. The data acquisition system accepts these signals produced by
sensors and transducers and converts them into a format that the computer can
understand. Data acquisition and control also involves the collection of digital
input data that originates from switches, relays, lights, and other on/off
signals. In addition, computer-controlled digital outputs may be used to turn on
or off lights, relays, switches, valves, conveyor belts, or on/off functions.
A data acquisition system can be used to gather, monitor, display, or
analyze data. If the system has output capabilities, it can also accurately
control the processes it is monitoring. The software works in association with
the data acquisition hardware. Without the software, the system's hardware is
considered to be generally ineffective. The software can be used to control the
collection of data, as well as to display and analyze the data.
The industrial manufacturing sector is currently the largest end-user
of data acquisition products. The Company believes that strong trends exist in
multiple markets for equipment based on open standards and standard PC
platforms. The industry is focused on technology leaders such as Intel and
Microsoft, and standard buses. Designs based on this technology ensure the
availability of enhanced equipment and software migration paths that preserve
the customers' investment in technology. The performance of PC technology has
now improved to the point where many applications that historically required
custom or special equipment can now use PC technology and embedded standard bus
products.
The industrial automation market is experiencing a shift to standards
based on PC technology and open bus architectures. According to an independent
market study, the PC-based control hardware and software segment will likely
demonstrate the strongest growth. The study also indicates that users are
considering their control systems software to be the value-added element in such
systems. The market trend is shifting from proprietary programmable logic
controllers (PLCs) to more general-purpose computers such as industrial PCs and
embedded computers. This market study complements the study by Automation
Research Corporation (ARC) that indicates PC-based logic control software
(SoftLogic) within a standard computer environment can perform the exact same
functions as conventional hardware-based proprietary PLCs. The ability to
upgrade the hardware while preserving the customer's software investment is a
key benefit of PC control.
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Business Strategy
Historically, the Company's focus was primarily defense, test and
measurement, nuclear power plant monitoring, and simulation and training. The
Company's revenues, investments, and marketing were primarily associated with
data acquisition and control board-level and systems-level products and
supporting niche products. These products served the Company well by providing
high margins. However, these markets were not large enough to sustain desired
growth.
The Company is transitioning to markets with potential high-volume
growth by investing in new technology and products associated high growth,
larger markets such as telecommunications and communications/networking.
Simultaneously with focusing on different markets, the Company is also
experiencing significant success in its legacy markets, such as defense, with
new Intel processor-based single-board computers based on the CPCI architecture.
The transitioning has included a new focus on OEM applications within legacy
markets, as well as new markets such as medical and telecom/datacom.
The trend in the embedded computer industry is to outsource the design
and manufacturing of standards-based products to fewer and fewer suppliers.
VMIC's strategy is to continue to offer a wide range of products to fill
customers' requirements in dealing with fewer suppliers. The Company's objective
is to be a leading supplier of board-level, systems-level, and software products
to the embedded computer industry for telecommunications, industrial automation,
test and measurement, medical devices, and defense applications.
The focus product lines are:
o embedded Intel processor-based PC computers for VMEbus, CPCI,
rail applications
o expanded communications/networking products for the embedded
industry and for the broader server computer market
o OEM products for industrial automation based upon PC control
The key elements of the Company's strategy to achieve this objective
are:
Leverage the Company's Pentium(R) Computer Expertise. The
Company has the broadest line of Intel processor-based Pentium single-board
computers in the embedded computer industry. Because of VMIC's close alliance
with Intel, Microsoft, Red Hat Inc., Serverworks, and other leading PC vendors,
and the Company's investment in leading technology, customers are now selecting
VMIC for custom-designed and standard products for potential high-volume
applications. The product line focus is for VMEbus and CPCI and DIN rail
applications.
Expand Fibre Channel/SCSI, Reflective Memory, and Gigabit
Ethernet Product Lines. The Company has expanded its communications/networking
product line to include a family of Fibre Channel SCSI and gigabit Ethernet host
bus adapters, which support computer clustering and networking of computers and
storage devices at high-speed gigabit data rates. Fibre Channel, SCSI, and
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gigabit Ethernet are industry standards adopted by most leading computer
companies. We are enhancing our Reflective Memory network products to
substantially increase their performance and reduce recurring costs. Host bus
adapters convert the electronic signals of a computer to a high-speed gigabit
data stream for efficient communications with other computers or storage devices
such as tapes and disks. The Company's extensive background with its Fibre
Channel-based Reflective Memory products, hub technology, and host adapters used
for computer networking should facilitate the Company's growth into broader
markets such as telecommunications/datacom and SANs.
Continue the Growth of Data Acquisition and Control or
Input/Output (I/O) Business. The Company's I/O product line has been primarily
based on VMEbus. This product line has been expanded to include CPCI and a
low-cost busless DIN rail mount I/O product line. The strategy is to focus on
OEM applications of I/O products such that the PC-based control software can be
used as a catalyst to sell I/O products such as boards and I/O systems. The
Company's plan is to transition its revenue base in I/O to an OEM focus rather
than a project focus. The Company is continuing to establish a worldwide
distribution network that is highly focused on the industrial automation market
while continuing the sale of other products through existing sales reps and
distributors. The Company diverted most of its investments from I/O to SBC and
communications/networking over the previous two years as part of its strategy of
re-inventing the Company to increase growth rates and profits while decreasing
the number of niche products. The Company has no plans to exit this product line
as revenues from this market segment still generate substantial profits for the
Company. The Company is examining I/O product acquisitions and licensed products
to enhance the product line in areas of significant growth potential. The DIN
rail I/O product line was recently licensed from a leader of industrial
automation. This licensing arrangement allows the Company to enjoy high margins
similar to products developed within the Company.
Remove Low-Volume Products from Production. The Company is
aggressively removing lower volume niche products from its product lines as
higher volume sales of SBCs and communications/network products provide the
necessary growth for the Company. The Company has implemented an EOL program to
minimize potential problems for customers who use such products. Generally, the
Company will manufacture EOL and products or products targeted for EOL for
special customer needs at a significant production cost premium to facilitate
customer transitions to higher volume VMIC products, or to competitor products
where the Company has decided to terminate the lower volume products.
Expand International Markets. The Company has a substantial
presence in the international market where it sells products in more than 60
foreign countries through its line of international distributors. The Company's
strategy is to continue to grow its international presence by expanding into
more countries while it continues to grow its business through existing
distributors. In 1998, the Company opened an office in Paris, France in response
to customer requests for VMIC to introduce a presence in Europe beyond its
distributor network personnel. The Company has changed its international
distribution strategy to support multiple distributors in most countries,
whereas historically we have executed exclusive contracts with one distribution
organization in each country. The Company has also aggressively replaced
distributors and, where necessary, added additional distributors to improve
geographic coverage. We recently added several new distributors in Germany,
Scandinavia, Korea, Russia, China, and France. Our business in Japan, Germany,
Israel, and Italy has significantly improved. We have also recently executed OEM
agreements with SMS DEMAG in Germany and ALSTOM in France and England.
Continue Investments in Engineering and Product Development.
The Company expects to continue its relatively high levels of developing
innovative new products and enhancing and redesigning its existing products to
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reduce costs and increase functionality. However, as a percentage of sales, we
expect R&D to be in the range of 10 percent, whereas historically the ratio has
been much higher. The Company is continuing its focus on new products that may
provide more substantial growth opportunities in more vertical markets. The R&D
strategy has recently changed to focus more on major targeted opportunities that
offer the potential for high-volume replicated sales and opportunities that
match our mass customization model. The Company's investments in new products
are primarily modifications and/or enhancements to existing products where
customers and VMIC are co-developing the specifications of products designed to
meet customer requirements for potential high-volume repeat business. In
addition, the Company's focus for new product investments is primarily focused
on communications/networking, Intel processor-based PC single-board computers,
and OEM applications involving the Company's PC-based control software coupled
with our new DIN rail CPUs as well as our PC-based controller products.
The Company has recently changed its strategy in the industrial
automation market to focus on OEM markets involving higher volume replicated
sales of single-board computers and CPU DIN rail, very small boxes utilizing the
Company's PC-based control software product. These new products are now
receiving serious interest from a leading company in the industrial automation
market.
Products
The Company's product lines can be partitioned into three primary
product lines as described in this section. The primary product lines are (1)
Intel processor-based embedded single-board computers, (2)
communications/networks, and (3) data acquisition and control (I/O) and
supporting software.
Single-Board PC Computers and Peripherals. The Company has significant
recognition in the embedded market with its VMEbus and CPCI Intel
processor-based CPU products. This product line has contributed significantly to
our recent success in transitioning the Company to an OEM focus in larger more
vertical markets. The product line is highly focused on Intel(R) Pentium
processors that have been used to build one of the largest lines of SBCs in the
industry. The Company has an excellent relationship with Intel's embedded
computer group where we are involved with receiving advanced data and
information for the development of new products based upon Intel's new
technology. We are an approved Intel "third-party board vendor" (TPBV). The
product line supports a wide variety of operating systems such as DOS,
Windows(R), Windows NT(R), LynxOS, Windows CE, Linux, VxWorks, and QNX. We have
recently partnered with Red Hat, Inc., a leading developer and provider of open
source operating system solutions, to resell Red Hat Linux 6.2 Deluxe Edition
for Intel (x86) platforms. The Red Hat Linux 6.2 Deluxe Edition includes
operating system software, documentation, and support from Red Hat. The Company
also manufactures an array of compatible boards such as floppy and hard drive
modules and complementary PMC products such as video, Fibre Channel, Reflective
Memory, gigabit Ethernet, SCSI, and sound. PMC is an industry-standard mezzanine
board that can be plugged into a site on the SBC. VMIC manufactures fully
functional PC/AT single-board computers, which support off-the-shelf PC/AT
software and enable the user to completely configure an embedded PC/AT computer
system. The Company's single-board computer products (CPCI, VME, and DIN) are
fully supported by the Company's component software (IOWorks(R)). See "Component
Software (IOWorks)" below.
Communications/Network Products. The Company's communications product
line consists of three primary product categories. Our primary focus is
associated with new and enhanced Reflective Memory networks, Fibre Channel,
gigabit Ethernet, and high-performance SCSI. Other communications product lines
are primarily legacy products. The primary product categories are:
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1. Fibre Channel. Fibre Channel, a highly reliable, high-speed
interconnect technology, that allows concurrent communications
among workstations, mainframes, servers, data storage systems,
and other peripherals using common storage and network
protocols. Installations range from small postproduction
systems on Fibre Channel loops to very large computer-aided
design, or CAD, systems linking thousands of users into a
switched Fibre Channel network.
Fibre Channel is ideal for the following applications:
o Internet/Intranet
o High-performance storage
o Large databases and data warehouses
o Storage backup systems and recovery
o Server clusters
o Network-based storage
o High-performance workgroups
o Campus backbones
o Distance learning
o Digital audio/video networks
o Medical imaging/telemedicine
o Embedded military sensor, processing, and displays
o Industrial control systems
VMIC's Reflective Memory (Rtnet(TM)) product line utilizes
Fibre Channel technology to achieve deterministic operations
beyond Fibre Channel. While many of the existing Fibre Channel
companies are highly focused on PCI bus solutions, VMIC's
strategy is to offer a more complete product line for most
industry-standard open architectures, such as PCI, CPCI, PMC,
VME, and future advanced architectures, such as Infiniband and
PCI-X, an enhanced version of PCI which is the leading
architecture used by most leading computer companies today
such as Sun, IBM, Compaq, Dell, Hewlett-Packard, Gateway, and
others. Infiniband is the Company's next-generation computer
architecture on the drawing board for future development. In
addition, VMIC has significant software experience to
differentiate this product line. The Company is also focusing
on combination communications features on the same board to
take advantage of the slot limitations associated with the PCI
bus-based server market.
VMic's host bus adapter (hba) fibre channel product line is
based on state-of-the-art technology. This product line
includes open architecture solutions based on several
industry-standard bus structures, such as pci bus, cpci, and
PMC/VME.
The Company has recently released for production several new
HBAs, boards for PCI, and PMC. The Company has also released
three new SAN-compatible single-board computers for VME and
CPCI. These products couple the PMC HBA boards with the
Company's single-board computers to offer customers fully
integrated and tested Fibre Channel single-board computers.
The Company has recently released a combination board
featuring Fibre Channel and SCSI on the same board. In
addition, we have released SCSI-based boards for embedded
applications.
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2. Gigabit Ethernet. The Company has recently expanded its
network products to include gigabit Ethernet boards based on
new Intel communications technology. Our first product is
focused on the embedded computer industry for high-speed
communications between and among computers using either copper
or fiber optics. Gigabit Ethernet technology is now moving
into the SAN market as well as the broader server
communications market.
3. Reflective Memory Networks. VMIC's Reflective Memory
Network products offer real-time networking for applications
where guaranteed delivery of data at precise times or time
intervals are primary requirements. The Company's Reflective
Memory allows customers to configure extremely
high-performance networks. The product line supports
networking of most computer systems offered by Silicon
Graphics, Harris, IBM, Intergraph, Hewlett-Packard, Motorola,
Gateway, DELL, and many others that are designed to support
standard buses. Reflective Memory has applications for
networking the same or dissimilar computer systems in a high-
performance, fiber-optic, or cable network. One of the most
significant benefits of Reflective Memory is that software is
not required for its operation. However, the Company offers
industry-compatible networking software compliant to
internationally recognized standards such as TCP/IP, which is
typically used with other types of networks.
The Company's legacy products within the communications sector includes:
1. General-purpose serial I/O products. The Company's
general-purpose serial I/O products support a wide variety of
connectivity options associated with peripherals, intelligent
sensors, dials, and indicators.
2. Serial I/O communication products for defense and aerospace.
The Company's serial I/O communication products are used in a
wide variety of military and space applications including
aircraft, missiles, ground support equipment, and avionics
buses, which are used in commercial applications.
3. Bus repeater products. The Company's bus repeater products
provide customers a means of expanding the capacity of a
system so that I/O boards may be used or added to the system
without the high cost of using a CPU for each chassis, which
may require I/O boards. The Company's bus repeater products
include more than six products that support the configuration
of large I/O systems and the remoting of I/O boards from the
CPU via fiber optics.
General-Purpose I/O Products. The Company offers a wide range of I/O
products including VMEbus, CPCI, PCI, and DIN rail I/O. The I/O product line
includes more than 90 I/O boards and supporting software drivers based upon a
broad line of operating systems such as VxWorks, QNX, Windows, Linux, and
Windows NT. The Company has recently privately labeled a complete low-cost DIN
rail mount I/O product line from a leading industrial automation supplier. The
product line consists of over 35 I/O modules and communication/networks blocks
such as Ethernet, Profibus and DeviceNet, which are the leading host computer
networks for the industrial automation market. Profit margins for these products
are in line with similar products developed by the Company. The I/O products are
used to perform such tasks as monitoring temperature, fluid flow, motion,
resistance, strain, revolutions, and reporting the states of many different
conditions such as the closed/open status valves or the on/off status of
switches.
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<PAGE>
Component Software (IOWorks). The Company's IOWorks software product
line is an extensive family of PC software components. Some of the components
are used to facilitate the sales of key board-level product lines such as SBCs
and I/O while others are designed to support the configuration and
implementation of complete I/O systems. Some of the components provide a
comprehensive set of tools used to create data acquisition and control system
and to interconnect the large number of legacy control products commonly found
in industrial plants today. Several of the IOWorks can be used to implement
complete plant-wide control, or can be used in conjunction with existing control
systems to augment or supplement those existing systems. The IOWorks component
architecture provides a seamless, cohesive, easy-to-use environment and
flexibility for users to pick and choose components for the application or VMIC
product of interest or users interested in configuring complete systems may
select an entire suite of components to suit their needs.
A variety of IOWorks components can be configured to form a
comprehensive development and control environment for PC-compatible computers
running Microsoft's Windows NT operating system. Control systems run under
Windows NT and VxWorks. Windows NT is used for less demanding applications,
whereas VxWorks is used for critical high-performance deterministic
applications. A complete set of IOWorks component software executes on the PC to
read temperatures, pressures, motor shaft positions, and other data from the
plant and then controls such machines as conveyors, packaging equipment, and
extruders. IOWorks components are based on open standards such as IEC 61131-3
and Microsoft technologies. IEC 61131-3 is an internationally recognized
software specification that defines and standardizes programming of control and
monitoring systems. IOWorks adherence to these open standards allows integration
with other standard off-the-shelf Windows NT-compatible software products.
IOWorks component software functions with various third-party boards
and platforms, as well as VMIC's hardware products. The software is designed for
hardware independence and software OS independence at the system control level.
IOWorks supports open architecture and open systems solutions, ensuring that the
customer's investments will be compatible with future programming environments.
I/O Systems Products. The Company offers a wide range of systems for
the embedded computer market. A system is a combination of board-level products,
coupled with backplanes (interconnecting boards), power modules, mechanical
packaging, and software. Systems products are configured by the Company to
customer specifications and are delivered to the customer as an integrated
product. The Company typically does not provide any custom software or hardware
products for such sales. Systems products are generally sold to OEMs, systems
integrators, or end-users who install the equipment, develop software, and add
third-party products to customize such systems for specific applications.
We offer a wide range of I/O systems based on a wide variety of
hardware and software products that have wide applications in the industrial
automation and test and measurement markets.
The Company has expanded its I/O systems product line to include CPCI,
PCI, and DIN rail I/O. These systems are based on the IOWorks software product
line and significantly expand the Company's offering of system-level products to
the industrial automation market and test and measurement market.
Special Products. The Company develops, manufactures, and markets a
variety of special products that are modified versions of the Company's standard
products. The Company has recently focused more of its resources on several
potential contracts associated with such opportunities. This market is typically
referred to as the "mass customization market" where customers work with the
Company to make modifications to existing products, or the Company uses an
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existing product as a baseline to develop a new product customized to meet
specific customer requirements. These opportunities typically have long design
cycles ranging from three months to nine months before the Company recognizes
any significant revenue from these relationships. The Company is experiencing
significant success in this area of its business in markets such as defense,
telecommunications, medical, and industrial automation. The Company typically
avoids such special products unless the business relationship involves
significant revenue and volume opportunities. The Company may either share
development expenses for such products, or completely underwrite the
development. The Company typically negotiates the complete ownership in all
rights to such products. Some contracts in the future may involve a guarantee of
a fixed period of production by VMIC after which the product rights could pass
to the customer. For the twelve month period ending September 30, 2000, the
Company has maintained complete ownership of all such products.
The development and sale of these special products provides the Company
a significant advantage over its competition because the products have been
tailored to specific customer requirements, which makes it difficult for the
competition to offer the same product at a lower price. VMIC believes that
customers that require such products will be unlikely to contract with multiple
suppliers because of the high cost of the initial efforts associated with the
design, qualification, and testing of such products. The Company lists such
customers as Lucent, Litton Data Systems, Paravant, and others as "mass
customization" accounts.
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<PAGE>
Customers
The Company offers a broad range of embedded computer solutions to
customers in a wide variety of industries. The customer base includes end-users,
systems integrators, value-added resellers, and distributors.
The Company has active customers worldwide. These customers include
major OEMs, systems integrators, value-added resellers, and educational/research
organizations, many of whom are Fortune 500 companies. For the year ended
September 30, 2000, 55 customers accounted for approximately 70 percent of the
Company's sales. However, no single customer represented greater than 7.9
percent of the Company's sales. The following table includes the Company's
representative customers and end-users by market:
<TABLE>
<CAPTION>
Representative Customers and End-Users by Market
<S> <C> <C> <C>
TELECOMMUNICATIONS COMPUTER MANUFACTURERS AEROSPACE RESEARCH
ALACATEL CONCURRENT COMPUTER CORPAEROSPATIALE ARGONNE NATIONAL LABS
ATT CRAY RESEARCH ALENIA AT&T BELL LABS
DIVICOM DIGITAL EQUIPMENT CORP. ANSALDO AT&T TECHNOLOGIES
EMS ELECTRONIC ASSOCIATES BENDIX FIELD ENGINEERING BECHTEL-NEVADA
LUCENT HARRIS CORPORATION BF GOODRICH BELL TELEPHONE LABS
MOTOROLA HEWLETT-PACKARD BOEING AEROSPACE CO. BROOKHAVEN NATIONAL LABS
NORTEL IBM BRITISH AEROSPACE DUKE UNIVERSITY
SED MOTOROLA CASA FERMILAB
DASSAULT GANIL
DEBIS SYSTEM HAUS HARRY DIAMOND LAB
INDUSTRIAL AUTOMATION AUTOMOTIVE DELTA AIRLINES HARVARD UNIVERSITY
3M COMPANY APPLIED AUTOMATION DORNIER JOHN HOPKINS UNIVERSITY
AGFA CHRYSLER FORD AEROSPACE LOS ALAMOS NATIONAL LABS
AVX CORPORATION COM GENERAL DYNAMICS MICHIGAN STATE UNIVERSITY
BETHLEHEM STEEL FORD MOTOR COMPANY GOODYEAR AEROSPACE MIT
CANON GENERAL MOTORS/EDS GRUMMAN AEROSPACE CORP. RENSSELAER POLYTECHNIC
CEGELEC MERCEDES BENZ HAMILTON STANDARD RIST
CIMTEK SVERDRUP TECHNOLOGIES HERCULES AEROSPACE SIERRA RESEARCH
COMMONWEALTH ALUMINUM TOYOTA HUGHES AIRCRAFT SRRC
CORNING WERTH ENGINEERING ISRAELI AIRCRAFT INDUSTRIES
DUPONT JET PROPULSION LABORATORY
EASTMAN KODAK LOCKHEED SIMULATION AND TRAINING
FAIRMONT TAMPER SEMI-CONDUCTOR MANUFACTULTVGAEROSPACET ATLAS ELEKTRONIK
GE FANUC APPLIED MATERIALS MARTA MBB AAI CORPORATION
GE DRIVES CANON MCDONNELL DOUGLAS BURTEK
INTEGRATED MILL SYSTEMS CANON QUESTER NASA CAE ELECTRONICS
KIMBERLY-CLARK CHAD NORTHROP CORPORATION FLIGHT SAFETY INTERNATIONAL
KVAERNER EXCELLON PRATT & WHITNEY GENERAL PHYSICS
LAMM RESEARCH ORTHODYNE ROCKWELL INTERNATIONAL METEOR
LOGAN ALUMINUM SILICON VALLEY GROUP ROLLS ROYCE ASSOCIATES MITSUBISHI HEAVY INDUSTRIES
MANNESMAN DEMAG SVG THERMO SMITH INDUSTRIES QUINTRON CORPORATION
MCNAUGHTON AND MCKAY REDIFFUSION
MINARIK CORPORATION REFLECTONE, INC.
NUCOR STEEL UTILITIES INDUSTRY DEFENSE/MILITARY S3 TECHNOLOGIES
POSCON COMMONWEALTH EDISON CO. AIDC SAIC
PROSOFT AUTOMATION DEPARTMENT OF ENERGY ARNOLD AFB SANDERS ASSOCIATES
QUEST ENGINEERING GEORGIA POWER AVCO SBS ENGINEERING
QUESTER HOUSTON LIGHTING & POWERBDM SIEMENS AG
RENFRO CORPORATION KSG BEI DEFENSE SYSTEMS CO. SIMULATION ASSOCIATES, INC.
REYNOLDS ALUMINUM MAJUBA DEPARTMENT OF DEFENSE SOGITEC
SMS-DEMAG MOCHOVCE EDWARDS AFB SSI
THERMCO ONTARIO HYDRO EGLIN AFB TAI
TUSCALOOSA STEEL PP&L ELECTRONICS WARFARE ASSOCIATES
US STEEL TVA E-SYSTEMS
WISE ALLOYS UNION ELECTRIC FERRANTI
XEROX UTILCOM LITTON DATA
VEPCO LITTON GUIDANCE & CONTROL
WESTINGHOUSE MARTIN MARIETTA
MOORE RESEARCH CENTER
NAVAL AIR TEST CENTER
NAVAL AIR TEST
DEVELOPMENT NAVAL
AVIATION DEPOT NAVAL
COASTAL SYSTEMS CENTER
NOVAL OCEANS SYSTEMS
CENTER NAVAL RESEARCH
LAB NAVAL SURFACE
WEAPONS CENTER NAVAL
UNDERWATER SYSTEMS NAVAL
WEAPONS CENTER PARAVANT
RAYTHEON
</TABLE>
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The Company's products are used in communications and networking of
computer and computer storage systems, voice recognition systems, medical
testing machines, telephone switching, digital TV signal routing, rolling mills
for steel and aluminum, textile machines, munitions testing, engine propulsion
systems, automotive manufacturing machines, aircraft wheel testing systems,
robotic arm control systems, and other applications.
Backlog
The Company's backlog of firm orders as of September 30, 2000 increased
80 percent to $23.5 million, as compared to a firm order backlog at September
30, 1999 of approximately $14.7 million. Although orders are subject to
cancellation in the normal course of business, historically the Company has
filled most of its firm orders. One customer accounts for $9.1 million of the
total backlog as of September 30, 2000. Management believes that the primary
reason for the increase in the Company's backlog of orders is the increasing
demand for a variety of new products. The book-to-bill ratio has been greater
than 1.0 for sixteen consecutive months through September 30, 2000.
For the fiscal year ended September 30, 2000, the Company received 7.9
percent of its revenues from Litton and 24 percent of its revenues from several
customers who received contracts from various agencies of the Department of
Defense.
Intellectual Property (IP)
(1) Intel Processor-Based Single-Board Computers. The Company offers one of the
widest PC single-board (SBC) embedded computer product lines in the industry.
Our SBCs involve advanced technology 12-layer PC boards and ball grid array
(BGA) technology. We build embedded computers on half the real estate of leading
PC suppliers, such as Dell, Compaq, and others. We have extensive supporting
software product lines, partnerships with PC leaders, one SBC patent, and the
most extensive SBC computer product line on the market. We have more than seven
new SBCs in development by a dedicated and experienced computer design team. We
have an extensive line of software products that enables most leading software
operating suppliers' products to run on our line of SBC products. We have an
extensive line of accessories and supporting mezzanine boards to support
expanded CPU functionality. Our investment in software and our leading
technology are keys to our success. We are an approved Intel "third-party board
vendor" (TPBV), which involved significant discussions and negotiations with
Intel. Our intellectual SBC property involves unique features in hardware and
software.
The Company has more than 22 SBC standard board products based on
Pentium(R), Pentium II, and Pentium III processors in production. These designs
differentiate VMIC from its competition and have allowed us to win several
custom SBC design-ins for large OEMs. Our software support packages include
products for Windows NT, Windows(R) 2000, VxWorks, Linux, LynxOS, QNX, and
Solaris operating systems. These software packages differentiate VMIC and offer
us significant advantages over the competition. Our SBC product line includes
various support products such as disk drive assemblies, transition panels, and a
complementary line of PMC products, such as video, Fibre Channel, Reflective
Memory, gigabit Ethernet, SCSI, and sound.
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Our relationship with Intel allows us to obtain advanced information
for new products and advanced information concerning Intel's new product
roadmaps. In addition, Intel assists the Company in marketing its products. We
participate with Intel in various forums, seminars, and symposiums.
The Company's recent success, and a substantial part of our recent
growth, can be attributed to our significant investment in Intel processor-based
SBCs, accessories, and software. Our SBC focus allows us to participate in other
product business with the same customers because the SBC is typically the first
product selected in configuring and designing embedded systems.
The Company has a dedicated SBC design staff highly focused on
expanding our product line with leading-edge technology for VMEbus and CPCI. We
are also expanding our product base to include other form factors, such as DIN
rail mount and other technologies.
The Company has announced a new, low-cost wall mount computer which
will include our PC-based control software package (IOWorks(R)), targeted for
high-volume industrial automation OEM accounts. Our SBCs form a critical element
in our I/O systems business where we couple I/O products, software (IOWorks),
and accessory products for turnkey systems.
(2) Fibre Channel Hardware and Software. The Company offers a wide variety of
Fibre Channel host bus adapters for standard buses, such as PCI, PMC, and CPCI.
To support these hardware products, we offer a complete line of software drivers
for most popular operating systems, such as Microsoft Windows NT, Windows 2000,
Wind River Systems, Inc. VxWorks, Red Hat Linux, and Sun Solaris. We have
contracts with LSI and QLogic that enables us to obtain advanced information for
new designs. The Company's technology includes 1 G and 2 G products, and we
offer combination functions on the same host bus adapter, such as Fibre Channel
and SCSI. The Company's hardware and software Fibre Channel products have
features and benefits not available from LSI or QLogic. The Company has also
recently released a high-performance SCSI product based on LSI technology.
(3) Communications/Network Products. We are a worldwide leader in RM
communications/networking products and technology. We have one patent pending
and have licensed five patents and the RM trademark from Sun. We have the widest
variety of RM hardware and software products in the market. This product line
offers unique high-performance communications/networking where determinism is
required. A subset of the product line uses a modified version of the Fibre
Channel to achieve low latency and high determinism. We have an extensive line
of supporting products, such as hubs. The Company offers more than 16 RM network
board products. These designs are unique in the industry, and include the
highest performance RM products available. We offer more than six bypass and hub
designs for use in RM networks. In addition, these products are supported by an
extensive line of software drivers for Windows NT, VxWorks, Linux, IRIX,
Solaris, VMS, UNIX, and others. We have a patent pending for a design concept
that improves the reliability of RM networks.
The Company has expanded its communications/networking product line to
include higher performance, lower cost Reflective Memory, gigabit Ethernet,
Fibre Channel, and SCSI products.
(4) We are a market leader in data acquisition and control boards and systems
for the embedded market arena. The Company has a large family of I/O products
for the data acquisition and control market. The IP associated with these
products includes hardware and software. However, the barrier to entry lies in
the sheer number of products and the systems' advantages we have because we
offer complete turnkey solutions based on our PC-based control software
(IOWorks) package. Our expertise, knowledge, and experience with PC-based
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control systems has allowed us to beat large industrial automation leaders in
applications, such as rolling mill control or other applications where I/O
system performance/speed is critical. We have the widest variety and most
extensive data acquisition product line on the market. We have more than 100
different input/output board-level products and a large number of supporting
products, such as transition panels, signal conditioning, and other accessory
products.
(5) We have extensive investments in a wide variety of software products
(support of most leading operating systems such as Windows NT, Windows 2000,
VxWorks, Linux, QNX, and others), including an extensive and high-performance
PC-based control software package (IOWorks). Our investments in software include
board drivers, firmware, host software drivers, computer BIOS software, and I/O
system software such as IOWorks. Our PC-based control software is enabling us to
penetrate industrial automation markets with leading relationships with
corporate giants, such as GE Fanuc, Alcan, Reynolds, Goodrich, Renfro, and many
others. We are also experiencing growth in the test and measurement and defense
systems because of our PC-based control software. Our PC-based control software
is modular such that sales involve components and total packages. The modules
seamlessly interact and support a wide variety of PC platforms, leading
input/output products, including VMIC I/O product line, communications/networks,
and other products used in applications involving the broader data acquisition
and control markets.
(6) We have numerous trade secrets, trademarks, two patents, and five licensed
patents from Sun (our proprietary design/technology).
(7) Our investments are enabling us to win many systems and opportunities where
VMIC is the preferred supplier for several products sold to the same customer in
high volumes because of our extensive product lines and intellectual property.
This form of internal reference selling is a significant factor in our success.
(8) We are highly focused on obtaining additional patents and trademarks, and we
are constantly adding trade secrets as our technology base expands.
(9) The barrier to entry is an extensive product line of hardware, software,
long-term relationships with suppliers, customers, partners, trade secrets,
patents, licensed patents, and a team of employees highly motivated by shared
ownership. The Company has historically invested more than 20 percent of its
revenues on building an extensive product line with unique features and benefits
that differentiates our Company, our products, and our service. Recent market
studies indicate that VMIC is one of the top most recognized names in the
embedded computer industry.
(10) The Company has built an excellent reputation through long-term
associations and close partnerships with leading suppliers, such as LSI, Intel,
QLogic, Microsoft, Wind River Systems, Inc., and many others. The Company has
recently negotiated agreements with QLogic, Red Hat, Inc., LSI, Serverworks, GE
Fanuc, and others to support the Company's marketing strategies and product
development roadmaps.
The Company has invested 15 years in building an excellent reputation
for delivering superior, high-quality products globally at reasonable prices,
and we have a history of winning significant contracts with many Fortune 500
companies. We have a formidable worldwide network of independent sales
representatives and distributors serving more than 60 countries. The Company has
the infrastructure and management talent to support high growth.
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<PAGE>
Our Company is focused on retaining long-term, repeat customers that
allow us to profit from such relationships. We are highly focused on service,
quality, technological leadership, and product differentiation, which allow us
to enjoy high margins.
Markets
The Company markets its products primarily to the embedded computer
industry, which serves markets such as telecommunications, defense, industrial
automation, test and measurement, and medical equipment industries.
The embedded computer market is projected to grow from $3.6 billion in
1998 to $9 billion in 2003, according to Market and Technology Quarterly. This
market includes VMEbus, CPCI bus, PCI bus, PMC, and other open architecture
standards. Within this market, VMEbus products are projected to grow from $700
million in 1999 to $1.9 billion by 2003. The embedded PCI market is projected to
grow from $600 million in 1999 to $1.65 billion in 2001. One of the hottest
markets within the embedded computer market is the relatively new CPCI market,
which is projected to grow from $100 million in 1999 to $1.9 billion in 2003.
Within the embedded computer market, VMIC has invested in the new CPCI computer
architecture, creating a complete product line of PC single-board computers and
network products such as Reflective Memory networks and Fibre Channel. In
addition, VMIC has invested in the development of a complete line of new I/O
products for CPCI. VMIC is highly focused on the VMEbus, PCI, PMC and CPCI board
business. The bus board market is a market that changes as new standards and new
open architecture technology is brought to market generally by very large
companies such as Intel, Motorola, Compaq, Hewlett-Packard, Sun, and other
leading computer suppliers. The Company is studying new PC standards, such as
Infiniband, supported by Intel, and PCI-X for new bus board products. PCI-X is
an enhanced version of the PCI bus, which is the most widely used computer
architecture today. PCI-X, according to recent market studies, is destined be
the next universal computer architecture for high-performance servers. Compaq is
presently a leader in developing this new open standard. PCI-X computer systems
are scheduled for availability during fiscal year 2001.
The single-board computer market within the VMEbus market arena
accounts for more than 25 percent of the market which is projected at more than
$1.9 billion by 2003, whereas the market according to COTS Journal was $700
million in 1999. Utilizing the VMEbus market as a guide, the Company believes
that the CPU business for CPCI could approach more than $500 million by 2003.
The telecommunications market has selected CPCI as its standard, and contract
awards for CPUs are presently estimated at 50 percent of the market. However,
VMIC expects substantial growth in other applications in addition to
single-board computers. The Company believes that the market projections for PC
computer board sales for VME and total computer board sales for CPCI indicate
that the total market for 1999 will exceed $388 million, for 2000 it will exceed
$600 million, and for 2001 it will exceed $964 million.
Based on the number of design-ins won by VMIC during 1999 and 2000, and
recent marketing information, the Company believes that multiple industries such
as defense, medical, digital video broadcasting, communications, and other
markets in addition to telecommunications have selected CPCI as their
next-generation architecture of choice for new embedded applications.
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The Telecommunications Market
According to the Company's market research data, high availability
technologies, specifically CPCI with hot swap capabilities, are enabling the
migration of telecommunications infrastructure from proprietary hardware and
software architectures to mass-marketed PC hardware and industry standard
software like Windows NT. With the popularity of Windows NT applications,
Intel's Pentium processor-based CPUs have become the most common standard
platform in next-generation telecommunications systems. The telecommunications
market has selected CPCI bus as its architecture of choice. However, VMEbus and
PCI bus applications are also prevalent in this market.
The transformation and upgrading of the existing networking
infrastructure to ensure that it will be able to connect voice, data, and video
gear is well on its way. With Internet growth fueling more and more network
usage for multimedia, the telecommunications market is developing boxes to offer
flexible service and avoid obsolescence. Reliability and availability is
dictating redundant systems interconnected by high-speed gigabit communications
products. These communication requirements typically involve deterministic
operations with little or no software overhead.
According to the PCI Industrial Computer Manufacturers' Group (PICMG),
the CPCI bus is particularly well suited for many high-speed data communication
applications such as servers, routers, converters, and switches.
The telecommunications market arena is projected to grow from $15
billion in 1999 to more than $18.5 billion in 2001. The embedded computer
industry sells boards into this market. The board-level market is projected to
grow from $800 million in 1999 to $1.55 billion by 2002 according to RTC.
The first six months of 1999 brought an 18 percent increase in U.S.
telecommunications equipment factory sales over the same period last year,
according to the annual 1999 Multimedia Telecommunications Market Review and
Forecast, published by the multimedia Telecommunications Association (MMTA
Arlington, Virginia). Sales rose to nearly $41.6 billion for the first six
months of 1999 from $35.2 billion for the first six months of 1998. The trade
organization credits the substantial growth to an economic rebound in Asia and
Latin America, which relies on U.S.-manufactured products to meet their
communications needs.
In addition, the Company believes that increases in Internet users,
which are expected to exceed 300 million by the end of 2002, and the resulting
bandwidth requirements, estimated to be 500TB per month volume in 1999, offers
market opportunities for the Company's products.
Communications/Networking
Gigabit Ethernet enables the unhindered flow of data across intranets
as communication within enterprises will move on from text-based e-mail messages
to bandwidth-intensive real-time audio, video, and voice. Ethernet is the most
popular cabling technology for local area networks. Initially, the most commonly
installed Ethernet systems were called 10Base-T, which provided transmission
speeds of up to 10 Mbps. As data transmitted across LANs increased, 100Base-T,
also known as Fast Ethernet, which could (theoretically) transmit at 100 Mbps,
became the standard that replaced 10Base-T. Fast Ethernet uses the same cabling
as 10Base-T, while everything else -- the packet format and length, error
control, and management information -- remained the same. Its scalability
ensured its quick adoption.
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Fast Ethernet was typically used for backbones, but the ever-prevailing
bandwidth crunch has pushed 100Base-T onto workstations. It is now giving up its
place at the backbone to gigabit Ethernet which can (theoretically) provide a
bandwidth of a billion bits per second over cable and/or fiber optics. A
backbone is a transmission line that carries data gathered from smaller lines
that connect to it. Since a backbone will have to bear the load of the entire
network, it must be built on very-high bandwidth lines.
In a LAN, the nodes may interface to the backbone using 100Base-T
network cards while the backbone interfaces across networks through gigabit
Ethernet. Applications in the modern enterprise make exacting demands from the
network and put pressure on the desktop, server, hub, and the switch for
increased bandwidth. Megabytes of data will have to flow unhindered across
intranets as communication within enterprises will move on from text-based
e-mail messages to bandwidth-intensive real-time audio, video, and voice.
An increasing number of enterprises are employing data warehousing for
strategic planning. This implies increased volumes of data and low transmission
latency. These warehouses may comprise of terabytes of data distributed over
hundreds of platforms and accessed by thousands of users, and must be updated
regularly to provide users near-real-time data for critical business reports and
analyses.
Archiving an enterprise's mission-critical information scattered across
a network usually occurs during off hours. Even then, it requires large amounts
of bandwidth for a fixed period of time (4 to 8 hours). The backup involves
gigabytes or terabytes of data distributed over hundreds of servers and storage
systems throughout an enterprise. Enterprise-critical applications will
proliferate and demand ever greater shares of bandwidth at the desktop level. As
the number of users grows rapidly, enterprises will need to migrate critical
portions of their networks (if not the whole network itself) to higher-bandwidth
technologies. Crossing over from megabit to gigabit Ethernet will be inevitable,
starting at the backbone.
A very straightforward scenario for upgrading, is increasing the 100
Mbps links between Fast Ethernet switches or repeaters to 1,000 Mbps links
between 100/1,000 switches. Such high-bandwidth, switch-to-switch links would
enable the 100/1,000 switches to support a greater number of both switched and
shared Fast Ethernet segments.
Demand for more bandwidth to support Internet, streaming media,
enterprise resource planning and customer relationship management applications,
and a huge installed base of compatible equipment and cabling, will drive
growth. The overwhelming prevalence of Ethernet topologies and installed copper
cable creates a virtually automatic decision to upgrade to the latest
technology.
The Storage Area Network Market
Fibre Channel products are used to connect servers and data storage
devices to form storage area networks (SANs). Fibre Channel technology, a new
generation of server-to-storage communications technology that improves data
communication speeds, connectivity, distance between connections, reliability
and accessibility, has made SANs possible.
The volume of electronic data generated, processed, stored, and
manipulated has expanded significantly in recent years as a result of the growth
of data-intensive applications such as transaction processing, data warehousing,
data mining, multimedia, and Internet applications. Application requirements for
video-on-demand, HDTV, 3-D Video, video mail, and visual computing are pushing
22
<PAGE>
the envelope on server capacity and transfer rates. International Data
Corporation (IDC) estimates that the amount of stored network data grew from 750
terabytes in 1994 to 10,500 terabytes in 1998, and that it will increase to
420,000 terabytes in 2002. With the dramatic increase in information storage and
data retrieval requirements, system performance has become increasingly
constrained by traditional input/output technologies, such as SCSI (small
computer communications interface), the currently prevailing server-to-storage
communications protocol. The support for a limited number of connections and the
short transport distance that characterize SCSI, as well as the lack of
reliability of data delivery, have limited the capabilities of traditional
network storage architectures and placed constraints on the size of the network.
Fibre Channel overcomes the limitations of traditional data communications
technologies, because it offers the connectivity, distance, and access benefits
of networking architectures combined with the high performance, scalability, and
quick response needed for data storage applications.
Many Fibre Channel products find their primary application in SANs.
However, they have also been deployed for use with digital graphics, video
networks, and nonlinear digital editing systems in the advertising,
broadcasting, and entertainment industries, as well as for high-speed data
processing applications in a variety of industries including Internet service
providers.
Fibre Channel is a technology standard that allows data to be
transferred from one network node to another at rates of 100 Mbyte per second,
which translates to about 45,000 pages of text in this document each second.
Fibre Channel was developed jointly by Seagate, Hewlett-Packard, and Sun
Microsystems, and is now backed by consortiums consisting of leading vendors in
both networking and storage markets. Fibre Channel is now an industry standard
accredited by the American National Standards Institute (ANSI). Leading server
companies such as Dell, Compaq, Sun Microsystems, Silicon Graphics, IBM, and
others have selected Fibre Channel as their technology for SAN and computer
clustering applications.
Fibre Channel HBAs are used to convert computer buses such as PCI,
CPCI, SBus, PMC, VMEbus, etc. to transmit and receive data pursuant to Fibre
Channel standards. Just as a wire is needed for telephone (noncellular)
operations, a wire fiber is needed to allow storage boxes and computers/servers
to be interconnected into a system. EMF Associates project the Fibre Channel
board market to grow from $1.6 billion in 1999 to $6.1 billion in 2002.
The Industrial Automation Market
Since the 1960s, industrial automation systems have included mechanical
devices, meters, and gauges, as well as data loggers and strip chart recorders.
In the 1970s, programmable logic controllers (PLCs), special-purpose,
proprietary, stand-alone, industrial computers, were introduced and were
primarily used for discrete manufacturing applications such as automobile
assembly. PLCs have traditionally had primitive operator interface panels
incorporating buttons, lights, and indicators. In parallel, sophisticated
industrial automation systems called distributed control systems (DCSs) were
also adopted to provide computer control of large-scale continuous processes
such as those found in oil refineries. DCSs integrated a variety of sensors and
control elements using I/O connections all controlled by a central computer
running proprietary software. Systems were also configured based on proprietary
hardware.
The market is undergoing significant changes, and customers are now
demanding solutions based on open hardware platforms and nonproprietary
standards such as VMEbus, CPCI, and PCI; Intel processor technology, Microsoft
operating systems, and other Microsoft key technologies; and PC-based control
23
<PAGE>
software such as VMIC's IOWorks software package.
The increased adoption of PC-based control systems is aided by software
suppliers who provide solutions based on PC-based architectures and open
networking. The advantages of PC-based control systems are:
o Reduced cost of installation
o Ability to upgrade systems easily
o Higher performance than other technologies
o Customers can select "best-in-class" products from multiple
vendors
o Reduced dependence upon just one vendor
o Ability to integrate special-purpose products
o Controls and human-machine interface, as well as other functions
can be executed on one computer
o Ability to integrate data with entire enterprise
o Leverage commercial technology in reduced cost and training
o Reduced development costs
o Design-in migration path for future enhancements and
system upgrades
The primary cost element involved in systems today is software.
Customers want to design their software application one time and have it run
unmodified for decades while they take advantage of continuous hardware
upgrades. Suppliers of software and hardware products fill this continuous need
and requirement through its open architecture hardware standards and PC-based
control software based upon international standards.
The industrial automation market is a key growth market because the
Company's customers are demanding open architecture solutions based on Intel
PCs, key Microsoft technologies, and open architecture equipment based upon
standards such as VME, CPCI, and PCI. Most of the Company's customers and
industry leaders consider these technologies nonproprietary open standards.
Customers are demanding more flexibility, more computer power, and higher
performance systems with open connectivity to other platforms, software, and
most industry leaders' I/O equipment.
VMIC selected industrial automation to take advantage of the industry
trends with open architecture hardware and PC-based control software. These
products, when packaged as an I/O system, allow VMIC to offer high-performance
I/O systems solutions with the flexibility, scalability, and life-cycle costs
that customers are requesting.
The Company's strategy is to continue to market I/O systems while
changing its focus to OEM replicated sales of SBCs and DIN rail CPUs with
PC-based control software. I/O systems are offered by the Company as a
configuration of boards, distributed I/O, chassis, power supplies, software, and
other products to effectively provide customers or systems integrators a
building block approach that enables the customer to focus on
application-specific problems, not problems associated with I/O programming. The
Company is the market leader in front-end systems according to Frost and
Sullivan, an independent market research organization.
The primary focus for I/O growth is industrial automation. The Company
has coupled its communications/networking products, single-board PC computers,
IOWorks software, and I/O boards to offer and complete I/O systems as
alternatives to PLCs.
24
<PAGE>
The Medical Market
In virtually all areas of the medical ultrasound and magnetic resonance
imaging markets, embedded computers are used in the real-time animation and
manipulation of 3D-objects in stereo by interactive computer graphics. The
processing, analysis, and manipulation of such data often requires several
tightly-coupled, super-high-performance, simultaneously-operating computers
located within the same box and communicating on the same hardware medium.
The medical industry has selected open architecture solutions based on
VMEbus and CPCI bus, both of which support the requirements of parallel
processing of large volumes of image data. In addition to processing the data,
the medical industry is faced with massive storage requirements, including
storage archiving, data sharing, and analysis often from multiple servers
simultaneously. Computer clustering and SAN problems are solved with Fibre
Channel products designed for high-performance servers and embedded computers.
Real-time computer software requirements are typically solved with
leading operating systems such as VxWorks from Wind River Systems, Inc.
Graphical user interfaces that demand less deterministic or real-time
performance are generally supported by Windows NT, LynxOS or other less robust
software operating systems. VMIC offers the Intel processor-based Pentium
high-performance computer boards, Fibre Channel HBAs, and supporting software
for such applications.
The Defense Market
The Defense Department has executed a new initiative to move from
custom militarized products to commercial-off-the-shelf (COTS) products to
reduce its cost of building electronic systems where possible. Therefore, the
tri-services have selected VMEbus as its architecture of choice for building
computer systems, and CPCI is now moving into many COTS applications. The
projection of standard bus open architecture board-level products for military
COTS applications is projected to grow from $716 million in 1999 to $1 billion
by 2001 according to NSWC-Crane. Most prime contractors for applications
involving ship control systems, radar, simulation and training, military
vehicular, and embedded computer systems have selected standard commercial
products. The defense industry is moving from proprietary designs to hardware
and software based on PC technology and industry standard software such as
VxWorks, Windows NT, LynxOS and others. The Company's defense business is
commercial-off-the-shelf products that also sell into all other markets within
the embedded computer industry. The Company does not offer militarized or rugged
products specifically designed for military or other applications.
The Simulation and Training Market
The simulation and training industry can be partitioned into three
primary markets. These markets include Defense, Power and Utilities, and
Transportation. The Defense market involves the use of the Company's simulation
and training I/O products in aircraft, helicopter, and ship simulators, and
trainers. The Company's customers are systems integrators such as Reflectone,
McDonnell Douglas, Quintron, Flight Safety International, AAI Corporation, and
others who typically purchase products designed specifically for the industry.
The power utility industry uses the Company's simulation and training products
for applications in nuclear power plant simulators and trainers. The Company's
customers are systems integrators and end-users such as S3 Technologies,
Siemens, Atlas, Thomson-CSF, Mitsubishi Heavy Industries, Georgia Power,
Virginia Electric Power, and TVA. The primary difference in the markets involves
the size of the I/O system. Usual I/O systems for nuclear power plants typically
sell for $500,000 to $1,000,000 per unit, whereas I/O systems for Defense
applications sell for $50,000 to $100,000 per unit.
25
<PAGE>
The Company believes that its success in this market centers around its
focus on providing a wide variety of standard bus products and systems that are
designed specifically for the simulation and training markets. This market
requires high-density I/O boards with self-test capability supporting extensive
fault detection and isolation capabilities. The defense and power plant
industries have focused on open architecture solutions, and VMEbus is the
leading embedded computer bus standard. The Company believes that its customers
in this market particularly value its Intelligent I/O Controllers that were
designed specifically for the simulation and training industry. The Company's
simulation and training product line enables a customer to order systems
solutions that obviate the need for detail-level programming of the Company's
equipment.
The Test and Measurement Market
The Company's data acquisition and control products are used in
semiconductor ovens, annunciation systems, gas turbine monitoring and control,
electron particle acceleration, power train testing, wind tunnel testing, and
emissions monitoring. VMIC's customers for such applications include OEMs,
systems integrators, and end-users such as Interautomation, Arnold Air Force
Base, Sverdrup, Chrysler, American Power, Ohio Edison, Synchrontron Radiation
Research Center, and others. The Company attributes its success in this market
to its broad array of I/O boards, open system technology, and the wide
acceptance of VMEbus in the embedded systems market.
The Company's line of Universal Intelligent I/O Controllers form the
core of its data acquisition and control systems. The I/O Controller product
line was designed specifically for the data acquisition and control market. It
features many benefits required by OEMs, systems integrators, and end-users. One
of the primary benefits is the I/O Controllers' support of the broadest
assortment of VMEbus I/O boards in the industry. This wide selection of I/O,
coupled with effective turnkey I/O solutions for the industry, is a major
benefit, and the prime reason for the Company's success in this market.
Sales and Distribution
The Company is a global corporation that distributes products in more
than 51 foreign countries through more than 31 distributors and 13
representative organizations worldwide. As of September 30, 2000, the Company's
marketing, sales, and distribution programs were conducted by 41 of the
Company's employees. The Company sells its products in the United States through
commissioned-based independent sales organizations and direct VMIC employees. As
of September 30, 2000, the Company has contracts with 13 independent
representative organizations that employ more than 56 salespeople. These sales
organizations are supported by their own support staff, as well as the Company's
employees. The Company's home office is located in Huntsville, Alabama. Remote
offices are located in Paris, France to support European customers and
distributors, and in Raleigh, North Carolina and Dallas, Texas.
The Company's products are sold internationally through 31
distributors. As of September 30, 2000, the Company's distributors employed more
than 79 salespeople.
In addition to international distributors and U.S. sales
representatives, the Company has 31 value-added resellers (VARs) who represent
the Company. VARs purchase and resell the Company's products and add value to
the Company's products by including custom software, hardware, or installation
and maintenance of the Company's equipment. The Company is expanding its
distributors and VARs. The plan is to establish a network of distributors, VARs,
and Representatives that is highly focused on industrial automation, and a
separate network of VARs and distributors that is highly focused on the Fibre
26
<PAGE>
Channel SAN markets. Because of the need to establish more market-focused
distributors, VMIC has elected to appoint multiple nonexclusive distributors in
various European countries.
The Company attends more than 40 tabletop trade shows per year and more
than ten major trade shows per year. Tabletop shows require minimum Company
involvement. The major shows are market related and require significant
planning, staffing, and promotional efforts. The Company also markets its
products through publicity received from numerous publications and magazines
that publish articles and press releases.
The Company continually invests in Web site updates, product brochure
enhancements, direct mail, and other marketing techniques to expand its customer
base and revenue growth. The Company is in the process of establishing an
E-commerce link which will allow customers to purchase products via the Web.
Manufacturing
The Company manufactures most of its products in-house while
subcontracting a small portion of the board-level product manufacturing. The
Company has an in-house manufacturing capability that includes automated,
semi-automatic, and manual assembly and testing. The Company's surface mount
technology (SMT) consists of an automated line that has fine pitch and ball grid
array placement capabilities. VMIC's automated inspection lines consisting of
state-of-the-art equipment that includes 5DX X-ray, Automatic Optical
Inspection, and a Dual PCB Inspection Robot. Product manufacturing operations at
the Company involve: electronic circuit board, module assembly, I/O systems
assembly, configuration and testing, cable assembly, and the production of
product support information. In addition, manufacturing agreements are
established with several local manufacturing companies to provide prompt service
for additional requirements. Although the Company may subcontract some of its
manufacturing, final testing and packaging are always conducted at VMIC under
the direction of VMIC's Quality Assurance Department. The Company is located in
a high-technology research community that allows the Company to take advantage
of the quality and high-volume manufacturing capabilities of several local
companies. The Company capitalizes the development costs of certain software
used in production testing and the manufacturing of its products. The total
deferred software development expense for product manufacturing and testing
software to be amortized over three years as of September 30, 2000 is $609,053.
Research and Development
The Company invests in research and development programs to develop new
hardware and software products, enhance existing products by integrating
state-of-the-art technology, and customization of certain products to meet
customers' specifications for applications that involve the potential for medium
to high-volume production opportunities.
As of September 30, 2000, the Company has approximately 56 employees in
research and development activities. Of these employees, 22 are involved in
hardware development and 34 are involved in software development.
As of September 30, 2000, 55 employees have technical degrees and eight
have advanced degrees. Approximately 12.0 percent of the Company's research and
development efforts in fiscal year 2000 were software related. The Company's
research and development expense was $5.2 million, $5.6 million and $6.2
million, in fiscal years 2000, 1999 and 1998, respectively, corresponding to
13.6 percent, 19.7 percent and 20.0 percent of sales, respectively. Software
deferred expense was $0.74 million, $2.33 million, and $2.20 million in fiscal
years 2000, 1999 and 1998, respectively.
27
<PAGE>
The Company expensed $0.8 million and $5.3 million of previously
capitalized software development costs for the fiscal year ended September 30,
2000 and 1999, respectively. The write-downs were based on management's
estimates of the gross future sales that can be generated from the existing
software products marketed by the Company. As of September 30, 2000, the total
deferred software development expense to be amortized over future sales is $0.2
million.
The Company has focused its R&D investments on new products designed
for more vertical markets; therefore, its research and development efforts
associated with legacy markets have been decreased. The Company has focused its
investments in single-board computers, communications/networking products, such
as Reflective Memory, Fibre Channel/SCSI, and gigabit Ethernet technology.
Competition
The markets for the Company's products are intensely competitive and
are characterized by rapid technological change and emerging industry standards
requiring ongoing expenditures for research and development and the timely
introduction of new technology and enhancements of existing technology. The
Company's future success will depend, in part, on its ability to enhance its
current technology and services, respond effectively to technological changes,
sell additional services to its existing client base, introduce new technologies
and meet the increasingly sophisticated needs of its clients. Other companies
may develop products or technologies that may adversely affect the Company's
competitive position, or render its technologies or services obsolete. The
Company competes for customers on the basis of price, performance, features,
quality, service, reliability, adherence to standards, availability, development
capabilities, and support. The Company's competitors vary in the size, scope,
and breadth of the products and services they offer. Some of the Company's
competitors and potential competitors have greater financial, technological,
manufacturing, marketing, sales, and personnel resources than the Company does.
The markets for the Company's products are highly competitive and are
characterized by rapid changing technology, evolving industry standards and
frequent product performance enhancements. The following tables list the
Company's competitors by market and product lines. As with VMIC, many of the
Company's competitors supply products to several markets, and many of their
products are fairly easily adapted to alternative market uses.
28
<PAGE>
<TABLE>
<CAPTION>
Competitor Matrix by Market
<S> <C> <C> <C> <C> <C> <C> <C>
=============================================================================================================================
Product Line Telecom Industrial Defense Test and Medical SAN
-----------------------------------------------------------------------------------------------------------------------------
Competitor
=============================================================================================================================
Systran X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Motorola X X X X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Force X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
General Microsystems X X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Pentek X X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Pentland X X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Acromag X X X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
RTP Inc. X X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Performance Tech. X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
National Instruments X X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Intellution X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Allen-Bradley X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
GE Fanuc* X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
SBS X X X X X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Qlogic X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Emulex X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
LSI* X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Object Automation X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Think and Do X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Steeplechase X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Interphase X X X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Ziatech X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Dynatem X X X X X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Nematron X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Adaptec X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Agilent X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Radisys X X X X X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
*Competitor and strategic alliance.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Competitor Matrix by Product Line
<S> <C> <C> <C> <C> <C> <C>
=============================================================================================================================
Product Line Computer Communications/ Input/ I/O PC-Based
Boards Output Systems
-----------------------------------------------------------------------------------------------------------------------------
Competitor
=============================================================================================================================
Systran X X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Motorola X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Force (Selectron) X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
General Microsystems X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Pentek X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Pentland X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Acromag X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
RTP Inc. X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Performance Tech. X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
National Instruments X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Intellution X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Allen-Bradley X X X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
GE Fanuc* X X X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
SBS X X X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Qlogic X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
LSI* X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Emulex X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Object Automation X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Think and Do X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Steeplechase X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Interphase X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Ziatech X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Dynatem X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Nematron X X X
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Radisys X
=============================================================================================================================
*Competitor and strategic alliance.
</TABLE>
30
<PAGE>
Government Business
The Company's reliance on direct and indirect government business has
been significantly reduced over the past eight years from 75 percent of the
Company's business to 24 percent. However, the Company is currently involved in
several opportunities and contracts that could have a material impact on the
Company's growth and significantly increase the percentage of the Company's
future revenue generated by government-related business. The Company has
received orders for CPUs and I/O products for shipboard propulsion monitoring
and control, and is well positioned to receive sizable follow-on orders. Should
the program prove successful, 27 cruiser-class ships, including follow-ons for
destroyers and carrier class ships, would use the Company's products. The
Company has also been contracted to supply a potentially large quantity of CPCI
single-board computers to two large government contractors. In the event that
the contracts are expanded, a significant percentage of the Company's future
revenue could be generated by government-related business.
Proprietary Rights
The Company's success depends to a significant degree on its software
proprietary technology and other confidential information. The software and
information technology industries have experienced widespread unauthorized
reproduction of software products and other proprietary technology. The majority
of the Company's software is not patented, and existing copyright law offers
only limited practical protection. VMIC relies on a combination of trade secret,
copyright, common law intellectual property rights, license agreements,
nondisclosure, and other contractual provisions and technical measures to
establish and protect its proprietary rights in its intellectual property and
confidential information. The Company does not, however, sell its software
source code, or provide its customers access to the source code associated with
its software products.
The Company owns two patents associated with its Reflective Memory and
SBC product line, and is a licensee of over five products from Sun Microsystems
associated with Reflective Memory.
There is no assurance that the Company will be able to protect its
trade secrets or that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets. There is no assurance that foreign intellectual
property laws will protect the Company's intellectual property rights. In
addition, the computer industry is characterized by frequent litigation
regarding patent and other intellectual property rights, and litigation has been
and may in the future be necessary to enforce the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of patent infringement. Litigation, with respect to
patents or other intellectual property matters, could result in substantial
costs and diversion of management and other resources, and could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
VMIC believes that its proprietary rights do not infringe on the
proprietary rights of third parties. However, third parties may assert
infringement claims against the Company in the future and such assertion could
cause the Company to enter into a license agreement or royalty arrangement with
the party asserting the claim. The Company may also be required to indemnify its
customers for claims made against them. Responding to and defending any such
claims, developing noninfringing intellectual property or acquiring licenses may
distract the attention of the Company's management, and could have a material
adverse affect on the Company's business, financial condition, or results of
operations.
31
<PAGE>
Employees
As of September 30, 2000, the Company had 227 full-time employees. None
of the Company's employees are represented by a collective bargaining agreement,
nor has the Company ever experienced any work stoppages. The Company believes
that it has an excellent relationship with its employees.
ITEM 2. PROPERTIES
The Company's headquarters and principal administrative, engineering,
sales, marketing, and manufacturing facilities are located in office buildings
containing approximately 77,000 square feet located on approximately 10 acres of
land in Huntsville, Alabama. The Company from time to time also leases
additional space in the vicinity as necessary. The Company believes that its
existing facilities are suitable for the Company's projected growth over the
next 24 to 36 months.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
32
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the executive officers of the Company as of
September 30, 2000, is set forth below. Officers serve at the discretion of the
Board of Directors.
Name Age Position
Carroll E. Williams 53 President, CEO and
Chairman of the Board
Alfred F. Casteleyn 61 Director, Vice President
Sales and Marketing
Charles McDonald 62 Executive Vice President
of Operations
George Meares 53 Vice President
Research and Development
Gordon Hubbert 58 Vice President and Chief
Financial Officer
Carroll E. Williams. Mr. Williams is the founder of the Company and has
served as its President, Chief Executive Officer, and Chairman of the Board of
Directors since its incorporation. Prior to founding the Company, he was a
Design Engineer for SAIC, Huntsville Division from 1972 to 1983. Mr. Williams
was the founder and Division Manager of the VME Microsystems Division of SAIC
from 1984 to 1986. Prior to joining SAIC, Mr. Williams was employed by Sperry
Rand where he was involved in numerous assignments associated with highly
reliable, fault-tolerant computer systems including the space shuttle main
engine controller dual processors. Mr. Williams gained experience with data
acquisition and control systems while employed at Pratt & Whitney Aircraft
during 1970 and 1971. Mr. Williams graduated from Georgia Tech in 1969 with
honors and continued graduate studies in electrical engineering and computer
science at the University of Florida and the University of Alabama.
Alfred F. Casteleyn. Mr. Casteleyn is the Vice President of Sales and
Marketing of the Company, and has been an officer of the Company since June of
1991. He is also a member of the Board of Directors of the Company. Prior to
joining the Company, he was the Sales and Marketing Manager and International
Manager for EAI Electronic Associates of West Long Branch, New Jersey. Mr.
Casteleyn has substantial experience in the International Sales and Marketing
area of the industry and has built a career in the field for over 30 years. He
has been successful in such efforts as design and maintenance of marketing
programs, planning company sales activities, representative/distributor
supervision, trade show preparation and participation, advertising, staff
recruitment and preparation of financial packages.
Charles McDonald. Mr. McDonald is an Executive Vice President of the
Company and acts as the Company's Executive Vice President of Operations. Mr.
McDonald has 30 years of electronics experience and has held positions in the
areas of manufacturing systems, computers, computer hardware systems, and
products. Before joining the Company Mr. McDonald spent seven years with SAIC,
where he was the Project Manager/Engineer for several computer systems contracts
and was manager of utilities system integration.Mr. McDonald has been with the
Company since August 10, 1987 and has served as an officer of the Company since
1990.
33
<PAGE>
George T. Meares. Dr. Meares is the Vice President of Research and
Development. Dr. Meares has been with the Company since 1990. He has over 14
years of experience in engineering leadership positions and has vast experience
in the design and development of communication and display products for many
commercial and governmental applications. Dr. Meares was formerly associated
with Pentastar Electronics, Inc. as the Electrical Design Branch Manager, a
Project Leader, and a Design Engineer. Dr. Meares earned his Ph.D. in Electrical
Engineering from Tennessee Technical University, as well as his M.S. in Systems
Engineering, and a B.S. in Electrical Engineering. Dr. Meares takes a very
active role in the design and development of the Company's product lines.
Gordon Hubbert. Mr. Hubbert is the Vice President and Chief Financial
Officer of the Company. He has been with the Company since 1991, and has been an
officer of the Company since September of 1996. Mr. Hubbert was formerly the
Controller at Tenneco and Duracell, as well as Division Controller at SCI. Mr.
Hubbert received his MBA from Indiana Northern University in 1976.
34
<PAGE>
PART II
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Dividend Policy, Market, and Stockholder Information
There is no established public trading market for the Company's Common
Stock. At September 30, 2000, the Company's Common Stock outstanding was held by
approximately 608 shareholders. At September 30, 2000, there were 293,423 stock
options outstanding, convertible into the Company's Common Stock. See footnote
No.6 Stock Option Plan in the Notes to Financial Statements. The Company has not
declared any dividends. The Company currently intends to retain its earnings to
finance future growth, and, therefore, does not anticipate paying cash dividends
in the foreseeable future. The Board of Directors may review the Company's
dividend policy from time to time to determine the desirability and feasibility
of paying dividends after giving consideration to the Company's capital
requirements, operating results and financial condition and such other factors
as the Board of Directors deems relevant.
Recent Sales of Unregistered Securities
On November 30, 1997, the Company completed a private placement stock
offering of common stock, receiving net proceeds of $3.0 million from the sale
of 300,000 shares of stock. After payment of offering expenses and legal fees,
the Company used approximately $2.0 million of the offering proceeds to repay
the balance of its working line of credit. The balance of the offering proceeds,
approximately $1.0 million, was used for general working capital purposes. The
Company relied on Section 4(2) of the Securities Act of 1933 and the provisions
of Rule 506 of Regulation D for exemption of this private placement from the
registration requirements of the Securities Act.
The Company maintains several employee stock option and purchase plans.
Pursuant to these plans, the Company has sold the following unregistered
securities:
Year Ended Shares Sold Aggregate
Consideration
1998 77,420 273,931
1999 74,069 257,204
2000 73,985 280,534
The securities were sold in reliance on exemptions under Section 4(2)
of the Securities Act of 1933 and Rule 701 promulgated under Regulation D of the
Securities Act of 1933. The proceeds of the sales were used for working capital
and general corporate purposes.
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ITEM 6. SELECTED FINANCIAL DATA
VMIC is providing the following summary financial information of the
Company to highlight selected financial information for your benefit. VMIC
derived this information from the audited financial statements of the Company
for each of the fiscal years shown. The following information is only a summary
and you should read it in conjunction with VMIC's financial statements and notes
thereto (beginning on page 49 in the latter portion of this document). For a
more detailed narrative explanation of the following results and conditions, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<TABLE>
<CAPTION>
Summary Financial Data
(in thousands, except per share data)
VMIC, Inc.
Years ended September 30
<S> <C> <C> <C> <C> <C>
2000 1999 1998 1997 1996
--------- --------- ---------- --------- --------
Statements of Operations Data:
Revenues $38,644 $28,446 $31,090 $27,901 $23,791
Gross profit 24,393 16,078 20,274 18,108 15,495
Selling, general and administrative expense 12,742 12,401 13,286 10,995 9,661
Research and development expense 5,230 5,601 6,232 5,307 5,335
Income (loss) from operations 6,054 (7,336)(1) 757 1,806 499
Net income (loss) $7,139(2) $(8,246)(1) $205 $934 $41
Per Share Data:
Diluted earnings (loss) per share $1.53 ($1.82) $0.04 $0.22 $0.01
Weighted average common stock
outstanding (diluted) 4,663,834 4,534,189 4,554,448 4,189,113 4,047,989
Excluding Certain One-Time Events (1)(2)
Net income(loss) $4,041 ($2,989) $205 $934 $41
Diluted earnings (loss) per share $0.87 ($0.66) $0.04 $0.22 $0.01
Balance Sheet Data:
Working capital $5,838 $607 $4,724 $4,693 $2,544
Total assets 27,145 20,270 25,162 19,707 16,410
Long-term debt 6,299 6,448 5,713 5,395 5,078
Total stockholders' net investment 11,423 3,890 11,747 9,397 6,693
</TABLE>
(1) Net loss for 1999 includes a non-recurring charge of approximately $5.3
million for the write-down of certain software development costs and purchased
product and software costs. See Management's Discussion and Analysis of
Financial Condition and Results of Operations - write-down of certain assets and
Notes to Financial Statements - significant Fourth-Quarter Event.
(2) Net Income for 2000 includes a non-recurring income tax valuation allowance
reversal of approximately $3.1 million in the fiscal quarter ended March 31,
2000.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information herein, this document 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 below. 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 and Business Environment
VMIC is a leading supplier of standard bus board-level products,
software, and I/O systems for the embedded computer industry. The products
perform a broad range of functions such as storage area and computer networking,
data acquisition and control, PC single-board computers, and complete I/O
systems based upon a PC-based control software product. The Company offers a
broad range of software products based upon the most popular operating systems.
The Company's products are used in communications and networking of
computers and computer storage systems, voice recognition systems, medical
testing machines, telephone switching, digital television signal routing,
rolling mills for steel and aluminum, textile machines, munitions testing,
engine propulsion systems, automotive manufacturing machines, aircraft wheel
testing systems, robotic arm control systems, and other applications.
The Company expects significant growth in the telecommunications/datacom
industry and storage area networks. The Company plans to continue to market its
products to the defense, test and measurement, medical, industrial automation,
and other markets.
The Company's strategic vision is to offer standard bus boards, software,
and systems to high-growth markets with a focus on PC SBCs and
communications/networks. Our strategy in the SBC market is to offer leading-edge
PC computer technology for standard products and attract high-volume OEM
business through mass customization for key accounts. The Company has recently
added to its customer list companies such as Litton Data, Nuspeed/Cisco,
Paravant, Lucent, Battelle/Cytyc, and others. The strategy for growth in
communications/networking is to focus on the Fibre Channel, SCSI, high-speed
gigabit Ethernet, and Reflective Memory product lines. Our focus for these
product lines is in the embedded computer market and the broader server markets.
The Company has recently won significant design-ins and contracts in the SAN and
computer clustering markets with customers such as Nuspeed/Cisco, QUALCOMM,
Lucent, Concurrent, and others, and our products are seriously being considered
by other leading companies.
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Risk Factors
The Company's business and financial performance are subject to risks
and uncertainties, including those discussed below.
The Company may not be able to compete effectively in its current or
future markets.
The standard bus embedded computer industry is highly competitive and
fragmented, and the Company faces significant competition in each of its product
markets. The Company's competitors differ depending on product type, geographic
market, and application type. Several of VMIC's competitors are well established
and have greater assets and financial resources than the Company, and have
larger marketing and research and development budgets. Several of the Company's
competitors also have larger service organizations.
Competition in the Company's business areas is influenced by technical
capacity, customer support, product longevity, supplier stability, breadth of
product offerings, reliability, performance, and price. Accordingly, even small
competitors who develop technologically similar or advanced products could
successfully compete with the Company. Other competitors have established
relationships with customers or potential customers that afford them a
competitive advantage. There can be no assurance that the Company will be able
to compete effectively in its current or future markets, or whether the
Company's technology and designs will be viable in the marketplace in the
future.
The Company recently entered into new product markets and may be unable
to develop the technologies or market presence necessary to succeed in these
markets.
VMIC's recent entry into vertically integrated markets such as
industrial automation and SANs has required the Company to develop new hardware
and software products. However, these new products, while offering potential new
revenue sources, may not achieve market acceptance, and the failure to succeed
in these markets could materially impact the financial condition of VMIC.
The Company has diverted research and development resources from core
products to new technologies.
The Company has recently undertaken substantial research and
development efforts outside of its core business with the intent of increasing
its revenue base and growth potential. This is reflected in the Company's
strategy of offering PC-based control software or IOWorks, embedded PC board
products, and communication products, such as Fibre Channel and Reflective
Memory to the SAN, industrial automation, and telecommunications markets, and
other more vertically integrated markets. To implement this strategy, the
Company reduced its research and development investments in its core business
while significantly increasing its investment in the new products designed to
address these more vertical markets. If the Company is unsuccessful in these new
markets, it will be dependent on its core business to maintain historical
operating results. VMIC may not be able to maintain its historical operating
results, however, because it has substantially reduced its research and
development investments in its core business.
Sales of the Company's new products may not meet the growth objectives
of the Company.
Some of the Company's new hardware products will be sold at lower
profit margins, and the Company requires significant market acceptance of these
products to meet the growth objectives of the Company. While there has been
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<PAGE>
significant customer interest in these new products, and Reflective Memory,
Fibre Channel, and PC-based products generated a significant percentage of the
Company's revenues in 2000, there can be no assurance that these new products
will be successful to the extent necessary to meet VMIC's growth objectives. If
these new products are not successful, the Company's operating results and
financial condition could be materially adversely affected.
The Company has increased its debt level and working capital
requirements.
Traditionally, the Company has utilized long-term liabilities as a
major financing source. Long-term debt of the Company rose from $200 thousand in
1986 to approximately $6.3 million as of September 30, 2000. The Company's
utilization of long-term debt is somewhat higher than the average company in
this industry. A primary reason for the increase in long-term debt was the need
for the Company to manage its growth. The Company believes its current revenue
level will be sufficient to service its long-term debt. However, if the revenues
and profits of the Company substantially decrease, it will be more difficult for
the Company to service its long-term debt, meet its current obligations, and
continue with its current business plan. As of September 30, 2000, the Company
had sufficient current assets to liquidate all of its current liabilities.
The Company's products may become obsolete and the Company may be
unable to respond to future market needs.
Most of the Company's products are developed to meet certain industry
standards. These standards continue to develop and are subject to change.
Elimination or obsolescence of all or some of these standards could affect the
design, manufacture, and sale of the Company's products and require costly
redesign to meet new or emerging standards. In general, technology in the
computer industry, and the computer bus board industry specifically, is subject
to rapid technological change. The introduction of new technology and products
by others could adversely affect the Company's business. There is no assurance
that future advances in technology may not make the Company's existing product
line obsolete, resulting in increased competition and requiring the Company to
undertake costly redesign efforts.
There can be no assurance that the Company will be able to incorporate
new technology into its product lines or redesign its products to compete
effectively.
Moreover, because new products and technologies require commitments
well in advance of sales, decisions with respect to those commitments must
accurately anticipate both future demand and the technology that will be
available to meet that demand. There can be no assurance that the Company will
be able to successfully anticipate or adapt to future technological changes, and
failure to do so may materially adversely affect the Company's business,
financial condition, and results of operations.
The Company may experience reduced cash flows as a result of selling
products with smaller margins, fluctuations in operating results and increases
in expenses.
The Company is dependent on the success of its recently developed
IOWorks software for the sale of I/O system products, embedded PC board
products, and communication products such as Reflective Memory and Fibre Channel
to substantially increase revenue growth. Embedded PC board products and
communication products typically yield smaller margins than the Company's
traditional product mix and the Company's profits could, therefore, erode in the
future.
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<PAGE>
In addition, the Company has experienced reduced net cash flows,
attributable to substantial software development, inventory expansion, building
expansion, purchased technologies associated with PC single-board computers, the
Company's expanded use of internal products for software development, and
fluctuations in the Company's operating results. Moreover, because of the
Company's high level of current fixed expenses and working capital requirements,
and because the Company believes it should continue its current business
strategy of expending substantial resources on research and development, VMIC
may experience a negative cash flow position in the future.
The Company may not be able to successfully protect its intellectual
property and confidential information.
The Company's success is, to a significant degree, attributable to the
unique features of its software, proprietary technology, and other confidential
information. Unfortunately, the software and information technology industries
have experienced widespread unauthorized reproduction of software products and
other proprietary technology. While the Company has some patent protection for
its hardware products, the Company's software is not fully patented, and
existing copyright law offers only limited practical protection. For most of its
intellectual property protection, VMIC relies on a combination of trade secret
laws, copyright protection, common law intellectual property rights, license
agreements, nondisclosure, and other contractual provisions. The Company does
not, however, sell its software source code, or provide its customers access to
the source code associated with its software products.
There is no assurance that the Company will be able to protect its
trade secrets or that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets. There is no assurance that foreign intellectual
property laws will protect the Company's intellectual property rights. In
addition, the computer industry is characterized by frequent litigation
regarding patent and other intellectual property rights, and litigation has
been, and may in the future be necessary to enforce the Company's trade secrets
or to defend against claims of patent infringement. While VMIC believes that its
proprietary rights do not infringe upon the proprietary rights of others, third
parties may assert infringement claims against the Company in the future and
such assertion could cause the Company to enter into a license agreement or
royalty arrangement with the party asserting the claim. The Company may also be
required to indemnify its customers for claims made against them. Responding to
and defending any such claims, developing noninfringing intellectual property or
acquiring licenses could have a material adverse affect on the Company's
business, financial condition, and results of operations.
The Company may not be able to adequately finance its continued growth.
The Company has been growing since 1986, during which time the Company
has experienced increased debt, sales growth, high research and development
expenditures, and an increased asset base. There are certain risks inherent in
any growing company arising from such factors as increased working capital and
capital expenditure requirements. Moreover, the Company's business strategy
calls for substantial continued investment in new products. The Company also
anticipates expanding its inventory and increasing investments in equipment and
other fixed assets. There is no assurance that the Company will be successful in
obtaining additional long-term debt or equity financing, or if obtained, there
can be no assurance that the debt or equity financing will be on terms favorable
to the Company or its stockholders. The failure of the Company to obtain
additional funds or the obtaining of such funds on unfavorable terms could
40
<PAGE>
adversely affect the financial performance and prospects of the Company and any
equity investment on unfavorable terms could cause substantial dilution to the
shareholders.
The Company will be required to expense certain software development
costs if software sales are not sufficient to amortize the capitalized software
development costs over a five-year period.
In fiscal year 1996, the Company began capitalizing development costs
associated with its IOWorks software and certain other products. The Company is
required to amortize its capitalized software costs against future sales of the
software products over a five-year period after the release of the products. The
Company accounts for these software development costs in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed. The Company
capitalizes certain costs incurred in the production of computer software once
technological feasibility of the product to be marketed has been established.
Capitalization of these costs ceases when the product is considered available
for general release to customers. The establishment of technological feasibility
and the ongoing assessment of recoverability of capitalized software development
costs require considerable judgment by VMIC. If software sales are not
sufficient to amortize the capitalized costs over the five-year period, the
Company is required to expense those capitalized costs. In 2000 and 1999, the
Company recorded $0.4 and $5.3 million, respectively, of write-downs of certain
software development costs and purchased product and software costs. See
footnote No.15 Significant Fourth-Quarter Event in the Notes to Financial
Statements.
The Company relies on suppliers for many of its electronic components,
some of which can only be obtained from a single source.
Most of the Company's products contain state-of-the-art digital
electronic components and integrated circuits. The Company is dependent on third
parties for the continuing supply of most of these components and all of its
integrated circuits. Some of these components are obtained from a sole supplier,
such as QLogic, Altus, Triquent, Intel, AMD, Tundra, Cypress, or a limited
number of suppliers for which alternative sources would be difficult to locate.
Recently, the Company has experienced difficulties in purchasing components for
its Fibre Channel products from QLogic. The Company has also experienced
shortages of integrated circuits and other key components from time to time.
This has resulted in delays in product deliveries. The Company has also had to
terminate its marketing of certain products, even newly developed products, when
a component supplier terminated its production of a critical product component.
Moreover, suppliers may discontinue or upgrade some of the components
incorporated into the Company's products, which could require the Company to
redesign a product to incorporate newer or alternative technology. Although the
Company believes it maintains good relationships with its suppliers, and has
arranged for an adequate supply of components to meet its short-term
requirements, any unavailability of components could cause delayed shipments and
lead to customer dissatisfaction. Any sustained unavailability of components
could materially adversely affect the Company's operating results and financial
condition.
The Company has limited manufacturing facilities and must rely on
subcontractors to complete some of the Company's products.
The Company relies on subcontractors for manufacturing some of the
Company's products. The subcontractors may experience delays because of quality
problems, backlog, component availability, financial difficulty, or other
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<PAGE>
situations which could have an adverse effect on the Company's operating results
and customer relationships. In this event, the Company may be required to find
alternative subcontractors, and there can be no assurance that the Company could
find suitable subcontractors.
The loss of one or more major customers or a number of smaller
customers could adversely affect the Company's revenues and profits.
Sales to two major customers accounted for approximately 6.4 percent of
VMIC's sales in 1998 and 12.7 percent of VMIC's sales during 1999. If either or
both of these customers discontinued purchasing products from the Company, the
Company's operating results and financial condition could be materially
adversely affected. In addition, in fiscal year 1999, approximately 31 percent
of the Company's sales were derived directly or indirectly from various agencies
of the U. S. Department of Defense. Although the percentage of the Company's
sales derived from governmental contracts has decreased from a high of 75
percent in 1986, the Company expects that the government will continue to be a
significant source of future revenues. It is possible that changes in national
policy or other factors could result in reduced defense spending which could
materially adversely affect the operating results and financial condition of the
Company.
Lack of a Public Market and Certain Transfer Restrictions.
There presently exists no public market for the shares of the Company's
stock, nor is there any likelihood of one developing in the near future. A
holder of the Company's Common Stock may not be able to liquidate his or her
position when liquidity is needed and may be required to retain the securities
indefinitely.
Control by Existing Shareholders.
Carroll E. Williams and Mary W. Williams own 31 percent of the
Company's outstanding Common Stock. Together, all of the current officers and
directors of the Company (including Carroll E. Williams and Mary W. Williams)
own a substantial majority of its Common Stock. Consequently, these individuals,
and particularly Carroll E. Williams and Mary W. Williams, control virtually all
aspects of the Company's business by virtue of their ability to nominate and
elect the Board of Directors and officers of the Company. As directors and
officers of the Company, they will, subject to their fiduciary duties, be
entitled to develop and implement the Company's course of business. Neither the
Company's Articles of Incorporation nor its Bylaws permit cumulative voting.
Consequently, the remaining shareholders will not be entitled to elect a
representative to the Company's Board of Directors.
The Company Does Not Anticipate Paying Dividends.
Since its incorporation, the Company has not paid dividends and does
not anticipate paying cash dividends in the foreseeable future. The Company
projects that it will retain future earnings, if any, to provide working capital
and implement the Company's business strategy. Also, pursuant to its loan
agreement, the Company's ability to pay dividends is substantially limited
because the loan agreement requires the Company to maintain certain financial
ratios that the Company believes would not be maintained if dividends were paid.
The Company may not be able to make acquisitions and the Company's
acquisitions may not be successful.
Part of the Company's strategy for growth includes acquisitions of
complementary technologies or businesses that would enhance the Company's
capabilities or increase the Company's customer base. The Company's ability to
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expand successfully through acquisitions depends on many factors, including
business and management's ability to effectively integrate and operate acquired
companies. The Company may compete for acquisition opportunities with other
companies that have significantly greater financial and management resources.
There can be no assurance that the Company will be successful in acquiring or
integrating any such technologies or businesses.
The Company may be subject to product liability claims.
The Company's products and services may be subject to product liability
or electronics manufacturing errors or omissions liability claims. The Company
maintains product recall insurance with an aggregate limit of $1.0 million,
primary product liability and electronics errors or omissions liability
insurance with a general aggregate limit of $2.0 million, and $1.0 million per
occurrence, with a $2.0 million excess policy. While the Company has never been
the subject of any such claims, given the wide use of the Company's products and
the propensity of claimants to initially pursue all possible contributors in a
legal action, there can be no assurance that such coverage will be adequate to
protect the Company from liability. Further, the Company may be unable to obtain
insurance in the future at rates acceptable to the Company. In the event of a
successful lawsuit against the Company, insufficiency of insurance coverage
could have a material adverse effect on the Company.
The Company may not be able to retain and recruit key employees and
skilled personnel necessary to maintain or grow the business.
The Company's success will depend in a large part on the continued
services of its key management and technical personnel. The loss of the services
of one or more of the Company's key employees or the inability to hire
additional key personnel as needed could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will be successful in attracting and retaining
needed personnel. While the Company is currently experiencing relatively low
rates of turnover for skilled employees, there can be no assurance that these
rates of turnover will not increase in the future. The inability of the Company
to hire, train, and retain a sufficient number of qualified employees could
impair the Company's ability to compete in its primary markets, resulting in a
material adverse effect on the Company's business, financial condition and
results of operations.
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Results of Operations
Year Ended September 30, 2000 Compared to Year Ended September 30, 1999
Sales. The Company's sales increased 35.9 percent from $28.4 million in 1999
to $38.6 million in 2000. International sales increased 15.4 percent from $6.5
million in 1999 to $7.5 million in 2000. Our single-board computer (SBC)
business increased 140.0 percent contributing to over 30.0 percent of our
revenues. The communications/networking business increased 12.5 percent while
the data acquisition and control business increased over 9.0 percent. We are
continuing our primary investments in Intel processor-based computer boards and
communications/networking products while maintaining our data acquisition and
control business.
Gross Margins. The Company's gross margin, which represents sales less cost
of products sold as a percentage of sales, increased from 57.0 percent in 1999
to 63.0 percent in 2000. The Company expects its gross margin to decline in the
future as the contribution of lower margin product to total sales increases.
Gross profits for the twelve months ended September 30, 2000 were $24.4 million
compared to $16.1 million for the twelve months ended September 30, 1999, an
increase of 52.0 percent.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses, increased 2.0 percent from $12.4 million in 1999 to
$12.7 million in 2000. As a percentage of sales, Selling, general, and
administrative expenses decreased from 44.0 percent in 1999 to 33.0 percent in
2000. This decrease resulted from continued cost reduction measures throughout
sales and marketing.
Warranty Expense. The Company's warranty expenses decreased to $526,500 in
2000 from $578,535 in 1999. This decrease was partially attributable to the
Company's increased focus on product reliability.
Software Amortization. Certain internal software development costs are
capitalized when incurred. Capitalization of software development costs begins
upon the establishment of technological feasibility. Amortization of capitalized
software costs is provided over the estimated economic useful life of the
software product on a straight-line basis, generally five years. Amortization
begins when a product master is made. Accumulated amortization as of September
30, 2000 was $1,956,438 as compared to $1,313,022 as of September 30, 1999 and
$705,722 as of September 30, 1998. Amortization expense for year ended September
30, 2000 was $643,416 compared to $607,300 for the year ended September 30,
1999.
Research and Development. Research and Development expenses decreased 7.1
percent from $5.6 million in 1999 to $5.2 million in 2000. As a percentage of
sales, research and development expenses decreased from 19.7 percent in 1999 to
13.5 percent in 2000.
Taxes. The Company's benefit from income taxes for year ended September 30,
2000 was $2.0 million as compared to a provision of $0.2 million for the year
ended September 30, 1999. The Company benefited from an income tax valuation
allowance reversal of $3.1 million during the quarter ended March 31, 2000. The
Company realized the income tax valuation allowance reversal based on its
current profitable operations and projected sales and net income for fiscal year
2001. The Company has remaining research and development tax credit
carryforwards for federal income tax purposes available to reduce future federal
income taxes, if any. These carryforwards expire in varying amounts between 2002
and 2015. The Company also has approximately $160,773 in minimum tax
carryforwards available for years beginning after September 30, 2000. The
Company has approximately $580,651 and $1,061,976 of regular and alternative
minimum tax net operating loss carryforwards, respectively, which expire in
2014.
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Net Income or Loss. Net income after taxes and adjustments was $7.1 million
in 2000 (including an income tax allowance reversal of $3.1 million), compared
to a net loss of $8.2 million in 1999. The net loss for 1999 was significantly
affected by a $5.3 million one-time write-down of certain software development
costs and product and software costs related to industrial automation. The net
income for 2000 was significantly affected by the Company's $2.0 milion benefit
from income taxes.
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
Sales. The Company's sales decreased 8.4 percent from $31.0 million in 1998
to $28.4 million in 1999. International sales increased 14.0 percent from $5.7
million in 1998 to $6.5 million in 1999. The Company believes that sales for
1999 did not meet expectations because of a general slow down in orders caused
by a combination of the Asian financial market crisis, budget deferrals for new
equipment purchases, anticipated year 2000-related computer problems, changes in
legacy business market technologies such as simulation and training, delays in
VMIC's penetration of new markets with the Company's new products, product
development delays, and delays in market acceptance of VMIC's PC-based control
software.
The downward trend in sales began in the fourth quarter of 1998 and
continued until the middle of the third quarter of 1999.Hardware sales accounted
for approximately $27.6 million in 1999 compared to $30.4 million in 1998, while
software sales accounted for approximately $0.8 million in 1999, compared to
$0.7 million in 1998.
Sales of the Reflective Memory product line accounted for approximately $6.8
million or 23.9 percent of sales, while sales of single-board PC products
accounted for approximately $4.9 million or 17.3 percent of sales. Sales of I/O
products accounted for approximately $12.1 million or 42.6 percent of sales
while miscellaneous other products accounted for approximately $4.6 million or
16.2 percent of sales.
Gross Margins. The Company's gross margin, which represents sales less cost
of products sold as a percentage of sales, decreased from 65.0 percent in 1998
to 57.0 percent in 1999. The Company expects its gross margin to decline in the
future as the contribution of lower margin product to total sales increases.
Such lower margins may, however, be partially offset by sales of the Company's
new software with I/O systems.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses, decreased 7.0 percent from $13.3 million in 1998 to
$12.4 million in 1999. This decrease was partially attributable to staffing
decreases in the Sales and Marketing Department, and the cost reduction measures
executed throughout the organization. To better control expenses, the Company
recently reduced sales commissions to independent sales contractors, established
house accounts, and replaced some independent sales representatives with direct
factory sales employees.
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Warranty Expense. The Company's warranty expenses increased to $578,535 in
1999, from $501,000 in 1998. This increase was partially attributable to the
Company's increased manufacturing of more complicated products such as PC
computer boards. The Company has invested in more sophisticated manufacturing
equipment; therefore, the Company believes warranty expense should decrease in
2000, although there are no assurances that such reversal will occur.
Software Amortization. Certain internal software development costs are
capitalized when incurred. Capitalization of software development costs begins
upon the establishment of technological feasibility. Amortization of capitalized
software costs is provided over the estimated economic useful life of the
software product on a straight-line basis, generally five years. Amortization
begins when a product master is made. Accumulated amortization as of September
30, 1999 was $1,313,022 compared to $705,722 as of September 30, 1998.
Amortization expense for year ended September 30, 1999 was $607,300 compared to
$471,598 for the year ended September 30, 1998.
Research and Development. Research and Development expenses decreased 9.7
percent from $6.2 million in 1998 to $5.6 million in 1999. As a percentage of
sales, research and development expenses decreased from 20.1 percent in 1998 to
19.7 percent in 1999. Although the Company has committed substantial resources
to the continued development of its IOWorks software, Reflective Memory
products, Fibre Channel products, and embedded PC boards, the Company's
reorganization of its software department combined with significant reductions
in software spending should allow more efficient use of the Company's research
and development budget and minimize the possibility of future write-downs of
software development costs.
Taxes. The Company's provision for income taxes for year ended September 30,
1999 was $163 thousand compared to $75,600 for the year ended September 30,
1998. The Company has remaining research and development tax credit
carryforwards for federal income tax purposes available to reduce future federal
income taxes, if any. These carryforwards expire in varying amounts between 2002
and 2009. The Company also has approximately $67,000 in minimum tax
carryforwards available for years beginning after September 30, 1998. The
Company has approximately $5,423,000 and $5,431,000 of regular and alternative
minimum tax net operating loss carryforwards, respectively, which expire in
2018.
Net Income or Loss. Net loss after taxes and adjustments was $8.2 million in
1999, compared to net income of $204,723 in 1998. The net loss for 1999 was
significantly affected by a $5.3 million one-time write-down of certain software
development costs and product and software costs related to industrial
automation.
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 September 30, 2000, the Company's
variable line of credit for working capital was $8.0 million, of which $3.0
million was used.
Working capital was $0.6 million at September 30, 1999 and $5.8 million at
September 30, 2000, respectively. Included in working capital are cash and cash
equivalents of $0.58 million at September 30, 1999 compared to $0.59 million at
September 30, 2000. Operating activities for the year ended September 30, 2000
provided $4.5 million in cash. Cash used for investing activities was $3.8
46
<PAGE>
million for the year ended September 30, 2000, of which $2.8 million was used
for capital expenditures. Cash provided by financing activities was $4.5 million
and $(0.7) million for the years ended September 30, 1999 and 2000,
respectively.
Inventory turnover for the year ended September 30, 2000 was approximately
163 days compared to approximately 178 days in 1999. This decrease was
attributable to improved inventory level management. At September 30, 2000, the
Company had a reserve of $267,196 for possible inventory obsolescence as
compared to $635,215 at September 30, 1999. Accounts receivable from customers
were outstanding on average approximately 45 days for the year ended September
30, 1999, compared to approximately 52 days in 2000.
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.
47
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Market Risks
The Company is exposed to certain levels of market risks, including
changes in foreign currency exchange rates and interest rates. Market risk is
the potential loss arising from adverse changes in market rates and prices, such
as foreign currency exchange and interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
Interest Rate Exposure
The Company believes that given its overall interest exposure at September
30, 2000, including all interest rate sensitive instruments, a near-term change
in interest rates, based on historical interest rate movements, would not
materially affect the results of operations or financial position of the
Company.
Currency Rate Exposure
The Company's revenues are generally denominated in United States dollars.
Accordingly, foreign currency fluctuations have not had a significant impact on
the Company's financial position, results of operations or cash flows for the
periods presented.
48
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements Included in Item 8:
Page
Report of Independent Accountants.......................50
Balance Sheets as of September 30, 2000 and 1999........51
Statements of Operations for the years ended
September 30, 2000, 1999 and 1998.......................52
Statements of Changes in Stockholders' Equity for the
years ended September 30, 2000, 1999 and 1998...........53
Statements of Cash Flows for the years ended
September 30, 2000, 1999 and 1998.......................54
Notes to the Financial Statements for the years
ended September 30, 2000, 1999 and 1998.................55-70
Schedule for each of the three years in the period
ended September 30, 2000 included in Item 14(a)
II- Valuation and Qualifying Accounts and
Reserves................................................73
49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of VMIC, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects the financial position of VMIC, Inc. at
September 30, 2000 and September 30, 1999, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
2000, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the accompanying index presents fairly in all material respects, the
information set forth therein when read in conjunction with the related
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Birmingham, Alabama
November 6, 2000
50
<PAGE>
VMIC, Inc.
Balance Sheets
September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 593,400 $ 582,883
Accounts receivable, net of allowance for doubtful accounts of
$250,603 and $250,382 in 2000 and 1999, respectively 6,369,480 5,080,529
Inventories 7,641,513 4,658,243
Prepaid expenses 132,826 110,483
Income tax receivable 5,238 106,553
Deferred income taxes 517,339 --
----------------- ------------------
Total current assets 15,259,796 10,538,691
Property, plant and equipment, net 8,885,123 8,165,822
Purchased product and software costs, net 551,701 728,630
Software development costs, net 823,682 836,363
Deferred income taxes 1,624,399 --
----------------- ------------------
$27,144,701 $20,269,506
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,140,555 $ 1,977,284
Income tax payable 93,635 --
Accrued liabilities 2,117,842 2,201,069
Current portion of notes and mortgages 5,070,255 5,753,110
----------------- ------------------
Total current liabilities 9,422,287 9,931,463
Notes and mortgages, less current portion above 6,298,980 6,447,808
----------------- ------------------
Total liabilities 15,721,267 16,379,271
----------------- ------------------
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, par value $0.10 (10,000,000 shares authorized;
4,668,403 and 4,580,016 shares issued and
outstanding in 2000 and 1999, respectively) 466,840 458,002
Additional paid-in capital 7,195,930 6,810,314
Retained earnings (accumulated deficit) 3,760,664 (3,378,081)
----------------- ------------------
Total stockholders' equity 11,423,434 3,890,235
----------------- ------------------
$27,144,701 $20,269,506
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
51
<PAGE>
VMIC, Inc.
Statements of Operations For the Years Ended September 30, 2000, 1999 and
1998
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Sales:
Hardware sales $ 37,722,036 $ 27,641,622 $ 30,370,261
Software sales 922,373 803,899 719,547
---------------- ---------------- ---------------
Total sales 38,644,409 28,445,521 31,089,808
---------------- ---------------- ---------------
Cost and expenses:
Cost of products sold 14,251,141 12,367,744 10,816,007
Research and development expense 5,229,578 5,601,454 6,231,572
Selling, general, and administrative expense 12,741,733 12,400,789 13,285,601
Writedown of property and equipment (Note 2) -- 154,662 --
Writedown of capitalized software costs (Note 15) 368,019 5,257,335 --
---------------- ---------------- ---------------
32,590,471 35,781,984 30,333,180
---------------- ---------------- ---------------
Operating income (loss) 6,053,938 (7,336,463) 756,628
Other income (expense):
Interest income 63,436 34,957 78,222
Interest expense (1,005,097) (821,212) (557,849)
Gain on disposal of property and equipment -- 39,957 3,322
---------------- ---------------- ---------------
(941,661) (746,298) (476,305)
---------------- ---------------- ---------------
Income (loss) before income taxes 5,112,277 (8,082,761) 280,323
Provision for (benefit from) income taxes (2,026,468) 163,466 75,600
---------------- ---------------- ---------------
Net income (loss) $ 7,138,745 $ (8,246,227) $ 204,723
========== ========= ========
Net income (loss) per common and common equivalent share:
Basic $1.55 $(1.82) $0.05
Diluted $1.53 $(1.82) $0.04
Weighted average common and common equivalent shares outstanding:
Basic 4,620,501 4,534,189 4,405,808
========== ======== ========
Diluted 4,663,834 4,534,189 4,554,448
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
52
<PAGE>
VMIC, Inc.
Statements of Changes in Stockholders' Equity For the Years Ended September
30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Total
----------------------------- Paid-In (Accumulated Stockholders'
Shares Amount Capital Deficit) Equity
------------ ------------ ---------- ------------- ---------------
<S> <C> <C> <C> <C>
Balance, September 30, 1997 4,214,535 $421,454 $4,312,209 $4,663,423 $9,397,086
Issuance of common stock 187,528 18,753 1,827,230 -- 1,845,983
Exercise of stock options 60,854 6,085 102,010 -- 108,095
Income tax benefit from exercise
of nonqualified stock options -- -- 191,350 -- 191,350
Net income -- -- -- 204,723 204,723
---------- ---------- ------------- --------- -----------
Balance, September 30, 1998 4,462,917 446,292 6,432,799 4,868,146 11,747,237
Issuance of common stock 38,598 3,860 353,782 -- 357,642
Exercise of stock options 108,056 10,806 248,067 -- 258,873
Purchase of common stock for
constructive retirement (29,555) (2,956) (240,973) -- (243,929)
Income tax benefit from exercise
of nonqualified stock options -- -- 16,639 -- 16,639
Net loss -- -- -- (8,246,227) (8,246,227)
---------- ---------- ------------- --------- -----------
Balance, September 30, 1999 4,580,016 458,002 6,810,314 (3,378,081) 3,890,235
Issuance of common stock 39,899 3,989 309,099 -- 313,088
Exercise of stock options 77,810 7,781 319,574 -- 327,355
Purchase of common stock for (29,322) (2,932) (264,692) -- (267,624)
constructive retirement
Income tax benefit from exercise
of nonqualified stock options -- -- 21,635 -- 21,635
Net income -- -- -- 7,138,745 7,138,745
--------- -------- ---------- ---------- -----------
Balance, September 30, 2000 4,668,403 $466,840 $7,195,930 $3,760,664 $11,423,434
========= ======== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
53
<PAGE>
VMIC,Inc.
Statements of Cash Flows For the Years Ended September 30, 2000, 1999 and
1998
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $7,138,745 $(8,246,227) $ 204,723
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,856,538 3,016,394 2,579,073
Provision for losses on accounts receivable 221 (134,001) 83,921
Reserve for inventory obsolescence (368,019) 635,215 --
Stock issued in lieu of cash compensation 244,475 255,940 71,680
Gain on disposal of property and equipment -- (39,957) (3,322)
Writedown of capitalized software costs 368,019 5,257,335 67,479
Writedown of property and equipment -- 154,662 --
Income tax benefit from exercise of nonqualified stock options 21,635 16,639 191,350
Change in operating assets and liabilities:
Accounts receivable (1,289,172) (580,198) (509,119)
Inventories (2,615,251) (350,219) (811,003)
Prepaid expenses (22,343) 140,250 (159,517)
Income tax receivable 101,315 467,218 (295,188)
Deferred income taxes (2,141,738) 146,828 54,441
Accounts payable 163,271 (390,113) 1,206,001
Income tax payable 93,635 -- --
Accrued liabilities (83,227) (220,111) 244,321
-------------- --------------- ---------------
Total adjustments (2,670,641) 8,375,882 2,720,117
-------------- --------------- ---------------
Net cash provided by operating activities 4,468,104 129,655 2,924,840
-------------- --------------- ---------------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,755,494) (1,441,990) (3,304,007)
Purchased product and software costs -- (456,283) (288,150)
Capitalized software development costs (998,754) (2,755,940) (2,195,068)
Proceeds from dispositions of property and equipment -- 79,768 10,570
-------------- --------------- ---------------
Net cash used in investing activities (3,754,248) (4,574,445) (5,776,655)
-------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of notes and mortgages 2,042,662 1,671,358 5,120,581
Proceeds from line of credit -- 4,100,000 --
Principal payments on notes and mortgages (1,774,345) (1,388,303) (3,562,293)
Repayment of line of credit (1,100,000) -- (400,000)
Proceeds from issuance of common stock 395,968 360,575 1,882,398
Purchase of common stock for constructive retirement (267,624) (243,929) --
-------------- --------------- ---------------
Net cash (used in) provided by financing activities (703,339) 4,499,701 3,040,686
-------------- ------------------------------
Net increase in cash and cash equivalents 10,517 54,911 188,871
Cash and cash equivalents, beginning of year 582,883 527,972 339,101
-------------- --------------- ---------------
Cash and cash equivalents, end of year $ 593,400 $ 582,883 $ 527,972
======== ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 1,004,566 $ 793,612 $ 558,150
======== ========= =========
Cash paid during the year for income taxes
$ -- $ -- $ 125,000
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
1. Nature of Business
Effective November 12, 1998, VME Microsystems International Corporation
changed its name to VMIC, Inc. (the Company). The Company is a global
company that develops, markets, and sells more than 200 different
products worldwide. The Company manufactures products for all popular
buses including CompactPCI (CPCI), VMEbus, PCI, PMC, Multibus I, ISA
and PC-MIP. Products range from analog and digital I/O boards and
drivers, distributed I/O, embedded single board computers (CPUs),
Reflective Memory, Fibre Channel, and component Soft Logic PC-based
control software (IOWorks) to complete systems for industrial control,
test and measurement, telecommunications, simulation and training, and
Storage Area Networks (SANs). The Company provides products that
emphasize open architecture, modularity and flexibility. The Company,
which is located in Huntsville, Alabama, primarily sells within the
United States, but has international sales. These international sales
are denominated in United States currency.
2. Summary of Significant Accounting Policies
The financial statements of the Company include the following
significant accounting policies:
Cash and Cash Equivalents - The Company considers all highly liquid
instruments purchased with original maturities of three months or less
to be cash equivalents.
Inventories - Inventory is carried at the lower of cost or market, with
cost being determined using the first-in, first-out method.
Financial Instruments - The carrying amounts reported in the balance
sheet for cash and cash equivalents, accounts receivable and accounts
payable approximate fair value due to the immediate or short-term
maturity of these financial instruments. The carrying amounts reported
for notes and mortgages approximate fair value because the underlying
instruments are either at variable interest rates which reprice
frequently or at stated rates of interest that approximate market.
Property, Plant and Equipment - Property, plant and equipment is
recorded at cost. Upon sale or retirement of property, plant and
equipment, the cost and related accumulated depreciation are removed
from the respective accounts, and the resulting gain or loss, if any,
is included in the income statement. Routine maintenance and repairs
are charged to expense when incurred. Expenditures that materially
increase values, change capacities or extend useful lives of the
respective assets are capitalized.
55
<PAGE>
Depreciation is computed using the straight-line method over the
estimated useful lives of the respective assets, as follows:
Buildings 15 years
Machinery and equipment 3 - 5 years
Furniture and fixtures 5 years
Automobiles 4 years
During periods of construction, the Company capitalizes interest
expenditures for certain assets requiring an extended period of time to
place in service. The capitalized interest is recorded as part of the
asset to which it relates and is depreciated over the asset's estimated
useful life. Interest in the amount of $0, $10,808 and $30,790 was
capitalized during 2000, 1999 and 1998, respectively.
Purchased Product and Software Costs - Certain purchased product and
software costs are being amortized over three to five years.
Amortization expense for the years ended September 30, 2000, 1999 and
1998 was $176,929, $267,702 and $250,542, respectively.
Software Development Costs - Certain internal software development
costs are capitalized when incurred. Capitalization of software
development costs begins upon the establishment of technological
feasibility. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized software
development costs require considerable judgment by management with
respect to certain external factors including, but not limited to,
technological feasibility, anticipated future gross revenues, estimated
economic life and changes in software and hardware technologies.
Amortization of capitalized software costs is provided over the
estimated economic useful life of the software product on a
straight-line basis, generally five years. Amortization begins when a
product master is made. Accumulated amortization as of September 30,
2000 and 1999 was $1,956,438 and $1,313,022, respectively. Amortization
expense for the years ended September 30, 2000, 1999 and 1998 was
$643,416, $607,300 and $471,598, respectively.
Impairment of Long-Lived Assets - The Company recognizes impairment
losses on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying values.
Losses in the amount of $154,662 were recognized for the year ended
September 30, 1999. There were no such losses recognized during 2000 or
1998.
Liability for Warranty Returns - The Company's sales generally include a
three-year warranty for product defects. The liability for warranty
returns approximated $500,000 at September 30, 2000 and 1999 and is
management's estimate of the Company's liability for such warranty
returns (at cost to repair or replace products) on sales made by the
Company. This liability is included in accrued liabilities on the
accompanying balance sheets.
56
<PAGE>
Revenue Recognition - The Company's revenue is primarily derived from
two sources: (1) hardware sales to distributors and end users and (2)
software sales. The Company generally recognizes revenue from product
sales upon shipment if a signed purchase order exists, the fee is fixed
and determinable, collection of resulting receivable is probable and
product returns are reasonably estimable. Revenue from hardware sales
is recorded net of any discounts and provisions for warranty returns.
Revenue from the sale of software products for which no technical
support is provided is generally recognized upon shipment of the
products, net of estimated returns.
Research and Development Costs - Research and development costs
incurred prior to the establishment of technological feasibility are
expensed as incurred.
Advertising Expense - Advertising costs are expensed as incurred.
Advertising expense totaled approximately $626,000, $848,000 and
$907,000 for the years ended September 30, 2000, 1999 and 1998,
respectively.
Shipping and Handling Fees and Costs- The Company's shipping and
handling fees are included in total sales and the related costs are
included in cost of products sold in the accompanying statements of
operations.
Accounting for Income Taxes - The Company accounts for income taxes
under the asset and liability method. Deferred income taxes are
recognized for the tax consequences in future years of temporary
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end. The amounts recognized
are based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income.
The Company records a valuation allowance when, based on the weight of
available evidence, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Income tax expense is
the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
Stock-Based Compensation - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with
Accounting Principles Board Opinion (APB) No. 25 Accounting for Stock
Issued to Employees, as permitted under the provisions of Statements of
Financial Accounting Standards (SFAS) 123 Accounting for Stock-Based
Compensation. Under APB 25, if the exercise price of the Company's
employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Use of Estimates - 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 revenue and expenses during the reporting period.
Actual results could differ from those estimates.
57
<PAGE>
Recently Issued Accounting Standards - In 1999, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures
about Segments of an Enterprise and Related Information, that requires
the use of the management approach in identifying operating segments of
the Company. Under the management approach, operating segments of an
enterprise are identified in a manner consistent with how the Company
makes operating decisions and assesses performance. SFAS No. 131 also
requires disclosures about products and services, geographic areas, and
major customers. The adoption of SFAS No. 131 did not affect results of
operations or financial position but did affect the disclosure of
segment information (see Note 13).
In 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of
FASB No. 133, which deferred the effective date provisions of SFAS No.
133 for the Company until fiscal 2000. SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and
hedging activities. SFAS No. 133 requires that all derivatives be
recognized at fair value in the statement of financial position, and
that the corresponding gains or losses be reported either in the
statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. The Company
currently does not hold derivative instruments or engage in hedging
activities.
In 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial
Statements. This pronouncement summarizes certain of the SEC staff's
views on applying generally accepted accounting principles to revenue
recognition. The Company has reviewed the requirements of SAB 101 and
believes that its existing accounting policies are in accordance with
the guidance provided in the SAB.
Reclassifications - Certain reclassifications have been made to the
1999 and 1998 amounts in order to conform to the 2000 presentation.
58
<PAGE>
3. Inventories
Inventories consist of the following at September 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Raw materials $ 4,146,871 $ 2,511,460
Work in process 2,361,306 1,232,573
Finished goods 1,400,532 1,549,425
--------------- ----------------
7,908,709 5,293,458
Less reserve for inventory obsolescence (267,196) (635,215)
---------------- ----------------
$ 7,641,513 $ 4,658,243
========== ==========
4. Property, Plant and Equipment
Property, plant and equipment consists of the following at September
30, 2000 and 1999:
2000 1999
Land $ 676,313 $ 676,313
Buildings 5,744,695 5,747,420
Machinery and equipment 10,786,306 8,048,088
Furniture and fixtures 55,142 55,142
Automobiles 67,592 67,592
Construction in progress 20,000
--------------- ---------------
17,350,048 14,594,555
Less accumulated depreciation (8,464,925) (6,428,733)
--------------- ---------------
$ 8,885,123 $ 8,165,822
============ ============
</TABLE>
59
<PAGE>
5. Notes and Mortgages
Notes and mortgages payable at September 30, 2000 and 1999 consist of
the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Short-term obligations:
Current portion of mortgages payable (1) $ 177,583 $ 164,826
Current portion of notes payable (2) 1,892,672 1,488,284
Line of credit (3) 3,000,000 4,100,000
----------------- -----------------
$ 5,070,255 $ 5,753,110
============== ==============
Long-term obligations:
Mortgages payable (1) $ 3,248,111 $ 3,425,694
Notes payable (2) 3,050,869 3,022,114
----------------- -----------------
$ 6,298,980 $ 6,447,808
============== ==============
</TABLE>
(1) Mortgages on buildings and land with unpaid principal balances
becoming due through 2004. Interest rates ranged from 7.0% to 7.5%
at September 30, 2000. The mortgages are collateralized by
buildings and land with a net book value of $4,161,114 and
$4,548,064 at September 30, 2000 and 1999, respectively.
(2) Automobile and equipment financing payable in monthly installments
ranging from $806 to $70,200 with the final payment due in June
2005; payments include interest at rates ranging from 7.5% to 8.3%
at September 30, 2000. Automobiles and equipment with a net book
value of approximately $4,759,000 and $4,243,000 at September 30,
2000 and 1999, respectively, serve as collateral.
(3) The Company can also borrow under an $8,000,000 revolving line of
credit with an interest rate of 7.75% at September 30, 2000. The
line of credit is collateralized primarily by accounts receivable
and inventory of the Company. The line of credit agreement
expires on March 1, 2001. The Company had $3,000,000 and
$4,100,000 of outstanding borrowings under this line of credit
agreement at September 30, 2000 and 1999, respectively. Under
this agreement, the Company is subject to certain restrictive
covenants which include a minimum tangible net worth, a maximum
net worth ratio, a minimum amount of working capital, a minimum
current ratio and a minimum fixed charge ratio. The Company is in
compliance with or has received appropriate waivers of these
covenants as of September 30, 2000.
60
<PAGE>
The aggregate maturities of notes and mortgages at September 30, 2000 are as
follows:
2001 $ 5,070,255
2002 1,452,561
2003 3,094,146
2004 1,459,755
2005 292,518
-------------
$ 11,369,235
=============
6. Stock Option Plan
The Company has a stock option plan under which 1,062,000 shares of
common stock have been reserved for issue to certain employees,
officers, and directors through incentive stock options and
nonqualified stock options at September 30, 2000. The options vest and
are exercisable primarily over a four year period from the date of
grant and normally expire either five years or ten years from the date
of grant depending on when the options were granted.
Transactions for 2000, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
Weighted-
Number of Range of Average
Options Exercise Prices Exercise Price
-------------- ---------------- --------------
<S> <C> <C> <C>
Options outstanding, September 30, 1997 543,766 $4.25-$10.00 $6.13
Options granted 92,887 $10.00-$11.50 $11.46
Options exercised (60,854) $4.25-$10.00 $6.19
Options canceled (54,880) $4.90-$11.50 $8.34
-------------- ---------------- --------------
Options outstanding, September 30, 1998 520,919 $2.125-$4.00 $2.29
Options granted 52,900 $4.00-$8.00 $7.89
Options exercised (108,056) $2.125-$4.90 $2.54
Options canceled (56,146) $2.125-$2.45 $2.30
-------------- ---------------- --------------
Options outstanding, September 30, 1999 409,617 $4.90-$11.50 $8.51
Options granted 56,100 $6.84-$11.04 $7.44
Options exercised (77,810) $2.45-$11.50 $4.21
Options canceled (94,484) $6.84-$11.04 $9.13
-------------- ---------------- --------------
Options outstanding, September 30, 2000 293,423 $6.84-$11.50 $9.17
============== ============== ==============
</TABLE>
61
<PAGE>
The following table summarizes information about stock options
outstanding at September 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ------------------------------
Weighted
Average Weighted Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------- -------------- --------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$6.84 45,300 $8.95 $6.84 -- --
$8.00 - $10.00 182,870 $5.18 $8.93 79,513 $8.61
$11.04 8,000 $9.89 $11.04 -- --
$11.50 57,253 $7.41 $11.50 11,451 $11.50
------------ --------------
293,423 90,964
=========== ==============
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock plans. Accordingly, no compensation cost has
been recognized related to the stock options. Had compensation cost for
the Company's stock based compensation plans been determined based on
the fair value at the grant dates for awards under those plans
consistent with the method prescribed in SFAS No. 123, the Company's
net income (loss) would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Net income (loss) - as reported $7,138,745 $(8,246,227) $ 204,723
Net income (loss) - pro forma $6,971,504 $(8,443,623) $ 9,605
Diluted income (loss) per share - as reported $1.53 $(1.82) $0.04
Diluted income (loss) per share - pro forma $1.50 $(1.86) $0.00
</TABLE>
62
<PAGE>
The pro forma amounts reflected above are not representative of the
effects on reported net income in future years because, in general, the
options granted typically do not vest for several years and additional
awards are made each year. The fair value of each option grant was
estimated on the grant date using the following assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected life (years) 1-4 1-4 1-4
Risk-free interest rate 4.34% - 6.79% 4.34% - 7.74% 4.76% - 6.63%
</TABLE>
In addition to the stock options granted under the stock option plan,
the Company has granted bonuses to employees in the form of stock
awards, which vest in variable terms, not to exceed five years. The
nonvested shares of the stock awards outstanding at September 30, 2000
and 1999 were 36,050 and 26,609, respectively. During 2000 and 1999,
15,709 and 24,745, respectively, shares of the Company's common stock
were issued and $88,733 and $165,400, respectively, was charged to
expense.
7. Income Taxes
The components of the provision for (benefit from) income taxes for the
years ended September 30, 2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Current:
Federal $ 93,635 $ -- $ 13,599
State -- -- 7,560
----------- -------------- --------------
Total current 93,635 -- 21,159
Deferred (2,120,103) 163,466 54,441
----------- -------------- --------------
Total provision for (benefit from) income taxes $(2,026,468) $ 163,466 $ 75,600
============ =============== =============
</TABLE>
63
<PAGE>
Temporary differences which generated deferred tax assets and
liabilities at September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Current deferred tax asset:
Accounts receivable $ 90,768 $ 90,550
Inventory 96,778 278,077
Accruals and other 329,793 624,132
-------------- --------------
517,339 992,759
Valuation allowance -- (992,759)
-------------- --------------
Net current deferred tax asset $ 517,339 $ --
=============== ==============
Noncurrent deferred tax asset (liability):
Property, plant, and equipment $ 154,855 $ 161,179
Software development costs (77,739) (103,227)
Loss carryforwards 226,437 1,980,439
Tax credits 1,320,846 67,137
-------------- --------------
1,624,399 2,105,528
Valuation allowance -- (2,105,528)
-------------- --------------
Net noncurrent deferred tax asset $ 1,624,399 $ --
=============== ==============
</TABLE>
The ultimate realization of the net deferred income tax asset depends
on the Company's ability to generate sufficient taxable income in the
future. Based on the Company's results of operations, it is more likely
than not that the net deferred tax asset will be realized. Accordingly,
the valuation allowance has been removed for the entire net deferred
tax asset.
64
<PAGE>
During 2000 and 1999, temporary differences resulted primarily from
using different methods of depreciation for book and tax purposes, the
capitalization of certain inventory costs for tax purposes, the
capitalization of certain software development costs for book purposes,
accrued warranty expense, and differences in the deduction of bad debts
and compensated absences for book and tax purposes.
The Company has remaining research and experimentation tax credit
carryforwards for federal income tax purposes available to reduce future
federal income taxes, if any. These carryforwards expire in varying
amounts between 2002 and 2015. The Company also has approximately
$160,773 in minimum tax carryforwards available for years beginning
after September 30, 2000. The Company has approximately $580,651 and
$1,061,976 of regular and alternative minimum tax net operating loss
carryforwards, respectively, which expire in 2014.
The provision for (benefit from) income taxes differs from the amounts
computed by applying the statutory federal income tax rate of 34 percent
to income before income taxes. The reasons for these differences are as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Income tax expense at statutory federal income
tax rate $ 1,738,174 $(2,748,009) $ 95,310
Effect of tax credits (755,091) -- (40,488)
State income taxes - net of federal income tax benefit 88,736 (178,671) 7,102
Miscellaneous -- (8,141) 13,676
--------------- --------------- --------------
1,071,819 (2,934,821) 75,600
Valuation allowance (3,098,287) 3,098,287 --
--------------- -------------- --------------
Total provision for (benefit from) income taxes $(2,026,468) $ 163,466 $ 75,600
=============== ============ ==============
</TABLE>
8. Employee Benefit Plan
In 1991, the Company adopted an incentive savings plan (the Savings
Plan) for all of its employees. The Savings Plan provides certain
employment benefits to all eligible employees and qualifies as a
deferred arrangement under Section 401(k) of the Internal Revenue Code.
Upon approval by the Board of Directors, the Company will match
one-fourth of the participants' contributions, limited to 6% of a
participant's income. An employee's interest in the Company's
contributions begins vesting after one year and becomes 100% vested
after five years. Amounts expensed for the Savings Plan amounted to
approximately $117,000, $110,000 and $110,000 in 2000, 1999 and 1998,
respectively.
65
<PAGE>
9. Employee Stock Purchase Plan
In 1992, the Company adopted an employee stock purchase plan (the Stock
Plan) for employees who have been employed by the Company for the
twelve months immediately preceding the date of participation in the
Stock Plan. The Stock Plan provides for the Company to withhold any
amount, not to exceed $25,000, for the purpose of purchasing shares of
the Company's stock at 85% of its fair market value on a quarterly
basis. The Company has reserved 100,000 shares of its common stock for
issuance under the Stock Plan. Included in accrued liabilities at
September 30, 2000 and 1999 in the accompanying balance sheets, is
approximately $36,751 and $71,194, respectively, withheld from
employees to purchase the Company's common stock under the Stock Plan.
10. Commitments and Contingent Liabilities
During the normal course of business, the Company is subjected to
various lawsuits and claims. Management does not anticipate any
judgments against the Company in excess of its insurance coverage or
liabilities already established which would have a material impact,
individually or in the aggregate, on the financial statements of the
Company. In addition, the Company has entered into certain
noncancelable, nonrefundable purchase commitments. Outstanding
commitments under these agreements were approximately $0 and $80,000,
respectively at September 30, 2000 and 1999.
66
<PAGE>
11. Earnings Per Share
A summary of the calculation of basic and diluted earnings per share
(EPS) for the years ended September 30, 2000, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
Income
(Loss) Shares Per-Share
(Numerator) (Denominator) Amount
---------------- ------------------ ------------
<S> <C> <C> <C>
2000
Basic EPS:
Income available to common stockholders $ 7,138,745 4,620,501 $1.55
Effect of dilutive securities:
Stock options -- 43,333 --
Diluted EPS $ 7,138,745 4,663,834 $1.53
1999
Basic EPS:
Loss available to common stockholders $ (8,246,227) 4,534,189 $(1.82)
Effect of dilutive securities:
Stock options -- -- --
Diluted EPS $ (8,246,227) 4,534,189 $(1.82)
1998
Basic EPS:
Income available to common stockholders $ 204,723 4,405,808 $0.05
Effect of dilutive securities:
Stock options -- 148,640 --
Diluted EPS $ 204,723 4,554,448 $0.04
</TABLE>
Options to purchase 145,254 shares of common stock at $10.00, $11.04
and $11.50 per share were outstanding during 2000 but are not included
in the computation of 2000 diluted EPS because the options' exercise
prices were greater than the average market price of common shares. The
options, which expire through 2010, were still outstanding at September
30, 2000. Options to purchase 409,617 shares of common stock at prices
ranging from $4.90 to $11.50 per share were outstanding at September
30, 1999 but were not included in the computation of diluted EPS
because inclusion of such options would have been antidilutive. Options
to purchase 90,137 shares of common stock at $11.50 per share were
outstanding during 1998 but are not included in the computation of 1998
diluted EPS because the options' exercise prices were greater than the
average market price of common shares. The options, which expire
through September 2008, were still outstanding at September 30, 1998.
67
<PAGE>
12. Related Parties
The Company compensates the members of its board of directors for
consulting services. Total expenses for these consulting services were
$23,750, $187,350 and $35,000 for the years ended September 30, 2000,
1999 and 1998, respectively. Included in accrued liabilities at
September 30, 2000 and 1999 is $0 and $135,000, respectively, of
consulting fees that were owed to one member of the board of directors.
13. Segment Reporting
The Company's reportable segments are based on the Company's method of
internal reporting which is disaggregated operationally. The two
reportable segments, U.S. and International, are evaluated based on
gross profit; therefore, selling, general, and administrative costs, as
well as research and development expense, interest income, interest
expense, and provision for taxes is reported on an entity-wide basis
only.
The accounting policies of the segments are the same as those described
in the Summary of Significant Accounting Policies to the extent such
policies affect the reported segment information. The operational
distributions of the Company's revenues and gross margin for the years
ended September 30, 2000, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
2000 1999 1998
(In Thousands)
<S> <C> <C> <C>
--------------------------------------------------------
Total sales:
U.S. $ 31,180 $ 21,939 $ 25,389
International 7,464 6,507 5,701
-------------- --------------- ---------------
$ 38,644 $ 28,446 $ 31,090
============== =============== ===============
Gross profit:
U.S. $ 20,002 $ 12,765 $ 16,925
International 4,391 3,313 3,349
-------------- -------------- ---------------
$ 24,393 $ 16,078 $ 20,274
============== =============== ===============
The Company's identifiable assets as of September 30, 2000, 1999 and 1998 relate to the U.S. segment
only.
</TABLE>
68
<PAGE>
14. Summarized Quarterly Financial Data (Unaudited)
The following table presents unaudited quarterly operating results of
each of the Company's last eight fiscal quarters. This information has
been prepared by the Company on a basis consistent with the Company's
audited financial statements and includes all adjustments, consisting
of normal recurring adjustments and the adjustment described in Note
15, that the Company considers necessary for a fair presentation of the
data.
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended
----------------------------------------------------------------
December 31, March 31, June 30, September 30,
1998 1999 1999 1999
---------------------------- -----------------------------
(In Thousands, Except for Per Share Amounts)
Net sales $ 7,705 $ 6,672 $ 6,116 $ 7,953
Gross profit $ 4,854 $ 4,211 $ 3,748 $ 3,265
Operating loss $ (264) $ (384) $ (211) $ (6,477)
Net loss $ (291) $ (410) $ (304) $ (7,241)
Net loss per share (1):
Basic $(0.07) $(0.09) $ (0.07) $ (1.60)
Diluted $(0.07) $(0.09) $ (0.07) $ (1.60)
Three Months Ended
----------------------------------------------------------------
December 31, March 31, June 30, September 30,
1999 2000 2000 2000
---------------------------- -----------------------------
(In Thousands, Except for Per Share Amounts)
Net sales $ 8,353 $ 9,252 $ 9,946 $ 11,093
Gross profit $ 5,335 $ 5,885 $ 6,207 $ 6,966
Operating income $ 1,079 $ 1,347 $ 1,562 $ 2,066
Net income $ 847 $ 3,585 $ 905 $ 1,802
Net income per share (1):
Basic $0.18 $0.78 $ 0.20 $ 0.39
Diluted $0.18 $0.78 $ 0.20 $ 0.37
</TABLE>
(1) The net income (loss) per share for each quarter within a fiscal year
does not necessarily equal the total net income per share for that
particular fiscal year due to variations in the estimated value of the
Company's common stock during the year and the effect these variations
had on the shares outstanding calculation.
69
<PAGE>
15. Significant Fourth-Quarter Event
In the fourth quarter of 2000 and 1999, the Company recorded charges of
$368,019 and $5,257,335, respectively, for the write-down of certain
software development costs and purchased product and software costs.
Due to the fact that the market for processed control software failed
to grow at the rate experts projected, the Company has significantly
restructured the software sales staff and realigned the product mix to
be more in line with the end-users' needs. Effective September 1999,
this change resulted in a significant reduction in the software sales
force and the hiring of a new software sales manager with extensive
knowledge of the industry and the end-users' needs. The write-down is
based on management's estimates of the gross future sales that can be
generated from the existing software products marketed by the Company.
The estimate takes into consideration no additional development costs
being incurred to increase the marketability of the products.
70
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12, and 13.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION;
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Items 10, 11, 12, and 13 is incorporated
herein by reference to VMIC's definitive Proxy Statement furnished to
stockholders in connection with the Annual Meeting of Stockholders to be held on
February 18, 2001.
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report
(I) The financial statements and other financial information of VMIC, Inc. set
forth below and the Report of Independent Auditors thereon are incorporated
by reference from pages 49 through 70 of this Form 10-K Annual Report:
Balance Sheets at September 30, 2000, 1999 and 1998
Statements of Operations For the Years Ended September 30, 2000, 1999 and
1998
Statements of Changes in Stockholders' Equity For the Years Ended
September 30, 2000, 1999 and 1998
Statements of Cash Flows For the Years Ended September 30, 2000, 1999 1998
Notes to Financial Statements
Report of PricewaterhouseCoopers LLP, Independent Auditors
Selected Quarterly Financial Data
(II)Financial Statement Schedule:
Page
-----
Schedule II Valuation and Qualifying Accounts and Reserves 73
for each of the three years in the period ended September 30, 2000.
All other Schedules called for under Regulation S-X are not
submitted because they are not applicable or not required or
because the required information is not material or is included
in the financial statements or notes thereto.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth
quarter of the fiscal year ended September 30, 2000.
71
<PAGE>
(c) Exhibits:
3.1+ Certificate of Incorporation of VME Microsystems International
Corporation and Amendments
3.2+ By-Laws of VME Microsystems International Corporation and Amendments
10.1+ Consolidated Nonqualified and Incentive Stock Option Plan*
10.2+ Form of Nonqualified Stock Option Agreement*
10.3+ Form of Incentive Stock Option Agreement*
10.4+ 1992 Employee Stock Purchase Plan and Amendment*
----------
* Management contract or compensatory plan or arrangement
+ Previously filed.
72
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<S> <C> <C> <C> <C>
Balance at Additions Deductions Balance at
Beginning Charged to from End
of Year Income Reserves of Year
--------------- ---------------- ---------------- ----------------
Inventory Reserve
Year ended September 30, 2000 $ 635,215 $ - $ 368,019 $ 267,196
Year ended September 30, 1999 $ - $ 635,215 $ - $ 635,215
Year ended September 30, 1998 $ - $ - $ - $ -
Allowance for Doubtful Accounts
Year ended September 30, 2000 $ 250,382 $ 75,000 $ 74,779 $ 250,603
Year ended September 30, 1999 $ 384,383 $ 24,381 $ 158,382 $ 250,382
Year ended September 30, 1998 $ 300,462 $ 90,000 $ 6,079 $ 384,383
Deferred Tax Asset Valuation Allowance
Year ended September 30, 2000 $ 3,098,287 $ - $ 3,098,287 $ -
Year ended September 30, 1999 $ - $ 3,098,287 $ - $ 3,098,287
Year ended September 30, 1998 $ - $ - $ - $ -
</TABLE>
73
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this the 28th day of
December 2000.
VMIC, INC.
By: Carroll E. Williams,
--------------------
Carroll E. Williams,
President, CEO and Chairman of the Board
Signature Title Date
Carroll E. Williams
___________________ Director December 28, 2000
Carroll E. Williams
Mary W. Williams
___________________ Director December 28, 2000
Mary W. Williams
Arthur Faulkner
___________________ Director December 28, 2000
Arthur Faulkner
Alfred F. Casteleyn
___________________ Director, Vice President December 28, 2000
Alfred F. Casteleyn Sales and Marketing
Ernest Potter
__________________ Director December 28, 2000
Ernest Potter
R. Gary Saliba
___________________ Director December 28, 2000
R. Gary Saliba
Jim Caudle, Sr.
___________________ Director December 28, 2000
Jim Caudle, Sr.
Gordon Hubbert
___________________ Vice President and December 28, 2000
Gordon Hubbert Principal Financial
and Accounting Officer
74
