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, 1999.
( ) 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)
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DELAWARE 63-0917261
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
12090 S. Memorial Parkway Huntsville Alabama 35803-3308
(256) 880-0444
Address, including zip code and telephone number of principal offices
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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 $.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, 1999, there were 4,580,016 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 $20,007,438 based on the
price of such stock with respect to a sale transaction at $8.25 per share for
654 shares on December 9, 1999, 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.
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 19,
2000 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 is a supplier of hardware and software products to the embedded
computer industry. Embedded computers are different from desktop and other
computers in that embedded computers are designed to perform repetitive tasks,
whereas other computers are more general purpose. Embedded computers are used in
markets such as telecommunications, medical, industrial automation, test and
measurement, and defense. VMIC supplies products to all of these markets.
However, the Company's focus for the future is primarily telecommunications and
and Fibre Channel storage area networks markets. VMIC has recently entered the
storage area network, or SAN market, and the computer networking industry with
Fibre Channel products that are also used throughout these markets. SAN and
computer networking have wide applications throughout the computer industry.
The Company is focused on growth in five key product revenue areas:
o embedded Intel(R) central processing units, or CPUs,
o communications/networking products, such as Fibre
Channel and Reflective Memory networks,
o data acquisition and control input and output, or I/O,
products,
o personal computer-based control I/O systems, and
o software to the embedded computer market.
VMIC specializes in open architecture, nonproprietary, standard
computer buses such as VMEbus, PCI bus, CompactPCI, PMC, and PCoMIP. These open
architecture buses are supported by companies such as Motorola, Intel,
Hewlett-Packard, Microsoft, Dell and Compaq. 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 low-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 and international
distributors.
The Company's products are used in:
o communications and networking of computer and computer
storage systems,
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
o other applications.
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VMIC recently expanded its product lines and changed its market focus. The
new product lines, such as singleboard computers, communications/networking
products, and PC-based I/O control systems, are targeted at vertical, larger
markets rather than the Company's historical niche markets. The Company's niche
markets, which generated high margins, were primarily in simulation and
training, defense, and power plant monitoring. The new vertical market focus is
telecommunications, and Fibre Channel storage area networks for the broader
computer market. VMIC'S communications/networking products are focused on the
Fibre Channel host adapter market, which is projected to grow from $1.6 billion
to $6.1 billion by 2002. According to EMF Associates, the total Fibre Channel
market is projected to be $23 billion by 2003. The Company plans, however, to
continue to market its products to the defense, test and measurement, medical,
industrial automation and other markets.
While the total telecommunications, storage area networks, and
communications markets are very large, the segments in which VMIC are focused
are estimated to have annual sales between $40 and $50 billion dollars. The
Company believes that each of these markets offers unique opportunities in that
the demands of each market are changing. The markets' demand for performance,
high-speed communications/ networking, and PC solutions, coupled with open
architecture software and hardware solutions, the Company believes presents
significant opportunities for the Company. VMIC has focused on the development,
sales, and marketing of products focused on these markets. The Company has
invested more than 20 percent of each year's sales hardware and software
products with a recent focus on Intel-based computers and
communications/networking products and complete PC Based Control I/O systems for
the high growth markets.
For the telecommunications market, the Company offers a line of
embedded PC computers and communications/networking products, such as Fibre
Channel and Reflective Memory networks, which satisfies the industry's demand
for high-performance, fiber-optic network products. The Company's strategic
vision is to offer a total solution to the industrial automation factory control
market, and board products to the telecommunications, storage area network and
embedded computer markets. The Company differentiates itself in these markets
through a broad product line and software. To effect the strategy, the Company
has invested in developing PC-based software and factory control hardware for
industrial automation, communications/network and computer boards for
telecommunications, a complete product line focused on the embedded computer
industry, and a line of Reflective Memory network and Fibre Channel products for
the communications/network industry. Each of these product lines is crucial to
the objective of offering total solutions; however, independently each product
line participates in a market with significant potential for growth.
The Company's objective is to become a leading supplier of standard bus
board products and software to the embedded computer and storage area network
markets. In addition, the Company believes that its expertise in the embedded
computer market will provide the stepping stone for the Company to enter the
high-growth Fibre Channel storage area network market with host adapter boards,
bridges and hubs.
VMIC, headquartered in Huntsville, Alabama, is a 13-year-old company with
207 employees and operates from over 72,000 square feet in buildings covering
ten acres.
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.
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Data acquisition refers to the process of collecting what is commonly
referred to as real-world information phenomena such as light, pressure,
temperature, humidity, force, and flow. A data acquisition system (which
comprises 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 upon open standards and standard PC
platforms. The industry is focused on technology leaders such as Intel and
Microsoft, and standard buses. Designs based upon 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.
Standard bus solutions include such buses as VME, CompactPCI, PCoMIP, 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. CompactPCI is an embedded computer version of
PCI. CompactPCI 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. CompactPCI has certain advantages in applications that require fast
transfers of large amounts of data.
CompactPCI 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 industrial automation market is experiencing a major shift to standards
based upon PC technology and open bus architectures. According to Frost and
Sullivan, the total industrial automation market generated revenues of $13.78
billion in 1999. Revenues for this market are anticipated to increase to
approximately $16.5 billion by the year 2001. According to this 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. Ability to upgrade the hardware while
preserving the customer's software investment is a key benefit of PC control.
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The telecommunications market recently adopted CompactPCI 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 CompactPCI-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 storage area network 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 a wide range of companies
are entering 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 upon a cost-effective scalable
architecture.
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 is now the choice for computer clustering, storage
interfacing, and networking.
Business Strategy
Until approximately three years ago, the Company's focus was primarily
defense, test and measurement, nuclear power plant monitoring, and simulation
and training. At that time, the Company's revenues were primarily generated from
specialized products in smaller niche markets. These products served the Company
well by providing high margins; however, these markets were not large enough to
sustain desired growth.
Approximately three years ago, the Company implemented a plan to
develop products focused on larger vertical markets with potential high-volume
growth. The product lines selected were:
o embedded PC computers for VMEbus and CompactPCI,
o expanded communications/networking products for the embedded computer
industry and for the broader server computer market,
o PC-based control software and other software products, and
o I/O systems for industrial automation based upon PC control software.
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 SAN industry and embedded computer industry for telecommunications,
industrial automation, test and measurement, medical devices, and defense
applications. The key elements of the Company's strategy to achieve this
objective are:
Leverage the Company's Pentium 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, and other leading PC vendors, and the Company's investment in leading
technology, customers are now selecting the Company for custom-designed products
for potential high-volume applications. The product line focus is for VMEbus and
CompactPCI applications.
Offer Fibre Channel Products. The Company has expanded its
communications/networking product line to include a family of Fibre Channel host
bus adapters which support computer clustering and networking of computers and
storage devices at high speed gigabit data rates. Fibre Channel is an ANSI
standard adopted by most leading computer companies. Host bus adapters convert
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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 entry into broader markets such as
telecommunications and storage area networks.
Leverage Input/Output (I/O) Expertise. VMIC's I/O product line has been
primarily based upon VMEbus. The product line was recently expanded to include
CompactPCI and a low-cost busless DIN rail mount I/O product line. The strategy
is to focus on lower cost I/O products designed specifically for industrial
automation 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 is establishing a
worldwide distribution network that is highly focused on this market while
continuing the sale of legacy products through existing sales reps and
distributors.
Expand International Markets. The Company has 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. The
Company anticipates significant growth in international orders in 2000. In 1998
the Company opened an office in Paris, France in response to customer requests
for a VMIC presence in Europe beyond its distributor network. The Company is now
pursuing business in China and Russia through new distributors managed by VMIC
personnel.
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 reduce costs and
increase functionality. 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 repeat sales. 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 more
focused on communications/ networking, PC single-board computers, and I/O
systems based upon PC-based control software and improvements in the PC-based
control software product.
Products
The Company designs and manufactures a wide variety of board-level
products, I/O systems, and software primarily for embedded computer solutions,
as well as communications products for most leading computer manufacturers. Some
of the Company's products are used for high-speed communications among embedded
computer systems and systems offered by such companies as Silicon Graphics,
Harris, IBM, Intergraph, Motorola, Gateway and DELL. The Company's product lines
can be partitioned into six primary groups:
Single-Board PC VMEbus and Compact PCI CPUs and Peripherals. The Company is
a technological leader in VMEbus and CompactPCI (CPCI) Intel-based CPU products.
The product line spans the complete line of Intel-based products including 486,
586, Pentium, Pentium II and Pentium III processor-based single-board computers.
The Company's Pentium processor-based single-board computers have recently
received national award recognition from Control Engineering. The product line
supports a wide variety of operating systems such as DOS, Windows, Windows
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NT/RTX, Lynx OS, Windows CE/RTX, Linux, VxWorks and QNX. In addition, the
Company manufactures an array of compatible VMEbus boards such as floppy and
hard drive modules. 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 with VMIC products. The
Company has recently announced a variety of Pentium single board computers based
on CPCI. According to recent independent market studies and the Company's recent
marketing efforts, CPCI products have the greatest potential in the
telecommunications market area. The Company's single-board products are fully
supported by the Company's component software (IOWorks). See "Component Software
(IOWorks)" below.
General Purpose I/O Products. The Company offers a wide range of I/O
products including VMEbus, Compact PCI, PCI and DIN rail I/O. The Company's 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, and
Windows NT/RTX. The Company has recently private 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. The Company's profit margins for
these products are in line with similar products developed by the Company. The
Company's 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.
Communications Products. The Company's communications product line includes
five discrete product categories. The categories are:
(1) Fibre Channel. Fibre Channel, a highly reliable, high speed
interconnect technology, 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:
* Internet/Intranet
* High-performance storage
* Large databases and data warehouses
* Storage backup systems and recovery
* Server clusters
* Network-based storage
* High-performance workgroups
* Campus backbones
* Distance learning
* Digital audio/video networks
* Medical imaging/telemedicine
* Embedded military sensor, processing, and displays
* Industrial control systems
VMIC's Reflective Memory (RTnet) product line utilizes Fibre Channel
technology to achieve deterministic operations beyond Fibre Channel. Because of
VMIC's experience with this technology, VMIC believes that it is qualified to
enter the host adapter, hub, and bridge market arena with a complete line of
Fibre Channel products. 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,
CompactPCI, 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,
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Gateway, and others. Infiniband is the next generation computer architecture on
the drawing board for the future. In addition, VMIC has significant software
experience to differentiate its product line.
VMIC's host bus adapter (HBA) Fibre Channel product line is based upon
state-of-the-art technology, and the product line includes open architecture
solutions based on several industry-standard bus structures, such as PCI bus,
CompactPCI, and PMC/VME.
The Company has recently released for production six new Host Adapter
Boards, or HBA's, boards for PCI, CPCI, and PMC. The Company has also recently
released three new storage area network compatible single board computers for
VME and CPCI. These new 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.
(2) 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.
(3) Serial I/O communication products. 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.
(4) 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 which support the configuration of large I/O
systems and the remoting of I/O boards from the CPU via fiber optics.
(5) Reflective Memory. VMIC's Reflective Memory 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 Company's Reflective Memory 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 Reflective Memory products have recently received national award
recognition from Control Engineering.
Component Software (IOWorks). The Company's IOWorks software product line
is an extensive family of PC software components intended primarily for
applications in the Industrial Automation industry, the products also have
applications in the Test and Measurement, Simulation and Training,
Telecommunications, and other markets. These components provide a comprehensive
set of tools used to create data acquisition and control systems and to
interconnect the large number of legacy control products commonly found in
industrial plants today. 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. IOWorks' strength lies in the seamless,
cohesive, easy-to-use environment it provides and the flexibility it gives users
to pick and choose the right components for the application.
IOWorks components 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. IOWorks 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 upon open standards such
as IEC-1131-3 and Microsoft technologies. IEC-1131-3 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 I/O boards
and platforms, as well as VMIC's hardware products. The software is designed for
hardware independence and software O/S 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 OEM's, systems
integrators, or end-users who install the equipment, develop software, and add
third-party products to customize such systems for specific applications.
The Company now offers a much wider range of I/O systems based upon new
hardware and software products which have wider applications in the industrial
automation and test and measurement markets. The Company's IOWorks software
product enables the Company to offer systems-level products for industrial
automation which:
o support the interconnectivity of a wide range of existing
dissimilar I/O systems, thereby opening a closed market,
o replace antiquated closed proprietary I/O systems with
state-of-the-art open architecture I/O systems which are based on
open standards,
o enhance the performance and increase the functionality of
antiquated installed I/O systems, allowing customers to maintain
their investment in such equipment, and
o support the interconnection of the Company's advanced I/O
systems with a broad array of installed I/O systems and new
systems offered by third-party suppliers.
IOWorks, when coupled with the Company's PC single-board computer line, I/O
boards, Reflective Memory, and other products, allows the Company to offer the
following additional systems-level products in the multibillion dollar
industrial automation market.
o The Company's IOWorks controller product line performs the same functions
as programmable logic controllers (PLCs) with the added benefit of being based
upon open standards, and Intel-based CPU designed by the Company which offers
high performance and system flexibility. In addition, the Company's products
preserve the customer's investment in software so that customers can update
their equipment without rewriting their software.
o The Company's new system-level Reflective Memory based PLC ACCELERATION
product increases the functionality of existing PLCs which may be overtaxed or
PLCs which are too slow for expanded requirements. The Company's solution allows
the customer to maintain their investment in old technology by linking the older
PLC products to the Company's IOWorks system by way of the Company's Reflective
Memory.
o IOWorks Server, which combines the Company's IOWorks PC-based control
software, with certain of the Company's hardware products and/or some
third-party products, to offer solutions that support the interconnectivity of a
wide variety of PLC systems in a seamless network. The Company's Reflective
Memory is utilized to support the networking of the same or dissimilar I/O
systems, computers, etc.
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In addition to these new systems-level products, the Company's IOWorks
component software is designed as a stand-alone product. This flexibility allows
the Company to market its software without the Company's hardware content in a
market that is projected to grow over 50 percent compounded annually to $500
million by 2003. This embryonic market is in the early stages of growth.
The Company's potential growth in the test and measurement I/O systems
market has been significantly enhanced because its IOWorks software, when
coupled with the Company's equipment and leading third-party test and
measurement software, enables the Company to offer state-of-the-art open
architecture I/O systems to the test and measurement market. While the Company
has sold products into the test and measurement market, its potential for
significant growth has also been increased because of its investment in PC
single-board computers, new IOWorks PC-based control software, and new I/O board
products designed specifically for the test and measurement market.
The company has recently expanded its' I/O systems product line to include
CPCI , PCI, and DIN rail I/O. These systems are based upon the IOWorks software
product line and significantly expand the Companies offering of system level
products to the Industrial Automation market .
Special Products. The Company develops, manufactures, and markets a variety of
special products which are modified versions of the companies standard products.
The Company has recently focused more of its' resources on several potential
contracts associated with such opportunities. 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 high volume opportunities. While special products are
normally developed at the customer's expense, occasionally the Company may share
development expenses for such products or completely underwrite the development.
The company typically negotiates the complete ownership in all rights to such
products.
The development and sale of these special products gives the company a
significant advantage over the 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.
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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 recently changed its marketing focus to more vertical
channels associated with OEMs who incorporate the Company's new products into
their new products for resale in these vertical markets. The Company has
recently won design-ins in the medical, digital broadcasting, defense,
telecommunications, and industrial automation markets with leading companies.
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, 1999, 70 customers accounted for approximately 68 percent of the
Company's sales. However, no single customer represented greater than 8.1
percent of the Company's sales. The following tables include representative
customers and end-users include of VMIC, by market:
<TABLE>
<CAPTION>
Industrial Process Control Computer Manufacturers Automotive
- -------------------------- ---------------------- -----------------
<S> <C> <C>
3M Company Concurrent Computer Corp. Applied Automation
AGFA Cray Research Chrysler
AVX Corporation Digital Equipment Corp. Ford Motor Company
Bethlehem Steel Electronics Associates General Motors/EDS
Cegelec Encore Mercedes Benz
Cimtek Harris Corporation Sverdrup Technologies
Commonwealth Aluminum Hewlett-Packard Toyota
Corning IBM
Dupont Motorola Research
--------
Eastman Kodak Perkins-Elmer Argonne National Labs
Fairmont Tamper Telecommunications AT&T Bell Labs
GE Fanuc Lucent Bell Telephone Labs
Kimberly-Clark ATT Brookhaven National Labs
Kvaerner Divicom Duke University
Lamm Research EMS Fermilab
Logan Aluminum Nortel Ganil
Mannesman Demag SED Harry Diamond Lab
McNaughton and McKay Utilities Industry Harvard University
Poscon Commonwealth Edison Co. Johns Hopkins University
Quester Department of Energy Los Alamos National Labs
Reynolds Aluminum Georgia Power Michigan State University
Thermco Houston Lighting & Power MIT
Tuscaloosa Steel KSG Rensselaer Polytechnic
Xerox Majuba RIST
Mochovce Sierra Research
Ontario Hydro SRRC
PP&L
TVA
Union Electric
Vepco
</TABLE>
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<TABLE>
<CAPTION>
Customers, continued
- --------------------
Simulation and Training Aerospace Defense Military
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Altas Elektronik Aerospatiale AIDC
AAI Corporation Alenia AVCO
Burtek Bendix Field Engineering BDM
CAE Electronics Boeing Aerospace Co. BEI Defense Systems Co.
Flight Safety International British Aerospace Department of Defense
General Physics CASA Edwards AFB
Mitsubishi Heavy Industries Dassault Eglin AFG
Quintron Corporation Debis Systems Haus Electronics Warfare
Rediffusion Delta Airlines E-Systems
Reflectone, Inc. Dornier Ferranti
S3 Technologies Ford Aerospace Martin Marietta
SAIC General Dynamics Moore Research Center
Sanders Associates Goodyear Aerospace Naval Air Test Center
Siemens AG Grumman Aerospace Naval Air Test Development
Simulation Associates, Inc. Hamilton Standard Naval Aviation Depot
Sogitec Hercules Aerospace Naval Coastal Systems Center
SSI Hughes Aircraft Naval Oceans Systems Center
TAI Israeli Aircraft Industries Naval Research Lab
Jet Propulsion Laboratory Naval Surface Weapons Center
Lockheed Naval Underwater Systems
LTV Aerospace Naval Weapons Center
Matra MBB Raytheon
McDonnell Douglas
NASA
Northrop Corporation
Pratt & Whitney
Rockwell International
Rolls Royce Associates
Smith Industries
</TABLE>
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.
The Company's customer base is changing from end-users and systems
integrators involved in projectrelated systems designs involving long
development and implementation cycles to OEM customers who use VMIC's products
in their products which they sell to end-users and systems integrators. The
Company believes that it has been successful in focusing its attention and
resources on such customers; however, there are no assurances that this trend
will continue. Recently, the Company has been informed of several key design-ins
where the Company's products have been selected by OEMs for leading companies
focused on telecommunications, medical, and industrial automation markets.
Shipments have begun to these customers and the Company is
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negotiating with some of the same customers for additional business associated
with other products. See Management's Discussion and Analysis of Financial
Condition and Results of Operations- Recent Developments.
Backlog
The Company's backlog of firm orders as of September 30, 1999 was $14.7
million, as compared to a firm order backlog at September 30, 1998 of
approximately $4.1 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 $2.0 million of the total backlog as of
September 30, 1999. 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.
For the fiscal year ended September 30, 1999, the Company received 8%
of its revenues from Litton Industries and 23% of its revenues from customers
who received contracts from various agencies of the Department of Defense.
Markets
The Company has recently concluded that its traditional markets are
insufficient to satisfy its growth objective, and a strategic plan was devised
and implemented to refocus the Company. The objective of the new strategy called
for a transition of the company from its traditional niche markets to higher
growth vertical markets involving original equipment manufactures, or OEM
applications. The Company identified the Fibre Channel storage area network, or
SAN and telecommunications markets as the two most promising high-growth
markets. These particular markets were selected because each was substantial in
size and the Company's existing infrastructure allowed for the development of
technology that could satisfy market demands. While the Company is highly
focused on the SAN and telecommunications markets, it expects significant growth
in the industrial automation, defense, test and measurement, digital video
broadcast and medical equipment industries .
VMIC specializes in supplying products to the embedded computer
industry and has expanded its focus to the broader server market which provide
products to the Fibre Channel SAN industry. Embedded computer products are a key
element of the broad electronics market and are the central to the control and
monitoring system for many types of electronic systems requiring advanced
capabilities for human interface, data analysis, communications and control.
Embedded computers are designed to operate in specific applications where they
are typically programmed to perform repetitive tasks, whereas more
general-purpose computers are designed to perform many types of operations in
broader, more general markets. Embedded computers differ from general purpose
computers, such as PCs, in several key respects. Embedded computers are
typically integrated into larger systems, perform a single or limited number of
complex functions and adhere to specific requirements regarding size,
scalability, maintainability, reliability and expandability.
Embedded computers can be used in a wide range of applications from
on-board automotive engine control to more extensive open architecture systems
that use plug-in boards in an industrial chassis. Open architecture systems are
nonproprietary designs based upon open standards supported by a wide variety of
vendors, all of which build products based upon the open systems specifications.
The leading open architecture embedded computers today are based upon industry
standard buses such as VMEbus, PCI bus, CompactPCI, PMC, and others. These
leading buses allow the interconnection of boards in a plug-in backplane that
supports data communications among a broad range of different boards offered by
embedded computer board suppliers.
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<PAGE>
VMIC specializes in open architecture standard bus boards and systems
solutions based upon these open standards. Open architecture standard bus
products have been adopted by a wide variety of companies in markets such as
SAN, telecommunications, digital video broadcasting, industrial automation,
medical, defense, and aerospace.
VMIC has recently experienced significant design-in success within the
industrial automation, telecommunications, defense, digital video broadcasting
and medical markets. The Company is highly focused on vertical markets involving
potential high-volume sales of specific single-board products and systems that
are used in customers' products (OEM applications) such as medical imaging,
telephone switching, communications systems, computer clustering, SANs and
complete I/O systems for control and monitoring applications.
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, CompactPCI 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
CompactPCI 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 CompactPCI 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 CompactPCI. VMIC is highly focused on the
VMEbus, PCI, PMC and CompactPCI 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 2000.
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 is $700
million in 1999. Utilizing the VMEbus market as a guide, the Company believes
that the CPU business for CompactPCI could approach more than $500 million by
2003. The telecommunications market has selected CompactPCI 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 CompactPCI
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 upon the number of design-ins won by VMIC during 1999 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 CompactPCI as their next
generation architecture of choice for new embedded applications.
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<PAGE>
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 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 non-linear digital editing systems in the advertising, broadcast
and entertainment industries as well as for high speed data processing
applications in a variety of industries including Internet service providers.
IDC forecasts that the market for products based on Fibre Channel
technology will grow from approximately $2.0 billion in 1998 to approximately
$23.0 billion by 2002.
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 Host Bus Adapters (HBA) 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
(non-cellular) 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 $1.643 billion in 1999 to $6.112 billion
in 2002. Hubs are devices/boxes that simplify the interconnection of nodes
within a Fibre Channel network. A hub allows the continued operation of
operating nodes in the event of a node failure or power off condition. Strong
growth has been projected for Fibre Channel hubs. International Data Corporation
(IDC) forecasts revenue for hubs of $827 million in 2002, which translates to a
compounded annual growth rate of 71 percent over a six-year time frame.
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<PAGE>
VMIC has significant experience with Fiber Channel HUB technology
because of its' reflective memory network boards and bypass hubs which are based
upon Fiber Channel technology.
Fibre Channel supports configurations/multiple topologies that allow
significant node growth while protecting existing investments as systems growth
explodes using switch boxes and/or hubs. Fibre Channel networks can be
configured without hubs and switch boxes; however, hubs are predicted to be a
popular investment for the foreseeable future. As a result, the ability to
leverage the installed base of hubs in simple configurations of HBA introduces a
market opportunity.
The Industrial Automation Market
Since the 1960's, industrial automation systems have included
mechanical devices, meters, and gauges, as well as data loggers and strip chart
recorders. In the 1970's, 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 upon open hardware platforms and nonproprietary
standards such as VMEbus , CompactPCI, and PCI; Intel processor technology;
Microsoft operating systems and other Microsoft key technologies; and PC-based
control software such as VMIC'S IOWorks software package.
The total market for distributed and remote I/O devices used with
distributed control systems (DCS), PC-based controllers, and programmable logic
controllers (PLC) is expected to grow from $1.9 billion in 1998 to $2.8 billion
in 2003, according to Venture Development Corporation. The report indicates that
the global markets and user needs for industrial distributed/remote I/O products
used only with PC-based systems is projected to grow by 19 percent per year from
$201 million in 1998 to $476 million in 2003. The report indicates the increased
adoption of PC-based control systems is aided by software suppliers who provide
solutions based upon PC-based architectures and open networking. The advantages
of PC-based control systems are:
* Reduced cost of installation
* Ability to upgrade systems easily
* Higher performance than other technologies
* Customers can select "best-in-class" products from multiple vendors
* Reduced dependence upon just one vendor
* Ability to integrate special-purpose products
* Controls and human-machine interface as well as other functions
can be executed on one computer * Ability to integrate data with
entire enterprise
* Leverage commercial technology in reduced cost and training
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<PAGE>
* Reduced development costs
* 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 upon Intel
PCs, key Microsoft technologies, and open architecture equipment based upon
standards such as VME, CompactPCI, 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. The industrial automation market is
projected to generate $11 billion in revenues by 2001 according to Frost and
Sullivan.
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 a 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 worldwide PC control software market is
projected to grow from $94.1 million in 1999 to more than $500 million annually
by 2003 according to a recent ARC study.
The Company's strategy is to continue to focus on the I/O systems
(front-end systems) business. 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.
The demand for process controller technology, both hardware and software,
is projected to grow from $8.51 billion in 1993 to $15.17 billion in 2000,
according to Frost and Sullivan. The Company now offers hardware and software,
as well as I/O systems for this market, and the Company is highly focused on
growth in this market arena. With a market value of $1.9 billion, automation
software is the most dynamic sector of the global automation industry and will
be a crucial product for large control system suppliers during the next decade,
according to a recent report by Datamonitor, a market analysis firm. Its Global
Automation Software report states that the global market for automation software
has grown at an average annual rate of 22 percent over the last five years and
will reach $3.6 billion in 2003. It adds the chemicals industry is the largest
global end-user of automation software. Growth has been strongest in the
Americas, where impact of new products in major U.S. and Canadian markets and
rapid market development in South America increased market value by 33 percent
annually. European growth has averaged 21 percent per year because those markets
have been well developed since the mid- 1990s and the full impact of recent new
product launches - especially in PC-based DCSs - haven't been fully felt.
Datamonitor's report projects future growth will be fastest in the Americas at
18.4 percent annually, pushing that segment $1.88 billion in 2003. Meanwhile,
Europe will grow 9.8 percent per year to reach $1.19 billion, while
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Asia will grow 7.3 percent annually to $574 million. The Company has entered
this market with an extensive product line for several industrial applications
such as petrochemical, hydro-desulphurization, film processing, aluminum rolling
mills, steel rolling mills, fiber-optic cable manufacturing, silicon wafer
manufacturing, and others.
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 CPU's have become the most common standard
platform in next-generation telecommunications systems. The telecommunications
market has selected CompactPCI 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, or 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 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 from $35.2 billion. 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.
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The Medical Market
In virtually all areas of the medical ultrasound and magnetic resonance
imaging, 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 co-located within the
same box communicating on the same hardware medium.
The medical industry has selected open architecture solutions based
upon VMEbus and CompactPCI 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 storage area network problems
are solved with Fiber 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 Windriver. Graphical user
interfaces that demand less deterministic or real- time performance are
generally supported by Windows NT, Lynx or other less robust software operating
systems. VMIC offers the Intel based Pentium class high performance computer
boards, Fiber Channel host bus adapters and supporting software for such
applications.
The Digital Video Broadcasting Market
An important transformation is taking place today in how information is
distributed. Digital video is at the forefront of the convergence of
broadcasting, entertainment, computers and telecommunications. Open architecture
CompactPCI (CPCI) platforms are being selected by leading providers of
standards-based encoding products and systems for digital video broadcasting.
CPCI offers significant benefits such as Hot swap capability, multiprocessor
work load sharing, expandability, reliability, high performance and Intel PC
architecture solutions.
End-to-end solutions designed for this market enable users to digitally encode
compress, transmit and decode broadcast quality video signals for a broad range
of applications, including satellite delivery, terrestrial and cable
broadcasting, and contribution. Products designed for this market enable digital
video broadcasting over a variety of networks including satellite, wireless,
fiber and cable. Solutions include audio, video, data encoding and networking
systems. Leaders in this industry reach into all major segments of the digital
television industry such as direct broadcast satellite (DBS), cable, content
distribution, digital terrestrial, MMDS, and digital subscriber line.
Leaders in this industry offer television service providers digital video
networking solutions that merge video, audio and data with leading-edge digital
compression and communications technologies. These solutions enable their
customers to optimize their digital transmission networks and expand their
services to increase revenue while providing consumers with unmatched digital
pictures and CD audio quality. Leading solutions enable terrestrial
broadcasters, satellite providers and cable operators to expand their service
offerings with high quality encoding and data broadcasting products.
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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 CompactPCI 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, Lynx 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.
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.
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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 48 foreign countries through more than 32 distributors and 14
representative organizations worldwide. As of September 30, 1999, the Company's
marketing, sales, and distribution programs were conducted by 43 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, 1999, the Company has contracts with 14 independent
representative organizations that employ more than 54 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 32
distributors. As of September 30, 1999, the distributors employed more than 78
salespeople.
In addition to international distributors and U.S. sales
representatives, the Company has 29 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 are highly focused on industrial automation, and a
separate network of VARs and distributors that are highly focused on the Fibre
Channel storage area network 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 catalog
enhancements, direct mail, and other marketing techniques to expand its customer
base growth revenues. The Company is in the process of establishing an
E-Commerce link which will allow customers to purchase products via the Web.
The Company has recently reorganized its Sales and Research and
Development departments to establish a business center staffed with key
employees highly focused on the industrial automation markets and products. This
staff includes an experienced industrial automation manager, three sales
managers, and a Research and Development staff of approximately 63 employees.
In addition, the Company has recently dedicated an experienced sales
manager to market Fibre Channel products to the storage area network customers.
21
<PAGE>
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 companies 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 which includes 5DX Xray, 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
high technology research community which allows the Company to take advantage of
the quality and high-volume manufacturing capabilities of several local
international.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 is $551,000.
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 which involve the potential for
medium- to high-volume production opportunities.
As of September 30, 1999, the Company has approximately 80 employees in
research and development activities. Of these employees, 45 are involved in
hardware development and 35 are involved in software development.
As of September 30, 1999, 75 employees have technical degrees and eight
have advanced degrees. Approximately 52 percent of the Company's research and
development efforts in fiscal year 1999 were software related. The Company
recently reduced its software development efforts and plans to invest
approximately 36 percent of the Company's R&D efforts for the fiscal year ending
2000. The Company's research and development expense was $5.6 million, $6.2
million, and $5.3 million in fiscal 1999, 1998, and 1997 respectively,
corresponding to 19.7 percent, 19.9 percent, and 19.0 percent of sales,
respectively. Software deferred expense was $2.33 million, $2.20 million, and
$1.47 million in fiscal 1999, 1998, and 1997, respectively.
The Company expensed $5.3 million of previously capitalized software development
costs for the fiscal year ended September 30, 1999. 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 As of September 30, 1999, the
total deferred software development expense to be amortized over future sales,
including software used in production testing and manufacturing, is $836,000.
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 on PC-based control software, single-board computers,
communications/networking products, such as Reflective Memory, CompactPCI I/O
products, and, in particular, Fibre Channel technology.
VMIC has recently developed a host adapter Fibre channel product line that
includes host adapters for the most popular open architectures, such as PMC, PCI
and CompactPCI. The Company is also converting its Reflective Memory bypass
switches to Fibre channel connectivity compatibility for a Fibre Channel hub.
The Fibre Channel hub allows a configuration of computers and peripherals such
that a failure on one node does not create a total failure of the entire
network. The Reflective Memory network bypass product is already based upon
Fibre channel technology. The Company is also examining the possibility of using
other VMIC technology to enter the concentrator, router, and bridge switch
markets. The Company is developing VxWorks host adapter software, and is
examining the enhancement of third-party software that is compatible with its
host adapters.
22
<PAGE>
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 the Company.
While the Company's focus remains directed to the telecommunications and
Fibre Channel storage area network markets, the Company is still committed to
the embedded markets of defense, test and measurement, industrial automation and
medical equipment. 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.
<TABLE>
<CAPTION>
Competitor By Market
Industrial Test and
Product Line Telecom Automation Defense Measurement Medical
<S> <C> <C> <C> <C> <C> <C>
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 X X
- ---------------------------- -------------- ----------------- ------------- -------------------- ------------
Emulex X X X
- ---------------------------- -------------- ----------------- ------------- -------------------- ------------
Object Automation X
- ---------------------------- -------------- ----------------- ------------- -------------------- ------------
Think and Do X
- ---------------------------- -------------- ----------------- ------------- -------------------- ------------
Steeplechase X
- ---------------------------- -------------- ----------------- ------------- -------------------- ------------
Interphase X X X
- ---------------------------- -------------- ----------------- ------------- -------------------- ------------
Ziatech X
- ---------------------------- -------------- ----------------- ------------- -------------------- ------------
Dynatem X X X X X
- ---------------------------- -------------- ----------------- ------------- -------------------- ------------
Nematron X
- ---------------------------- -------------- ----------------- ------------- -------------------- ------------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Competitor By Product Line
Computer Communications/ Input/ I/O PC-Based Control
Product Line Boards Networking Output Systems Software
<S> <C> <C> <C> <C> <C>
Competitor
- ---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Systran X X
- ---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Motorola X
- ---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Force 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
- ---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Emulex X
- ---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Object Automation X
- ---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Think and Do X
- ---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Steeplechase X
- ---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Interphase X
- ---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Ziatech X
- ---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Dynatem X
- ---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
Nematron X X X
- ---------------------------- ----------------- ----------------------- ------------- -------------- ----------------------
</TABLE>
Government Business
The Company's reliance on direct and indirect government business has been
significantly reduced over the past eight years from 75% of the Company's
business to 31%; 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
tentatively selected to supply a potentially large quantity of CPCI single board
computers to a large government contractor. The Contract award should be
finalized in the first quarter of 2000. In the event that the contract is
awarded to VMIC a significant percentage of the Company's future revenue could
be generated by government related business.
24
<PAGE>
Proprietary Rights
The Company's success depends to a significant degree upon its software
proprietary technology and other confidential information. 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 has applied for two patents associated with Reflective Memory
and single board computers. Reflective Memory is a trademark of Sun Microsystems
and Sun owns five patents related to Reflective Memory.
VMIC is an approved licensee of the trademark and all patents.
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 upon 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 non-infringing 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
Employees
As of September 30, 1999, the Company had 207 full-time employees. None of
the Company's employees is represented by a collective bargaining agreement, nor
has the Company ever experienced any work stoppage. 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 south 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.
25
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the executive officers of the Company as of
September 30, 1999, 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 56 Director, Vice President Sales and Marketing
Charles McDonald 58 Executive Vice President of Operations
George Meares 49 Vice President Research and Development
Gordon Hubbert 54 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.
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
26
<PAGE>
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.
27
<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, 1999, the Company's Common Stock outstanding was held by
approximately 525 shareholders. At September 30, 1999, there were 409,617 stock
options outstanding, convertible into the Company's Common Stock. See "VMIC,
Inc. Notes to the Financial Statements- 6. Stock Options." 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
1997 117,978 364,015
1998 77,420 273,931
1999 74,069 257,204
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.
28
<PAGE>
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 F-1 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
------------------------------------------------
1995 1996 1997 1998 1999
------------ ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues $ 23,104 $ 23,791 $ 27,901 $ 31,049 $ 28,381
Gross profit 15,546 15,495 18,108 20,290 16,096
Selling, general and administrative expenses 8,328 9,661 10,995 13,302 12,419
Research and development expenses 5,105 5,335 5,307 6,231 5,801
Income (loss) from operations 2,113 499 1,806 757 (7,336) (1)
Net income (loss) $ 1,455 $ 41 $ 934 $ 205 $ (8,246) (1)
Per Share Data:
Diluted earnings (loss) per share $ 0.37 $ 0.01 $ 0.22 $ 0.04 $ (1.82)
Weighted average common share outstanding
(diluted) 3,901,278 4,047,989 4,189,113 4,554,448 4,534,189
Excluding Certain One-Time Events (1)
Net income(loss) $ 1,455 $ 41 $ 934 $ 205 $ (2,989)
Diluted earnings per share $ 0.37 $ 0.01 $ 0.22 $ 0.04 $ (0.66)
Balance Sheet Data:
Working capital $ 3,463 $ 2,544 $ 4,693 $ 4,724 $ 607
Total assets 13,511 16,410 19,707 25,162 20,270
Long-term debt 3,507 5,078 5,395 5,713 6,448
Total stockholders' net investment 6,365 6,693 9,397 11,747 3,890
</TABLE>
29
<PAGE>
(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.
30
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 below. These forwardlooking 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 new 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 is now focused on the telecommunications industry and storage
area networks for the broader computer market. The Company plans to continue to
market its products to the defense, test and measurement, medical, industrial
automation, and other markets.
The Company's objective is to maintain its position as a leading supplier
of standard bus board products and software to the embedded computer market. In
addition, the Company believes that its expertise in the embedded computer
market will provide the stepping stone for the Company to enter the high-growth
Fibre Channel storage area network market with host adapter boards and hubs.
Approximately three years ago, the Company developed a plan to change its
primary market focus and product lines from defense, test and measurement,
nuclear power plant monitoring, and simulation and training to new, large
vertical markets that were experiencing changes, and where customers were
demanding new solutions. At that time, the Company's revenues were primarily
generated from specialized products in niche markets. These products served the
Company well by providing high margins; however, these markets were not large
enough to sustain the Company's planned growth rate.
31
<PAGE>
As a result of this change in focus the Company implemented a plan to
develop products focused on larger vertical markets with potential high-volume
growth. The product lines selected were 1) embedded PC computers for VMEbus and
CompactPCI, 2) expanded communications/networking products for the embedded
computer industry and for the storage area network market, 3) PC-based control
software and other software products, and 4) I/O systems for industrial
automation based upon PC control software.
Recent Developments
Telecommunications. The Company is in negotiations with two leading
telecommunications companies for contracts to deliver Reflective Memory network
products for telephone switching, voice recognition, and redundant computer
communications. In addition, VMIC is also negotiating contracts for the delivery
of PC single-board computers to several telecommunication companies. The Company
believes that these opportunities may lead to significant sales to the
telecommunication industry.
Industrial Automation. VMIC has recently received orders from several major
industrial automation companies for PC-based control I/O systems that use the
Company's IOWorks software products. In addition, the Company is negotiating
with a leading global industrial automation company to supply a PLC replacement
computer that uses the Company's PC-based control software. The Company has also
recently negotiated a contract to provide a distributed I/O product line under
private label for a leading industrial automation company.
Medical. The Company has recently been selected to supply VMIC's
Intel-based single-board computers, or SBCs, for use in a six processor medical
testing device. In addition, the Company is negotiating with a leading supplier
of medical imaging systems to supply CompactPCI SBCs for ultrasound
applications.
Digital Video Broadcasting. The Company has recently been selected by a
leading provider of encoding products and systems for digital video broadcasting
to supply SBCs to be used in digital video broadcasting. The customer's products
enable digital video broadcasting over a variety of networks including satellite
wireless, fiber, and cable.
Defense. VMIC is negotiating with a large defense subcontractor to supply a
significant number of SBCs for a military project. VMIC has shipped beta test
specimen SBCs and expects to be informed of a contract award in December 1999.
This opportunity could result in the sale of more than 40,000 SBCs over 10 years
if all the contact options are exercised.
Fibre Channel. VMIC has recently released its host bus adapter Fibre
Channel product line, which includes six host adapters for the most popular open
architectures, such as PMC, PCI, and CompactPCI. The Company has also recently
released three SAN ready single board computers with Fiber Channel adapters
attached for VME and CPCI.
The Company recently began extensive marketing of its Fibre Channel
product line and has a dedicated Fibre Channel Web site at www.vmicnet.com. The
Company anticipates increasing its investments in Fibre Channel technology to
include additional adapters, bridges and hubs to enhance its position in the
marketplace.
Manufacturing. The Company has recently expanded its manufacturing capacity
and capability and now manufactures the majority of its products in its own
facilities. The Companies reduced reliance on contract manufacturers has
decreased the cost of certain of the Company's products and should allow the
Company to be more competitive.
32
<PAGE>
Sales Organization. The Company has initiated a significant reorganization
of its sales department, which is now organized around specific markets and
product specialists who work closely with customers to develop high-volume
products designed to meet specific customer requirements. A group within the
Sales Department is dedicated to the industrial automation market and the
products designed especially for industrial automation. In addition, the Company
has recently dedicated a sales manager to the Fibre Channel market and
associated products.
International Sales. The Company has substantial presence in international
markets where it sells products in more than 60 foreign countries through its
line of international distributors. International revenues as a percentage of
sales were 18.3% of sales in 1998, or $5.7 million, and 22% of sales in 1999 or
$6.16 million. The Company's anticipates international orders significantly
increasing in 2000. In 1998 the Company opened an office in Paris, France, in
response to customer requests for a VMIC presence in Europe beyond its
distributor network. The Company is now pursuing business in China and Russia
through new distributors managed by VMIC personnel.
Write-down of Certain Assets. In the fourth quarter of 1999, the Company
recorded a charge of approximately $5.3 million for the write-down of certain
software development costs and product and software costs related to industrial
automation. Due to the fact that the market for processed control software
failed to grow at projected rates, the Company significantly restructured the
software sales staff and realigned its product mix. The Company reduced its
software sales force and research and development staff devoted to industrial
automation and hired a new software sales manager with extensive knowledge of
the industry. The Company also changed its marketing strategy associated with
this industrial automation to focus on selling I/O systems based upon the
Company's software and hardware. The Company has also expanded the VMIC hardware
platforms supported by the software to include systems based upon PCI, CPCI, VME
and a new line of low-cost I/O products. The Company is continuing to make
investments in the industrial automation at reduced levels compared to fiscal
year 1999 levels. The investments are primarily associated with modifications
and enhancement to the software product to make it more acceptable to the
industrial automation market. There are no assurances that these changes will be
successful and the Company may have to take additional write-offs in the future
should sales of systems not be sufficient to amortize the cost of the software
development. The write-down is based on management's estimates of the gross
future sales from the existing software products marketed by the Company. This
takes into consideration no additional development costs being incurred to
increase the marketability of the products. See Notes to Financial Statements-
Significant Fourth Quarter Event.
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.
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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 storage area networks 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
Storage Area Network, 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
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 1999, 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.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 $6.4 million as of September 30, 1999. 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, 1999 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
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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, or 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 upon 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.
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, 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 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
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non-infringing intellectual property or acquiring licenses could have a material
adverse affect on the Company's business, financial condition or 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 shareholders. The failure of the Company to obtain
additional funds or the obtaining of such funds on unfavorable terms could
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.
The Company, in fiscal year 1996, began to capitalize 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 1999, the Company
recorded a $5.3 million write-down of certain software development costs and
purchased product and software costs. See Notes to Financial Statement
Significant Fourth-Quarter Event.
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 upon 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 Q
Logic, 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 Q Logic. The Company has also experienced shortages of
integrated circuits and other key components from time to time, and 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 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.
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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 contractors may experience delays because of quality
problems, backlog, component availability, financial difficulty, or other
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% of VMIC's
sales in 1998 and 12.7% 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% 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% in 1986, the
Company expects that the government will continue to be a significant source of
sales. 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 37% of the Company's 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, will 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 never 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.
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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
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 upon 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 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 markets resulting in a material adverse
effect on the Company's business, financial condition and results of operations.
The Company may not be able to identify, successfully remedy or assess all year
2000 related date-handling problems that could directly or indirectly impact its
business or financial condition.
The Company is aware that many computer programs were designed and
developed without considering the upcoming change in the century, which could
lead to failure of computer applications or create erroneous results by or at
the year 2000. This issue is referred to as the "Year 2000" problem. The Year
2000 problem is a broad business issue, whose impact may extend beyond the
Company's computer hardware and software and may affect utility and
telecommunication services as well as disrupt the systems of its customers and
suppliers. It is possible that the Company's currently installed computer
systems, software products or other business systems, or those of its suppliers
or customers, will not always accept input of, store, manipulate or output dates
in the years 1999, 2000, or thereafter without error or interruption. VMIC has
conducted a review of its business systems, including its computer systems, in
an attempt to identify ways in which its systems could be affected by Year 2000
problems. Based on this review, the Company does not expect the Year 2000 issue
to have a material adverse affect on its systems. In addition, the Company is
requesting assurances from all software vendors from which it has purchased or
from which it may purchase software that the software sold to the Company will
correctly process date information. The Company is querying its significant
customers and suppliers as to their progress in identifying and addressing
problems that their computer systems may face in correctly processing date
information as the Year 2000 approaches. However, there can be no assurance the
Company will identify all date-handling problems in its business systems or
those of its
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customers and suppliers in advance of their occurrence or that the Company will
be able to successfully remedy problems that are discovered. The expenses of the
Company's efforts to identify and address such problems, or the expense or
liabilities to which the Company may become subject as a result of such
problems, could have a material adverse affect on the Company's business and
financial condition. See Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000.
Year 2000.
Many computer programs were designed and developed without considering the
upcoming change in the century, which could lead to failure in computer
applications or create erroneous results due to those computer programs not
recognizing the year 2000. This issue is referred to as the "Year 2000" problem.
Although the Company believes that its Year 2000 compliance program is
comprehensive, the Company may not be able to identify, successfully remedy or
assess all date-handling problems in its business systems or operations or those
of its customers and suppliers. As a result, the Year 2000 problem could have a
materially adverse affect on the Company's business, financial condition or
results of operations.
Results of Operation
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
SALES. The Company's sales decreased 8.6% from $31.0 million in 1998 to
$28.4 million in 1999. International sales decreased 14% from $7.4 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 cause 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. Since that time, the
Company believes that the downturn has stabilized after a series of cost-cutting
measures and the Company's shift to new markets and products. The Company
recently negotiated several OEM product sales which, the Company believes,
should have a positive impact on 2000 sales of singleboard computers and
Reflective Memory networks. Hardware sales accounted for approximately $27.6
million in 1999 compared to $30.3 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% of sales, while sales of single-board PC products
accounted for approximately $4.9 million or 17.3% of sales. Sales of I/O
products accounted for approximately $12.1 million or 42.6% of sales while
miscellaneous other products accounted for approximately $4.6 million or 16.2%
of sales.
GROSS MARGINS. The Company's gross margin, which represents sales less cost
of goods sold as a percentage of sales, decreased from 65% in 1998 to 57% 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.
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SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses, including warranty and software amortization, decreased
7.5% from $13.3 million in 1998 to $12.3 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.
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 %
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% in 1998 to 19.7% 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.
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.
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
carry-forwards for federal income tax purposes available to reduce future
federal income taxes, if any. These carry-forwards expire in varying amounts
between 2002 and 2009. The Company also has approximately $67,000 in minimum tax
carry-forwards 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 carry-forwards, respectively, which expire in
2018.
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Results of Operation
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997 ? Year
Ended September 30, 1998 Compared to Year Ended September 30, 1997 [update for
last quarter]
SALES. The Company's sales increased 11% from $27.9 million in 1997 to
$31.0 million in 1998. Sales of IOWorks and the Company's Reflective Memory
products accounted for approximately $9.5 million or 30% of the Company's total
sales in fiscal year 1998 compared to $7.9 million or 28% of sales in 1997. The
Company's international sales increased 7% in 1998 to $5.7 million, from $5.3
million in 1997. Sales for 1998 did not meet expectations because of delays in
orders from several major customers. Equipment manufacturers whose products are
marketed in Asian countries have been experiencing repercussions from the Asian
financial market problems and have been slow to place orders. Delayed orders
negatively impacted the sales of VMIC's quad redundant Reflective Memory for
Naval surface applications, and several Industrial Automation products. The week
fiber-optic cable market has also caused a delay in orders for VMIC equipment.
While the IOWorks software product has been well received in the marketplace,
software sales of IOWorks have not met expectations because of the delayed
time-to-market of certain software components that make the product more
attractive to users of non-VMIC hardware. The Company has recently enhanced the
IOWorks product to appeal to a broader market, and has redesigned its multimedia
presentations and demonstration compact disks to support its marketing to this
larger, more general market.
GROSS MARGINS. The Company's average gross margin, which represents sales
less cost of goods sold as a percentage of sales, increased from 64.9% in 1997
to 65.4% in 1998. During this period the gross margin for hardware increased
from 64.5% to 66.3%, while software margins decreased from 83% to 27.2. The
Company expects its average 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. For fiscal year 1998 the shift in product mix did not impact the
Company's average gross margin. The decease in software margins was attributable
to increased amortization associated with the Company's capitalized software
product investment. VMIC believes that software margins will increase as the
Company gains market acceptance for its software products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative expenses (including warranty and software amortization) increased
21% from $11.0 million in 1997 to $13.3 million in 1998. This increase was
partially attributable to staffing increases in the Sales and Marketing
department which accounted for $0.3 million of the increase, and the Company's
recent publication and worldwide distribution of more than 5,000 copies of its
new 450-page product catalog at a cost of $0.4 million. The company also
released a new software only catalog. Additional promotional expenditures of
$0.2 million, including an enhanced Internet site, have approximately doubled
the number of qualified sales leads generated each week. The Company also
incurred expenses associated with the termination of certain independent sales
representatives, and their replacement with Company sales people in locations
throughout the United States.
WARRANTY EXPENSE. The Company's warranty expenses decreased to $501,000 in
1998, from $645,000 in 1997. This reduction was partially attributable to the
Company's use of new suppliers for certain components used in its Reflective
Memory products and the improvements made to its Pentium processor based
products.
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, 1998 was $471,598 compared to $234,124 as of September 30, 1997. Unamortized
software costs increased to $3,543,030 as of September 30, 1998 from $1,819,560
as of September 30 1997.
RESEARCH AND DEVELOPMENT. Research and Development expenses increased 17%
from $5.3 million in 1997 to $6.2 million in 1998. As a percentage of sales,
research and development expenses increased from 19%
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in 1997 to 20% in 1998. The Company has committed substantial resources to the
continued development of its IOWorks software, Reflective Memory products, and
embedded PC boards.
NET INCOME. Net Income after taxes decreased to $204,723 in 1998, compared
to $934,229 in 1997. Profits decreased despite higher sales because of increased
promotional, advertising, and staffing expenses and the sale of lower margin
products. The Company has recently reduced its operating expenses as a
percentage of sales, and plans to implement significant cost controls in 1999.
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, 1999, the Company's
variable line of credit for working capital was $8.0 million, of which $4.1
million was used. The Company's $2 million equipment line of credit availability
was $1.0 million.
Working Capital was $4.7 million at September 30, 1998 and $1.6 million at
September 30, 1999 respectively. Included in working capital are cash and cash
equivalents of $0.53 million at September 30, 1998 compared to $0.58 million at
September 30, 1999. This decrease occurred as a result of the changes in
operating assets and liabilities. Operating activities for the year ended
September 30, 1999 provided $78 thousand in cash. Cash used for investing
activities was $4.6 million for the year ended September 30, 1999, of which $4.1
million was used for capital expenditures. Cash provided by financing activities
was $3.2 million and $4.5 million for the years ended September 30, 1998 and
1999, respectively.
Inventory turnover for the year ended September 30, 1999 was approximately 179
days compared to approximately 192 days in 1998. This decrease was attributable
to improved inventory level management. At September 30, 1999, the Company had a
reserve of $635,215 for possible inventory obsolescence, the Company did not
have such a reserve at September 30, 1998. Accounts receivable from customers
were outstanding on average approximately 56 days for the year ended September,
30 1998, compared to approximately 49 days in 1999.
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. However,
management is examining several options to raise working capital to pay down its
revolving line of credit.
YEAR 2000 READINESS DISCLOSURE
OVERVIEW. Historically, certain computerized systems have had two digits
rather than four digits to define the applicable year, which could result in
recognizing a date using "00" as the year 1900 rather than the year 2000. This
could cause significant software failures or miscalculations and is generally
referred to as the "Year 2000" problem.
The company recognizes that the impact of the Year 2000 problem extends
beyond its computer hardware and software and may affect utility and
telecommunication services, as well as the system of customers and suppliers.
The Year 2000 problem is being addressed by a team within the Company and
progress is reported periodically to management. The Company has committed
resources to conduct extensive risk assessments and to take corrective action,
where appropriate, within each of the following areas:
VMIC PRODUCTS. VMIC has initiated extensive internal Year 2000 testing and
analysis of its products. The Company believes that a majority of its products
are Year 2000 compliant and VMIC anticipates maintaining compliance in future
revisions of any product that is currently compliant.
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INTERNAL INFORMATION SYSTEMS. The Company's internal information systems
utilize hardware and software from several commercial suppliers. The Company has
investigated its internal information systems for Year 2000 compliance, and
potential Year 2000 problems have a been identified and corrected on critical
systems to ensure that the Company's operations will be Year 2000 compliant. The
Company's most critical system, MRPII, has been upgraded and is certified Year
2000 compliant.
THIRD PARTIES. The Company has surveyed all of its internal systems and
software for Year 2000 compliance and has received Year 2000 compliance
certification from the suppliers of the systems and software that are compliant.
Non-compliant systems and software have been or will be upgraded or replaced to
achieve compliance. It is the Company's intention to become Year 2000 compliant;
however, uncertainties exist about the thoroughness of how other companies,
vendors, customers and other service providers that the Company does business
with will be successful at also becoming Year 2000 compliant. These other
companies, regardless of the dollar volume transacted with the Company, may
significantly affect either directly or indirectly the operations of the
Company. Where practicable, the Company will attempt to mitigate its risks with
respect to the failure of suppliers to be Year 2000 compliant. In the event that
suppliers are not Year 2000 compliant, the Company will seek alternative sources
of supplies. However, such failures remain a possibility and could have an
adverse impact on the Company's results of operations or financial condition.
COST FOR YEAR 2000 COMPLIANCE. The Company believes that the total cost of Year
2000 compliance activity will not be material to the Company's operations,
liquidity and capital resources. VMIC estimates that the total cost for its Year
2000 compliance will be approximately $75,000, which represents 1,136 hours of
internal analysis, modification and testing and $15,000 for hardware and
software upgrades. As of September 30, 1999, the Company had completed its
software and hardware upgrades and approximately 1,050 of hours of Year 2000
analysis, modification and testing at a cost of approximately $69,300.
YEAR 2000 RISKS FACED BY VMIC. Although the Company believes that its Year 2000
compliance program is comprehensive, the Company may not be able to identify,
successfully remedy or assess all date-handling problems in its business systems
or operations or those of its customers and suppliers. As a result, the Year
2000 problem could have a materially adverse affect on the Company's business
financial condition or results of operation.
43
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
44
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants
To the Board of Directors
VMIC, Inc.
In our opinion, the accompanying balance sheets and related statements of
income, changes in stockholders' equity, and cash flows present fairly, in all
material respects, the financial position of VMIC, Inc. (the Company) as of
September 30, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1999, in
conformity with generally accepted accounting principles in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, 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 the opinion expressed above.
PricewaterhouseCoopers LLP
January 6, 2000
45
<PAGE>
<TABLE>
<CAPTION>
VMIC, Inc.
Balance Sheets
September 30, 1999 and 1998
- ---------------------------
1999 1998
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 582,883 $ 527,972
Accounts receivable, net of allowance for doubtful accounts of
$250,382 and $384,383 in 1999 and 1998, respectively 5,080,529 4,366,330
Inventories 4,658,243 4,943,239
Prepaid expenses 110,483 250,733
Income tax receivable 106,553 573,771
Deferred income taxes 954,929
----------------- ------------------
Total current assets 10,538,691 11,616,974
Property, plant, and equipment, net 8,165,822 9,033,922
Purchased product and software costs, net 728,630 967,852
Software development costs 836,363 3,543,030
----------------- ------------------
$20,269,506 $25,161,778
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,977,284 $ 2,367,397
Current portion of notes, mortgages, and capital leases 5,753,110 2,104,777
Accrued liabilities 2,201,069 2,421,180
----------------- ------------------
Total current liabilities 9,931,463 6,893,354
Notes, mortgages, and capital leases, less current portion above 6,447,808 5,713,086
Deferred income taxes 808,101
----------------- ------------------
Total liabilities 16,379,271 13,414,541
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, par value $0.10 (10,000,000 shares authorized;
4,580,016 and 4,462,917 shares issued and
outstanding in 1999 and 1998, respectively) 458,002 446,292
Additional paid-in capital 6,810,314 6,432,799
Retained earnings (accumulated deficit) (3,378,081) 4,868,146
----------------- ------------------
Total stockholders' equity 3,890,235 11,747,237
----------------- ------------------
$20,269,506 $25,161,778
================== =================
</TABLE>
The accompanying notes are an integral part of these
financial statements.
46
<PAGE>
<TABLE>
<CAPTION>
VMIC, Inc.
Statements of Operations
For the Years Ended September 30, 1999, 1998, and 1997
- --------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Sales:
Hardware sales $ 27,577,162 $ 30,329,726 $ 27,337,479
Software sales 803,899 719,547 563,649
---------------- ---------------- ---------------
Total sales 28,381,061 31,049,273 27,901,128
---------------- ---------------- ---------------
Cost and expenses:
Cost of products sold 12,285,219 10,759,343 9,793,061
Research and development expense 5,601,454 6,231,572 5,307,207
Selling, general, and administrative expense 12,418,854 13,301,730 10,994,853
Writedown of property and equipment (Note 2) 154,662
Writedown of capitalized software costs (Note 15) 5,257,335
---------------- ---------------- ---------------
35,717,524 30,292,645 26,095,121
---------------- ---------------- ---------------
Operating income (loss) (7,336,463) 756,628 1,806,007
Other income (expense):
Interest income 34,957 78,222 25,497
Interest expense (821,212) (557,849) (586,030)
Gain on disposal of property, plant, and equipment 39,957 3,322
---------------- ---------------- ---------------
(746,298) (476,305) (560,533)
---------------- ---------------- ---------------
Income (loss) before income taxes (8,082,761) 280,323 1,245,474
Provision for income taxes (163,466) (75,600) (311,245)
---------------- ---------------- ---------------
Net income (loss) $ (8,246,227) $ 204,723 $ 934,229
================ ================ ===============
Net income (loss) per common and common equivalent share:
Basic $(1.82) $.05 $.23
Diluted $(1.82) $.04 $.22
Weighted average common and common equivalent
shares outstanding:
Basic 4,534,189 4,405,808 4,054,764
================ ================ ===============
Diluted 4,534,189 4,554,448 4,189,113
================ ================ ===============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
47
<PAGE>
<TABLE>
<CAPTION>
VMIC, Inc.
Statements of Changes in Stockholders' Equity
For the Years Ended September 30, 1999, 1998, and 1997
- -------------------------------------------------------
Retained
Additional Earnings Total
Common Stock Paid-In (Accumulated Stockholders'
-----------------------------
Shares Amount Capital Deficit) Equity
--------------- ------------ ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1996 3,989,684 $398,968 $2,565,101 $ 3,729,194 $ 6,693,263
Issuance of common stock 177,378 17,739 1,669,532 1,687,271
Exercise of stock options 58,040 5,804 121,726 127,530
Purchase of common shares for
constructive retirement (10,567) (1,057) (104,367) (105,424)
Income tax benefit from exercise
of nonqualified stock options 60,217 60,217
Net income 934,229 934,229
--------------- ------------ ------------- ---------------- ---------------
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 shares 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
=============== ============ ============= ================ ===============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
48
<PAGE>
<TABLE>
<CAPTION>
VMIC, Inc.
Statements of Cash Flows
For the Years Ended September 30, 1999, 1998, and 1997
- -------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(8,246,227) $ 204,723 $ 934,229
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,016,394 2,579,073 2,014,322
Provision for losses on accounts receivable (134,001) 83,921 50,955
Reserve for inventory obsolescence 635,215
Stock issued in lieu of cash compensation 220,991 71,680 116,110
Gain on disposal of property and equipment (39,957) (3,322)
Writedown of capitalized software costs 5,257,335 67,479
Writedown of property and equipment 154,662
Change in operating assets and liabilities:
Accounts receivable (580,198) (509,119) (1,013,504)
Inventories (350,219) (811,003) (844,236)
Prepaid expenses 140,250 (159,517) 40,422
Income tax receivable 467,218 (295,188) (197,066)
Deferred income taxes, net 146,828 54,441 53,928
Accounts payable (390,113) 1,206,001 (540,483)
Accrued liabilities (220,111) 244,321 385,233
-------------- --------------- ---------------
Total adjustments 8,324,294 2,528,767 65,681
-------------- --------------- ---------------
Net cash provided by operating activities 78,067 2,733,490 999,910
-------------- --------------- ---------------
Cash flows from investing activities:
Purchases of plant and equipment (1,441,990) (3,304,007) (1,268,476)
Purchased product and software costs (456,283) (288,150) (332,471)
Capitalized software development costs (2,755,940) (2,195,068) (1,468,726)
Proceeds from dispositions of plant and equipment 79,768 10,570
-------------- --------------- ---------------
Net cash used in investing activities (4,574,445) (5,776,655) (3,069,673)
-------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,671,358 5,120,581 2,080,202
Proceeds from line of credit 4,100,000 1,750,000
Principal payments on long-term debt (1,388,303) (3,562,293) (1,914,167)
Repayment of line of credit (400,000) (1,350,000)
Proceeds from issuance of common stock 395,524 1,882,398 1,698,691
Purchase of common stock for constructive retirement (243,929) (105,424)
Income tax benefit from exercise of nonqualified stock options 16,639 191,350 60,217
-------------- --------------- ---------------
Net cash provided by financing activities 4,551,289 3,232,036 2,219,519
-------------- --------------- ---------------
Net increase in cash and
cash equivalents 54,911 188,871 149,756
Cash and cash equivalents, beginning of year 527,972 339,101 189,345
-------------- --------------- ---------------
Cash and cash equivalents, end of year $ 582,883 $ 527,972 $ 339,101
============== =============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 793,612 $ 558,150 $ 584,671
============== =============== ===============
Cash paid during the year for income taxes $ - $ 125,000 $ 381,600
============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
49
<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
(IO Works) to complete systems for industrial control, test and
measurement, telecommunications, simulation and training, and Storage
Area Networks (SANs). The Company provides a synergistic approach to the
future by offering 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 debt
instruments purchased with original maturities of three months or less to
be cash equivalents.
Inventories - Inventories are valued at the lower of standard cost, which
approximates first-in, first-out cost, or market.
Financial Instruments - The carrying amount reported in the balance sheet
for cash and cash equivalents, accounts receivable, and accounts payable
approximates fair value because of the immediate or short-term maturity
of these financial instruments. The carrying amounts reported for notes,
mortgages, and capital leases 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.
50
<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 $10,808, $30,790, and $0 was
capitalized during 1999, 1998, and 1997, 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, 1999, 1998, and 1997 was
$267,702, $250,542, and $172,447, 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, 1999 and 1998 was $1,313,022
and $705,722, respectively. Amortization expense for the years ended
September 30, 1999, 1998, and 1997 was $607,300, $471,598, and $234,124,
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 1998 or
1997.
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 and $630,000 at September 30, 1999 and
1998, respectively, 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 balance sheets.
51
<PAGE>
Revenue Recognition - The Company records sales upon shipment of the
related products, net of any discounts and provision for warranty
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 $848,000, $907,000 and $849,000
for the years ended September 30, 1999, 1998, and 1997, respectively.
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.
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.
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 June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income, which requires the reporting and
display of comprehensive income and its components in an entity's
financial statements. The Company adopted SFAS No. 130 during 1999 and
for the three years ending September 30, 1999, 1998, and 1997, there were
no differences between net income and comprehensive income.
52
<PAGE>
Reclassifications - Certain reclassifications have been made to the 1998
and 1997 amounts in order to conform to the 1999 presentation.
3. Inventories
At September 30, 1999 and 1998, inventories consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Raw materials $2,511,460 $2,388,844
Work in process 1,232,573 829,125
Finished goods 1,549,425 1,725,270
---------------------- ----------------
5,293,458 4,943,239
Less reserve for inventory obsolescence (635,215)
---------------------- ----------------
$4,658,243 $4,943,239
====================== ================
</TABLE>
4. Property, Plant, and Equipment
Property, plant, and equipment consists of the following at September 30,
1999 and 1998:
1999 1998
Land $ 676,313 $ 676,313
Buildings 5,747,420 4,664,693
Machinery and equipment 8,048,088 9,719,590
Furniture and fixtures 55,142 115,035
Automobiles 67,592 273,579
Construction in progress 1,058,742
--------------- ---------------
14,594,555 16,507,952
Less accumulated depreciation 6,428,733 7,474,030
--------------- ---------------
$8,165,822 $9,033,922
=============== ===============
53
<PAGE>
5. Notes, Mortgages, and Capital Leases
Notes, mortgages, and capital leases payable at September 30, 1999 and
1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Short-term obligations:
Current portion of mortgage payable (1) $ 164,826 $ 992,424
Current portion of note payable (2) 1,488,284 1,112,353
Line of credit (3) 4,100,000
----------------- -----------------
$ 5,753,110 $ 2,104,777
================= =================
Long-term obligations:
Mortgage payable (1) $ 3,425,694 $ 2,510,291
Note payable (2) 3,022,114 3,202,795
----------------- -----------------
$ 6,447,808 $ 5,713,086
================= =================
</TABLE>
(1) Mortgages on buildings and land with unpaid principal balances
becoming due through 2004. Interest rates ranged from 7.0% to 8.5%
at September 30, 1999. The mortgages are collateralized by building
and land with a net book value of approximately $6,420,000 at
September 30, 1999.
(2) Automobile and equipment financing payable in monthly installments
ranging from $806 to $70,200 with the final payment due in April
2004; payments include interest at rates ranging from 7.5% to 8.3%
at September 30, 1999. Automobiles and equipment with a net book
value of approximately $4,243,000 at September 30, 1999 serve as
collateral.
(3) The Company can also borrow under a $8,000,000 revolving line of
credit with an interest rate of 7.75% at September 30, 1999. This
line of credit is collateralized primarily by accounts receivable
and inventory of the Company. The line of credit agreement expires
on March 1, 2000. The Company had $4,100,000 and $0 outstanding
borrowings under this line of credit agreement at September 30, 1999
and 1998, 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.
54
<PAGE>
The aggregate maturities of notes and mortgages at September 30, 1999 are
as follows:
2000 $ 5,753,110
2001 1,718,555
2002 1,065,881
2003 2,669,660
2004 993,712
-----------------
$12,200,918
=================
6. Stock Options
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 at September 30, 1999. 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 1999, 1998, and 1997, are as follows:
<TABLE>
<CAPTION>
Weighted-
Number of Range of Average
Options Exercise Prices Exercise Price
------------- ----------------- ----------------
<S> <C> <C> <C>
Options outstanding, October 1, 1996 463,430 $2.125-$8.00 $4.23
Options granted 159,176 $8.00-$10.00 $9.76
Options exercised (58,040) $2.125-$8.00 $2.20
Options canceled (20,800) $4.25-$8.00 $7.50
------------- ----------------- ----------------
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, October 1, 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
============= ================= ================
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes information about stock options
outstanding at September 30, 1999:
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>
$4.90 3,000 0.32 $4.90 3,000 $4.90
$8.00 - $10.00 327,521 4.77 $8.71 124,767 $8.35
$11.50 79,096 8.52 $11.50 7,909 $11.50
---------------- ---------------
409,617 135,676
================ ===============
</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
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net (loss) income - as reported $(8,246,227) $ 204,723 $ 934,229
Net (loss) income - pro forma $(8,443,623) $ 9,605 $ 754,430
Diluted earnings per share - as reported $(1.82) $0.04 $0.22
Diluted earnings per share - pro forma $(1.86) $0.00 $0.18
</TABLE>
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>
1999 1998 1997
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected life (years) 7 7 6
Risk-free interest rate 4.34% - 7.74% 4.76% - 6.63% 5.87% - 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, 1999 and 1998
were 26,609 and 362,885, respectively. During 1999 and 1998, 24,745 and
7,033, respectively, shares of the Company's common stock were issued and
$165,400 and $71,680, respectively, was charged to expense.
56
<PAGE>
7. Income Taxes
The components of the provision for income taxes for the years ended
September 30, 1999, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current:
Federal $ - $ 13,599 $ 223,816
State - 7,560 33,501
--------------- -------------- ---------------
Total current - 21,159 257,317
Deferred 163,466 54,441 53,928
--------------- -------------- ---------------
Total provision for income taxes $ 163,466 $ 75,600 $ 311,245
=============== ============== ===============
</TABLE>
Temporary differences which generated deferred tax assets and liabilities
at September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Current deferred tax asset:
Accounts receivable $ 90,550 $ 139,224
Inventory 278,077 418,702
Accruals and other 624,132 397,003
-------------- --------------
992,759 954,929
Valuation allowance (992,759)
-------------- --------------
Net current deferred tax asset $ - $ 954,929
============== ==============
Noncurrent deferred tax asset (liability):
Property, plant, and equipment $ 161,179 $ 75,886
Software development costs (103,227) (1,251,307)
Loss carryforwards 1,980,439 300,183
Tax credits 67,137 67,137
-------------- --------------
2,105,528 (808,101)
Valuation allowance (2,105,528)
-------------- --------------
Net noncurrent deferred tax asset (liability) $ - $(808,101)
============== ==============
</TABLE>
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<PAGE>
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 not be realized.
Accordingly, a valuation allowance has been established for the entire
net deferred tax asset.
During 1999 and 1998, 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 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.
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income before
income taxes. The reasons for these differences are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Income tax expense at statutory federal income
tax rate $(2,748,009) $ 95,310 $ 423,461
Effect of tax credits (40,488) (174,366)
State income taxes - net of federal income tax benefit (178,671) 7,102 25,830
Miscellaneous (8,141) 13,676 36,320
--------------- -------------- ---------------
(2,934,821) 75,600 311,245
Valuation allowance 3,098,287
--------------- -------------- ---------------
Total provision for income taxes $ 163,466 $ 75,600 $ 311,245
=============== ============== ===============
</TABLE>
8. Employee Benefit Plan
In April 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
58
<PAGE>
vesting after one year and becomes 100% vested after five years.
Amounts expensed for the Savings Plan amounted to approximately
$109,700, $110,300, and $106,200 in 1999, 1998, and 1997,
respectively.
9. Employee Stock Purchase Plan
In July 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,
1999 and 1998 in the accompanying balance sheets, is approximately
$71,200 and $117,500, 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 their 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 at September
30, 1999 and 1998 is approximately $80,000 and $0, respectively.
59
<PAGE>
11. Earnings Per Share
A summary of the calculation of basic and diluted earnings per share for
the years ended September 30, 1999, 1998, and 1997 is as follows:
<TABLE>
<CAPTION>
Income
(Loss) Shares Per-Share
(Numerator) (Denominator) Amount
---------------- ------------------ ------------
<S> <C> <C> <C>
1999
Basic EPS:
Income (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 $.05
Effect of dilutive securities:
Stock options - 148,640 -
Diluted EPS 204,723 4,554,448 $.04
1997
Basic EPS:
Income available to common stockholders 934,229 4,054,764 $.23
Effect of dilutive securities:
Stock options - 134,349 -
Diluted EPS 934,229 4,189,113 $.22
</TABLE>
Options to purchase 409,617 shares of common stock at prices ranging from
$0.50 to $11.50 per share were outstanding at September 30, 1999 but were
not included in the computation of diluted net income (loss) per share
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 price was greater than the
average market price of common shares. The options, which expire through
September 2008, were still outstanding at September 30, 1998. Options to
purchase 137,961 shares of common stock at $10 per share were outstanding
during 1997 but are not included in the computation of 1997 diluted EPS
because the options' exercise price was greater than the average market
price of common shares.
12. Related Parties
During 1999, the Company entered into an agreement with a member of the
board of directors to provide certain consulting services totaling
$150,000. The Company paid consulting fees of $15,000 in 1999. Included
in accrued liabilities at September 30, 1999 is $135,000 of consulting
fees to be paid during 2000.
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<PAGE>
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, 1999, 1998, and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(In Thousands)
---------------------------------------------------------
<S> <C> <C> <C>
Total sales:
U.S. $ 21,889 $ 25,355 $ 22,641
International 6,492 5,694 5,260
------------------- ------------------ ---------------
$ 28,381 $ 31,049 $ 27,901
=================== ================== ===============
Gross profit:
U.S. $ 12,779 $ 16,938 $ 14,972
International 3,317 3,352 3,136
------------------- ------------------ ---------------
$ 16,096 $ 20,290 $ 18,108
=================== ================== ===============
</TABLE>
The Company's identifiable assets as of September 30, 1999, 1998, and
1997 relate to the U.S. segment only.
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.
61
<PAGE>
<TABLE>
<CAPTION>
Three
Months Ended
----------------------------------------------------------------
December 31, March 31, June 30, September 30,
1997 1998 1998 1998
--------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
(In Thousands, Except for Per Share Amounts)
Net sales $ 7,584 $ 7,689 $ 7,762 $ 8,014
Gross profit $ 5,054 $ 5,002 $ 5,116 $ 5,118
Operating income (loss) $ 478 $ 400 $ 269 $ (390)
Net income (loss) $ 242 $ 196 $ 109 $ (342)
Net income (loss) per share (1):
Basic $0.06 $0.04 $0.03 $(0.08)
Diluted $0.06 $0.04 $0.02 (0.08)
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 $ 7,888
Gross profit $ 4,854 $ 4,211 $ 3,748 $ 3,283
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)
</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 .
15. Significant Fourth-Quarter Event
In the fourth quarter of 1999, the Company recorded a charge of
approximately $5.3 million 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.
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<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 19, 2000.
63
<PAGE>
PART IV
a. ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) 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 45 through 62 of this Form 10-K Annual
Report:
Consolidated Balance Sheets at September 30, 1999, 1997, 1996
Consolidated Statements of Income for the three years ended September 30, 1999
Consolidated Statements of Stockholders' Equity for the three years ended
September 30, 1999
Consolidated Statements of Cash Flows for the three years ended
September 30, 1999
Notes to Consolidated Financial Statements
Report of PricewaterhouseCoopers LLP, Independent Auditors
Selected Quarterly Financial Data
(2) All financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
(3) 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*
64
<PAGE>
(a) Reports on Form 8-K. No reports on Form 8-K were filed during the
fourth quarter of the fiscal year ended September 30, 1999.
(b) Exhibits. The response to this portion of Item 14 is submitted as
a separate section of this report.
(c) Financial Statement Schedules. The response to this portion of
Item 14 is submitted as a separate section of this report.
- -------------
* Management contract or compensatory plan or arrangement
+ Previously filed.
65
<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, 1999.
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, 1999
Carroll E. Williams
Mary W. Williams
___________________ Director December 28, 1999
Mary W. Williams
Arthur Faulkner
___________________ Director December 28, 1999
Arthur Faulkner
Alfred F. Catelyn
___________________ Director, Vice President December 28, 1999
Alfred F. Catelyn Sales and Marketing
Ernest Potter
___________________ Director December 28, 1999
Ernest Potter
R. Gary Saliba
___________________ Director December 28, 1999
R. Gary Saliba
Jim Caudle, Sr.
___________________ Director December 28, 1999
Jim Caudle, Sr.
Gordon Hubbert
___________________ Vice President and Principal December 28, 1999
Gordon Hubbert Financial and Accounting Officer
66
