SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From _____________
To _____________
--------------------------
Commission File Number 0-25309
VMIC, INC
(Exact name of registrant as specified in its charter)
----------------------------
DELAWARE 63-0917261
(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)
----------------------------
NO CHANGE
(Former name, address and fiscal year if changed since last report)
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
COMMON STOCK, $.10 PAR VALUE
4,635,030 shares outstanding on June 30, 2000
<PAGE>
FORM 10-Q
VMIC, Inc.
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2000
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of June 30, 2000 (Unaudited)
and September 30, 1999..............................................1
Statements of Operation for the Nine Months Ended
June 30, 2000 and June 30, 1999 (Unaudited).........................3
Statements of Cash Flows for the Nine Months Ended June 30, 2000
and June 30, 1999 (Unaudited)......................................4
Notes to Condensed Financial Statements (Unaudited).................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..............................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........19
Part II. OTHER INFORMATION
Signatures.........................................................27
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
VMIC, Inc.
Condensed Balance Sheets
June 30, September 30,
2000 1999
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 329,564 $ 582,883
Accounts receivable (includes allowance for doubtful accounts of
$286,381 and $250,381 at June 30, 2000 and September 30, 1999)
6,276,896 5,080,529
Inventories 7,571,539 4,658,243
Prepaid expenses 13,008 110,483
Deferred income taxes 992,758 0
Income tax receivable 5,238 106,553
-------------------- -----------------
Total current assets 15,189,003 10,538,691
Property, plant, and equipment, net 8,036,802 8,165,822
Purchased product and software costs, net 595,934 728,630
Software development costs, net 1,119,386 836,363
Deferred income taxes 2,105,509 0
-------------------- -----------------
$ 27,046,634 $ 20,269,506
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,571,222 $ 1,977,284
Current portion of notes and mortgages 5,056,790 5,753,110
Accrued liabilities 3,091,892 2,201,069
-------------------- -----------------
Total current liabilities 10,719,904 9,931,463
Notes and mortgages less current portion above 6,813,980 6,447,808
-------------------- -----------------
Total liabilities 17,533,884 16,379,271
-------------------- -----------------
Stockholders' equity:
Common stock, par value $.10 (10,000,000 shares authorized; 4,635,030
and 4,580,016 shares issued and outstanding at June 30, 2000
and September 30, 1999, respectively) 463,503 458,002
Additional paid-in capital 7,090,775 6,810,314
Retained earnings (accumulated deficit) 1,958,472 (3,378,081)
-------------------- -----------------
Total stockholders' equity 9,512,750 3,890,235
-------------------- -----------------
$ 27,046,634 $ 20,269,506
=================== ==================
See notes to condensed financial statements.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
VMIC, Inc.
Condensed Statements of Operations
(Unaudited) Three months ended
June 30, June 30,
<S> <C> <C>
2000 1999
Sales:
Hardware sales $ 9,749,791 $ 5,889,997
Software sales 196,661 225,528
------------------- ------------------
Total sales 9,946,452 6,115,525
------------------- ------------------
Cost and expenses:
Cost of products sold 3,738,975 2,367,541
Research and development expense 1,320,596 1,251,995
Selling, general, and administrative expense 3,324,509 2,706,774
------------------- ------------------
8,384,080 6,326,310
------------------ ------------------
Operating income (loss) 1,562,372 (210,785)
Other expense (230,960) (205,441)
------------------- -----------------
Income (loss) before income taxes 1,331,412 (416,226)
Provision (benefit) for income taxes 426,050 (112,381)
------------------- -----------------
Net income (loss) $ 905,362 $ (303,845)
------------------ ------------------
Net income (loss) per common and common equivalent share:
Basic $0.20 $(0.07)
=================== =================
Diluted $0.20 $(0.07)
=================== =================
Weighted average common and common equivalent
shares outstanding:
Basic 4,627,025 4,549,591
=================== =================
Diluted 4,638,299 4,549,591
=================== =================
See notes to condensed financial statements.
2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VMIC, Inc.
Condensed Statements of Operations
(Unaudited) Nine months ended
June 30, June 30,
<S> <C> <C>
2000 1999
Sales:
Hardware sales $ 26,856,075 $ 19,894,646
Software sales 695,124 597,674
------------------- -----------------
Total sales 27,551,199 20,492,320
------------------- ------------------
Cost and expenses:
Cost of products sold 10,123,263 7,680,178
Research and development expense 3,886,283 4,299,620
Selling, general, and administrative expense 9,552,927 9,371,628
------------------- ------------------
23,562,473 23,351,426
------------------- ------------------
Operating income (loss) 3,988,726 (859,106)
Other expense (697,130) (517,658)
------------------- -----------------
Income (loss) before income taxes 3,291,596 (1,376,764)
Benefit for income taxes (2,044,958) (371,730)
------------------- ------------------
Net income (loss) $ 5,336,554 $ (1,005,034)
=================== ==================
Net (loss) income per common and common equivalent share:
Basic $1.16 $(0.22)
=================== =================
Diluted $1.15 $(0.22)
=================== =================
Weighted average common and common equivalent
shares outstanding:
Basic 4,613,290 4,529,263
=================== =================
Diluted 4,626,861 4,529,263
=================== =================
See notes to condensed financial statements.
</TABLE>
3
<PAGE>
VMIC, Inc.
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended
<S> <C> <C>
June 30, June 30,
2000 1999
Cash flows from operating activities:
Net income (loss) $ 5,336,554 $ (1,005,034)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,223,866 2,247,451
Provision for losses on accounts receivable 36,000 24,000
Stock issued in lieu of cash compensation 29,813 115,280
Gain on disposal of property and equipment 0 (39,957)
Change in operating assets and liabilities:
Accounts receivable (1,232,366) 394,945
Inventories (2,913,297) (953,508)
Prepaid expenses 97,475 88,604
Income tax receivable 101,315 467,218
Income tax payable 1,053,309 0
Deferred income tax (3,098,267) 0
Accounts payable 543,655 (521,224)
Accrued liabilities (872,857) (600,006)
--------------- ----------------
Total adjustments (4,031,354) 1,222,803
--------------- ----------------
Net cash provided by operating activities 1,305,200 217,769
--------------- ----------------
Cash flows from investing activities:
Capital expenditures (1,364,105) (1,383,448)
Software development costs and purchased product and software costs (150,328) (2,364,734)
Proceeds from dispositions of property, plant,
and equipment 0 39,957
--------------- ----------------
Net cash used in investing activities (1,514,433) (3,708,225)
--------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 2,042,662 2,827,270
Principal payments on long-term debt (2,372,710) 0
Proceeds from issuance of common stock 285,962 161,092
--------------- ----------------
Net cash (used in) provided by financing activities (44,086) 2,988,362
--------------- ----------------
Net decrease in cash and cash equivalents (253,319) (502,094)
Cash and cash equivalents, beginning of period 582,883 527,972
--------------- ----------------
Cash and cash equivalents, end of period $ 329,564 $ 25,878
=============== ================
See notes to condensed financial statements.
</TABLE>
4
<PAGE>
VMIC, Inc.
Notes to Condensed Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed financial statements of VMIC, Inc.
(the Company) have been prepared by management in accordance with
generally accepted accounting principles for interim financial
information and in conjunction with the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments necessary for a fair presentation of the interim condensed
financial statements have been included, and all adjustments are of a
normal and recurring nature. The condensed financial statements as of and
for the interim period ended June 30, 2000 should be read in conjunction
with the Company's financial statements as of and for the year ended
September 30, 1999 included in the Company's Form-10K filed January 13,
2000. Operating results for the nine months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year
ended September 30, 2000. The September 30, 1999 balance sheet data
presented herein was derived from audited financial statements but does
not include all disclosures required by generally accepted accounting
principles.
2. Stock Options
The Company granted 19,900 options to purchase shares of common stock on
varying dates throughout the quarter to employees under the Employee
Stock Option Plan, at the market price as of the effective date. Also
options to purchase 6,850 shares of common stock were exercised during
the quarter.
5
<PAGE>
VMIC, Inc.
Notes to Condensed Financial Statements (Continued)
3. Earnings Per Share
<TABLE>
<CAPTION>
Earnings Per Share:
A summary of the calculation of basic and diluted
earnings per share is as follows:
<S> <C> <C> <C>
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------------- ---------------- --------------
Three months ended
June 30, 2000
Basic EPS:
Income available to common stockholders $ 905,362 4,627,025 $ 0.20
Effect of dilutive securities:
Stock options 11,274
Diluted EPS $ 905,362 4,638,299 $ 0.20
------------------- ----------------- ---------------
Three months ended
June 30, 1999
Basic EPS:
Loss available to common stockholders $ (303,845) 4,549,591 $ (0.07)
Effect of dilutive securities:
Stock options 0
Diluted EPS $ (303,845) 4,549,591 $ (0.07)
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------------- ---------------- --------------
Nine months ended
June 30, 2000
Basic EPS:
Income available to common stockholders $ 5,336,554 4,613,290 $ 1.16
Effect of dilutive securities:
Stock options 13,571
Diluted EPS $ 5,336,554 4,626,861 $ 1.15
------------------- ----------------- ---------------
Nine months ended
June 30, 1999
Basic EPS:
Loss available to common stockholders $ (1,005,034) 4,529,263 $ (0.22)
Effect of dilutive securities:
Stock options 0
Diluted EPS $ (1,005,034) 4,529,263 $ (0.22)
</TABLE>
6
<PAGE>
4. Inventories
At June 30, 2000 and September 30, 1999, inventories consist of the
following:
June 30, September 30,
2000 1999
--------------------- ------------------
Raw Materials $ 4,231,119 $ 2,511,460
Work in Process 2,520,262 1,232,573
Finished Goods 1,455,373 1,549,425
--------------------- ------------------
8,206,754 5,293,458
Less Reserve for Inventory
Obsolescence (635,215) (635,215)
--------------------- ------------------
$ 7,571,539 $ 4,658,243
===================== ==================
5. 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 three and nine months ended
June 30, 2000 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------------- ---------------- --------------------- --------------
Total Sales:
U.S. $ 7,639,959 $ 4,953,108 $ 21,159,250 $ 15,819,265
International 2,306,511 1,162,418 6,391,949 4,673,055
$ 9,946,470 $ 6,115,526 $ 27,551,199 $ 20,492,320
=================== ================ ==================== ================
Gross Profit:
U.S. $ 4,991,683 $ 3,245,114 $ 13,877,263 $ 10,360,320
International 1,215,794 502,870 3,550,673 2,451,822
$ 6,207,477 $ 3,747,984 $ 17,427,936 $ 12,812,142
=================== ================ ==================== ================
The Company's identifiable assets as of December 31, 1999 and 1998 relate to the
U.S. Segment only.
</TABLE>
7
<PAGE>
6. Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities," which will be effective for
fiscal years beginning after June 15, 2000. SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and
hedging activities. SFAS 133 requires that all derivatives be recognized at
fair value in the statement of financial position, and that the
corresponding gains or losses be reported either in the statement of
operations or as a component of comprehensive income, depending on the type
of hedging relationship that exists. The Company currently does not hold
derivative instruments or engage in hedging activities.
7. Income Taxes
The benefit for income taxes for the nine months ended June 30, 2000
consists of the following:
Income tax expense $ 1,053,331
Reversal of valuation allowance (3,098,289)
-----------------
$ (2,044,958)
=================
The ultimate realization of the net deferred income tax assets depends on
the Company's ability to generate sufficient taxable income in the future.
Management believes that it is more likely than not that the deferred
income tax asset will be realized. Accordingly, the valuation allowance was
reversed during the quarter ended March 31, 2000.
8
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with
the Company's financial statements and notes thereto.
Except for historical information contained herein, this quarterly report
contains forward-looking statements as defined in Section 21E of the
Securities and 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 following Management's Discussion and Analysis of Financial Condition
and Results of Operations section and the Quantitative and Qualitative
Disclosures About Market Risk section of this quarterly report. These
forward-looking statements can be generally identified as such because the
content of the statements will usually contain such words as the Company or
management "Believes," "Anticipates," "Expects," "Plans," or words of
similar import. Similarly, statements that describe the Company's future
plans, objectives, goals, or strategies are forward-looking statements.
The forward-looking statements included in this quarterly report are also
subject to a number of risks and uncertainties, including, but not limited
to, economic, competitive, governmental, and technological factors
affecting the Company's operations, markets, products, services, prices,
and other risk factors listed in the Company's Form 10-K for the year ended
September 30, 1999 and this quarterly report. These forward-looking
statements are not guarantees of future performance and actual results;
developments and business decisions may differ from those expressed or
implied by these forward-looking statements.
9
<PAGE>
Overview
VMIC is a supplier of standard bus boards, software, and systems products
which are used in applications involving markets such as
telecommunications, Fibre Channel storage area networks (SANs), medical,
industrial automation, test and measurement, and defense. VMIC supplies a
variety of products to all of these markets; however, the Company's focus
is high-volume OEM applications involving the PC single-board computers
(SBCs) and communications/networking products. VMIC has recently entered
the 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 has focused its attention on two key product revenue areas that
are experiencing high growth:
* Embedded Intel(R) central processing units or CPUs
* Communications/networking products, such as Fibre Channel, SCSI,
gigabit Ethernet, and Reflective Memory networks
VMIC specializes in open architecture, nonproprietary, standard computer
buses, such as VMEbus, PCI bus, CompactPCI(R), PMC, PCI-X, and PCoMIP.
Companies such as Motorola, Intel, Hewlett-Packard, Sun, Microsoft, Dell,
Compaq, and other leaders in the industry support these open architecture
buses. The Company manufactures its own products to enable it to meet its
customers' demands for high quality, responsiveness, reliability, and low
cost, while reducing time-to-market and life cycle costs. The Company's
manufacturing facility supports medium-volume, high-mix production and
high-volume production using state-of-the-art equipment. The Company
markets its products in more than 60 countries through a direct sales staff
and a network of manufacturers' representatives, international
distributors, and remote offices in Texas, the Carolinas, and Paris,
France.
The Company's objective is to become a leading supplier of standard bus
board-level products and software to the embedded computer with a focus on
high volume OEM applications. Embedded computers are different from
general-purpose computers in that embedded computers are designed to
perform repetitive tasks, whereas other computers are more flexible in
10
<PAGE>
their use and applications. Embedded computer products are used throughout
markets such as telecommunications, SAN, defense, medical, industrial
automation, and test and measurement. The Company differentiates itself in
these markets through a feature-rich hardware product line and supporting
software that obviates the need for customers to invest in VMIC
product-specific software development.
VMIC, headquartered in Huntsville, Alabama, is a 14-year-old company with
215 employees, and operates from more than 76,000 square feet in four
buildings on a campus of ten acres.
Management's Discussions and Analysis of Financial Conditions and Results
of Operation
Revenues were $9,946,452 for the quarter and $27,551,199 for the nine
months Ended June 30, 2000 compared to $6,115,525 for the quarter and
$20,492,320 for the nine months ended June 30, 1999, for increases of 62.6
percent and 34.4 percent, respectively. Gross profits for the quarter and
nine months ended June 30, 2000 were $6,207,477 and $17,427,936 compared to
$3,747,984 and $12,812,142 for the quarter and nine months ended June 30,
1999, for increases of 65.6 percent and 36 percent, respectively.
Net income was $905,362 and $5,336,554 for the quarter and nine months
ended June 30, 2000 compared to a net loss of ($303,845) and ($1,005,034)
for the quarter and nine months ended June 30, 1999. Earnings per common
share (diluted) were $0.20 and $1.15 for the quarter and nine months ended
June 30, 2000 compared net losses of ($0.07) and ($0.22) for the quarter
and nine months ended June 30, 1999.
International sales for the third quarter increased 98.4 percent to
$2,306,511 million compared to $1,162,418 million for the quarter ended
June 30, 1999.
Domestic sales for the third quarter increased 54.2 percent to $7,639,959
million compared to $4,953,108 million for the quarter ended June 30, 1999.
Systems sales decreased 15.8 percent to $1,040,995 million for the third
quarter compared to $1,236,061 million for the quarter ended June 20, 1999.
Systems sales include the sale of a mixture of products involving
input/output hardware and software typically preconfigured to customers'
specifications. Our investment in PC-based control software has been
instrumental in expanding our I/O systems business into the industrial
automation market arena.
The Company began shipments for the Applique'+V4 program, which involves
the production of single-board computers (SBCs) designed to meet the
military's digital battlefield requirements with applications involving
situational awareness, command and control, weapons targeting, as well as
tactical and operational applications. Litton Systems, Data Systems
Division, recently awarded VMIC a $2.8 million contract to use its Intel
Pentium(R) II processor-based CompactPCI SBCs in Litton's Applique'+ V4
computer system. A second source contract has also been awarded to VMIC for
a similar product which could also generate equivalent revenues over the
same time frame.
11
<PAGE>
VMIC announced eight new products during the quarter. Of these products,
four were new SBC products. Of the four new SBCs two are based on the 850
MHz Pentium III for VMEbus and two are CompactPCI Pentium IIIs based on
Intel's embedded module. VMIC was recently selected by Intel to be a leader
account for a new 815e PC chipset which allows VMIC to begin early
development of leading PC technology sooner than its competition. VMIC
engineers identified this chipset as a good solution for embedded
computers. VMIC's embedded SBCs designed with this chipset will have
processor speed of 1 GHz and higher. We believe VMIC's position as a leader
account has provided VMIC with strategic advantage in the development of
embedded computers based on the 815e chipset. We also released Fibre
Channel software drivers for Solaris and Windows NT(R), and announced
support for Microsoft(R) Windows(R) 2000. We recently announced an
enhanced, user friendlier version of our PC-based control software package
(IOWorks(R)) for industrial automation. This new version, coupled with
VMIC's CPU, VME I/O, and IOMax(TM) distributed I/O products, has been
selected by Logan Aluminum for a major automation upgrade to their
Russellville, Kentucky plant.
VMIC achieved four design wins in the quarter ended June 30, 2000. "The
Company characterizes a design win as a project estimated to produce
$500,000 or more in revenue per year when in production. Of the four design
wins, two are expected to produce over $500,000 annually and two are
expected to produce over $1 million or more in revenue per year once in
full production," explained Mr. Williams. Of these four design wins, three
involves data acquisition and control and one involves SBCs in turbine
control and training.
Design wins ramp into production volume over time intervals which range
from 3 to 9 months after the win occurs. A variety of risks can affect
these programs before the start of production, such as schedule delays,
changes in customer markets, and customer product sales volumes.
LSI Logic Corporation and VMIC have entered into an agreement that allows
VMIC to become a beta test site for LSI Logic's Fibre Channel and SCSI
chips and software. The agreement provides VMIC with licensed technology to
enable VMIC to develop state-of-the-art Fibre Channel and SCSI board-level
products, firmware, and software with advance information from LSI Logic.
The agreement provides LSI Logic access to VMIC Fibre Channel and SCSI
technical data, firmware, and software.
VMIC is in the process of immediate release of several new board-level
products based upon LSI Logic Fibre Channel and SCSI chips supported by a
robust suite of software drivers.
The Company's new relationship with LSI Logic is critical to the continued
implementation of our strategy of moving to large vertical markets with
advanced products and technology.
12
<PAGE>
The Company's gross margin for the third quarter increased to 62.4 percent
from 61.3 percent in the quarter ended June 30, 1999. This increase was
primarily the result of decreased software amortization costs and selected
price increases on lower volume products and reduced costs of some
products.
R&D expenses for the third quarter decreased to 13.3 percent of sales from
20.5 percent of sales for the quarter ended June 30,1999. SG&A decreased as
a percentage of revenue to 33.4 percent from 44.3 percent for the quarter
ended June 30, 1999. Operating income as a percentage of revenue for the
third quarter was 13.4 percent compared to an operating loss of 6.8 percent
for the quarter ended June 30, 1999.
The Company's cash flow was sufficiently positive during the third quarter
to reduce our borrowings on our working line of credit from $3.5 million to
$3.0 million.
Inventory for the third quarter increased 61.7 percent to $7.6 million
compared to $4.7 million for the year ended September 30, 1999. Inventory
increased primarily because of increased requests from customers for
quicker deliveries, new hardware products focused on SBCs and increased
backlog creating demands for increasing shipments.
Stockholder equity increased 143.6 percent from $3.9 million as of
September 30, 1999 to $9.5 million as of June 30, 2000.
We are pleased with this quarter's performance, the performance
year-to-date and expect the benefits from recent new business awards and
our continued cost containment program to provide strong support for
achieving our financial goals for fiscal year 2000.
Results of Operations
(Nine Months Ended June 30, 2000 Compared to Nine Months Ended June 30,
1999.)
Sales
For the nine-month period ended June 30, 2000, sales increased 34.6 percent
to $27.6 million compared to $20.5 million for the nine-month period ended
June 30, 1999. Sales were generated primarily from four product areas
involving input/output, communications/networking, SBCs, and software.
Sales for input/output products increased 17.5 percent to $12.1 million for
the nine-month period ended June 30, 2000 compared to $10.3 million for the
same period in 1999. Sales for communications/network products increased
27.0 percent to $8.0 million for the nine-month period ended June 30, 2000
compared to $6.3 million for the same period ended in 1999. The increase in
sales for communications/network products was primarily from growth in
Reflective Memory and Fibre Channel product lines. Sales for SBCs increased
109.1 percent to $6.9 million for the nine-month period ended June 30, 2000
compared to $3.3 million for the same period in 1999. The increase in sales
was generated as a result of shipments associated with new design wins in
telecommunications, medical, defense, and industrial automation.
13
<PAGE>
Sales for software increased 16.2 percent to $695 thousand for the
nine-month period ended June 30, 2000 compared to $598 thousand for the
same period in 1999. This increase in sales was generated because of
increased shipments of PC-based control software coupled with higher
shipments of other software modules associated with other product lines.
Gross Profits
For the nine-month period ended June 30, 2000, gross profit increased 35.9
percent or $4.6 million to $17.4 million from $12.8 million for the
nine-month period ended June 30, 1999. Gross profits as a percentage of
sales increased to 63.3 percent from 62.5 percent for the nine-month period
ended June 30, 2000.
The increase resulted from lower amortized software costs selected price
increases on lower volume niche products and improvements in parts costs.
Gross margins as a percentage of sales are expected to decrease as the
Company's lower margin products business becomes a larger portion of the
total sales mix.
Selling, General, and Administrative Expenses
For the nine-month period ended June 30, 2000, selling, general, and
administrative (SG&A) expenses increased 2.1 percent to $9.6 million from
$9.4 million for the nine-month period ended June 30, 1999.
Research and Development
For the nine-month period ended June 30, 2000, Research and Development
(R&D) expenses decreased 9.3 percent to $3.9 million from $4.3 million for
the nine-month period ended June 30, 1999. This decrease resulted from the
reduction in staff and reductions in amortized expenses to align resources
to the companies new market focus. Capitalized software development
expenses for the nine-month period ended June 30, 2000 decreased 65 percent
to $0.7 million compared to $2.0 million for the same period in 1999.
14
<PAGE>
Capitalized Software Development Costs
During the nine-month period ended June 30, 2000, VMIC had two categories
of capitalized software products under development as follows:
Software Product Category | Capitalized | Expensed
====================================================
IOWorks (PC-Based Control) $16,078 $130,078
-------------------------------------------------------------------
Board Drivers* $24,875 $95,247
-------------------------------------------------------------------
*Includes software drivers for products such as CPUs,
communications/networks, and I/O products.
The Company is continuing the capitalization of some software modules;
however, the majority of our investments in software products are expensed.
Special custom software developed for production testing of products is
capitalized and amortized over its useful life.
Earnings Per Share
Net income per common shares was $1.16 for the nine months ended June 30,
2000 compared to a net loss of ($0.22) for the nine months ended June 30,
1999. Earnings per common share (diluted) was $1.15 for the nine months
ended June 30, 2000 compared to a net loss of ($0.22) for the quarter and
nine months ended June 30, 1999.
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30,
1999
Sales
Revenues for the third quarter ended June 30, 2000 were $9.9 million, a
62.3 percent increase from revenues of $6.1 million for the quarter ended
June 30, 1999.
International sales for the third quarter increased 91.7 percent to $2.3
million compared to $1.2 million for the quarter ended June 30, 1999.
Domestic sales for the third quarter increased 52.0 percent to $7.6 million
compared to $5.0 million for the quarter ended June 30, 1999. Systems sales
decreased 16.7 percent to $1.0 million for the third quarter compared to
$1.2 million for the quarter ended June 30, 1999. Systems sales include the
sale of a mixture of products involving input/output hardware and software
typically preconfigured to customers' specifications. Our investment in
PC-based control software has been instrumental in expanding our I/O
systems business into the industrial automation market arena.
Sales were generated primarily from four product areas involving
input/output, communications/networking, SBCs, and software. Sales for
input/output products increased 32.3 percent to $4.1 million for the third
quarter compared to $3.1 million for the same period in 1999. Sales for
15
<PAGE>
communications/network products increased 47.1 percent to $2.5 million for
the third quarter compared to $1.7 million for the same period in 1999. The
sales increase for communications/network products was primarily due to
increased sales of Reflective Memory and Fibre Channel products. Sales for
SBCs increased 181.8 percent to $3.1 million for the third quarter compared
to $1.1 million for the same period in 1999.
Sales for software decreased 12.8 percent to $197 thousand for the third
quarter compared to $226 thousand for the same period in 1999. Software
sales decreased because of lower shipments of PC-based control software and
other software modules.
Sales increases were generated because of new products, our focus on new
markets, OEM accounts, and generally better business conditions.
Gross Profits
For the three-month period ended June 30, 2000, gross profits increased
67.6 percent or $2.5 million to $6.2 million from $3.7 million for the
three-month period ended June 30, 1999. The increase was generated because
of increases in revenues.
The Company's gross margin increased to 62.4 percent for the third quarter
from 61.3 percent in the quarter ended June 30, 1999. The increase was
primarily the result of decreased software amortization costs, selected
price increases on lower volume products, and improved parts costs.
Gross margins as a percentage of sales are expected to decrease as the
Company's lower margin products business becomes a larger portion of the
total sales mix.
Selling, General, and Administrative Expenses
For the three-month period ended June 30, 2000, selling, general, and
administrative (SG&A) expenses increased 22.2 percent to $3.3 million from
$2.7 million for the three-month period ended June 30, 1999.
SG&A for the third quarter decreased as a percentage of revenues to 33.4
percent from 44.3 percent for the quarter ended June 31, 1999.
Research and Development Expenses
For the three-month period ended June 30, 2000, Research and Development
expenses (R&D) increased 8.3 percent to $1.3 million from $1.2 million for
the three-month period ended June 30, 1999.
R&D expenses decreased to 13.3 percent of sales for the third quarter from
20.5 percent of sales for the quarter ended June 30, 1999.
16
<PAGE>
Capitalized Software Development Costs
During the three-month period ended June 30, 2000, VMIC had two categories
of capitalized software products under development as follows:
-------------------------------------------------------------------
Software Product Category | Capitalized | Expensed
-------------------------------------------------------------------
IOWorks (PC-Based Control) $119,722 $70,085
-------------------------------------------------------------------
Board Drivers* $39,888 $24,499
-------------------------------------------------------------------
*Includes software drivers for products such as CPUs,
communications/networks, and I/O products.
The Company is continuing to capitalize the development of some software
products on a very limited basis. Most software product development is now
expensed. Custom software developed for production testing of products is
capitalized and amortized over its useful life.
Income Taxes
The Company is accruing income taxes at the rate of 32 percent. The
statuatory tax rate is 34 percent less credits for research and
development.
Earnings Per Share
Net income per common share was $0.20 for the three months ended June 30,
2000 compared to a net loss of ($0.07) for the three months ended June 30,
1999. Net income per common share (diluted) was $0.20 for the quarter ended
June 30, 2000 compared to a net loss of ($0.07) for the quarter ended June
30, 1999.
17
<PAGE>
Liquidity and Capital Resources
Historically, VMIC's cash flow from operations and available credit
facilities has provided adequate liquidity and working capital to fully
fund VMIC's operational needs. As of June 30, 2000, VMIC's variable line of
credit for working capital was $8.0 million, of which $3 million was used.
The Company's cash flow was sufficiently positive during the second quarter
to reduce our borrowings on our working line of credit from $3.5 million to
$3.0 million.
The lines of credit require the Company to maintain certain loan covenants
and, as of June 30, 2000, the Company was in compliance with such
covenants.
Working capital was $4.5 million at June 30, 2000 and $0.6 million at
September 30, 1999. Included in working capital are cash and cash
equivalents of $0.3 million at June 30, 2000 compared to $0.6 million at
September 30, 1999. Total working capital increased as a result of the
profit experienced for the nine months ended June 30, 2000 and changes in
operating assets and liabilities. Current liabilities were $10.7 million at
June 30, 2000 compared to $9.9 million at September 30, 1999. Operating
activities for the nine-month period ended June 30, 2000 provided $1.3
million of cash. Cash used for investing activities was $1.5 million for
the nine months ended June 30, 2000, of which $1.4 million was used for
capital expenditures. Cash used for financing activities was $0.04 million
for the nine months ended June 30, 2000.
Inventory turnover for the nine months ended June 30, 2000 was
approximately 202 days compared to approximately 212 days for the same
period in 1999. This decrease is attributable to higher sales and improved
inventory management. Accounts receivable from customers were outstanding
on average approximately 52 days for the nine months ended June 30, 2000
compared to approximately 52 days for the same period in 1999.
VMIC believes that its financial resources, including its internally
generated funds and debt capacity, will be sufficient to finance its
current operations and capital expenditures for the next 12 months.
18
<PAGE>
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company's business and financial performance are subject to risks and
uncertainties, including those discussed below.
The Company may not be able to compete effectively in its current or future
markets.
The standard bus embedded computer industry is highly competitive and
fragmented, and the Company faces significant competition in each of its
product markets. The Company's competitors differ depending on product
type, geographic market, and application type. Several of VMIC's
competitors are well established and have greater assets and financial
resources than the Company, and have larger marketing and research and
development budgets. Several of the Company's competitors also have larger
service organizations.
Competition in the Company's business areas is influenced by technical
capacity, customer support, product longevity, supplier stability, breadth
of product offerings, reliability, performance, and price. Accordingly,
even small competitors who develop technologically similar or advanced
products could successfully compete with the Company. Other competitors
have established relationships with customers or potential customers that
afford them a competitive advantage. There can be no assurance that the
Company will be able to compete effectively in its current or future
markets or whether the Company's technology and designs will be viable in
the marketplace in the future.
The Company recently entered into new product markets and may be unable to
develop the technologies or market presence necessary to succeed in these
markets.
VMIC's recent entry into vertically integrated markets such as Industrial
Automation and 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.
19
<PAGE>
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, 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.
Traditionally, the Company has utilized long-term liabilities as a major
financing source. Long-term debt of the Company rose from $200,000 in 1986
to approximately $6.8 million as of June 30, 2000. The Company's
utilization of long-term debt is somewhat higher than the average company
in this industry A primary reason for the increase in long-term debt was
the need for the Company to manage its growth. The Company believes its
current revenue level will be sufficient to service its long-term debt.
However, if the revenues and profits of the Company substantially decrease,
it will be more difficult for the Company to service its long-term debt,
meet its current obligations, and continue with its current business plan.
As of June 30, 2000 the Company had sufficient current assets to liquidate
all of its current liabilities.
The Company's products may become obsolete and the Company may be unable to
respond to future market needs.
20
<PAGE>
Most of the Company's products are developed to meet certain industry
standards. These standards continue to develop and are subject to change.
Elimination or obsolescence of all or some of these standards could affect
the design, manufacture, and sale of the Company's products and require
costly redesign to meet new or emerging standards.
In general, technology in the computer industry, and the computer bus board
industry specifically, is subject to rapid technological change. The
introduction of new technology and products by others could adversely
affect the Company's business. There is no assurance that future advances
in technology may not make the Company's existing product line obsolete,
resulting in increased competition, and requiring the Company to undertake
costly redesign efforts. There can be no assurance that the Company will be
able to incorporate new technology into its product lines or redesign its
products to compete effectively.
Moreover, because new products and technologies require commitments well in
advance of sales, decisions with respect to those commitments must
accurately anticipate both future demand and the technology that will be
available to meet that demand. There can be no assurance that the Company
will be able to successfully anticipate or adapt to future technological
changes, and failure to do so may materially adversely affect the Company's
business, financial condition, 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 to increase the sales of I/O system products. The Company has also
made significant investments in embedded PC board products and
communications products such as Reflective Memory and Fibre Channel to
substantially increase revenue growth. Embedded PC boards products and
communications 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 SBCs, 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.
21
<PAGE>
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 noninfringing 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.
22
<PAGE>
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.
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 QLogic, Altus, Triquent, Intel, AMD, Tundra, Cypress; or
a limited number of suppliers, for which alternative sources would be
difficult to locate. Recently, the Company has experienced difficulties in
purchasing components for its Fibre Channel products from QLogic. The
Company has also experienced shortages of integrated circuits and other key
components from time to time, 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.
23
<PAGE>
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 12.7 percent of
VMIC's sales in 1999 and 9.6 percent of VMIC's sales during 2000. If either
or both of these customers discontinued purchasing products from the
Company, the Company's operating results and financial condition could be
materially adversely affected. In addition, in fiscal year 1999,
approximately 31 percent of the Company's sales were derived directly or
indirectly from various agencies of the U. S. Department of Defense.
Although the percentage of the Company's sales derived from governmental
contracts has decreased from a high of 75 percent in 1986, the Company
expects that the government will continue to be a significant source of
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 36 percent 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.
24
<PAGE>
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.
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.
25
<PAGE>
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.
IOWorks and the VMIC logo are registered trademarks of VMIC. Intel and
Pentium are registered trademarks of Intel Corporation. Microsoft, Windows,
and Windows NT are registered trademarks of Microsoft Corporation.
CompactPCI is a registered trademark of PCI Industrial Computer
Manufacturer's Group. Other registered trademarks are the property of their
respective owners.
26
<PAGE>
Signatures
Management Representation
The accompanying Balance Sheets at June 30, 2000, and September 30, 1999 as
well as the Statements of Income, Statements of Changes in Stockholders'
Equity, and Statements of Cash Flows for the nine months June 30, 2000 and
June 30, 1999 have been prepared in accordance with instructions to Form
10-Q and do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting only of normal
recurring accruals, considered necessary for a fair presentation have been
included.
August 12, 2000 By: Gordon Hubbert
Date Gordon Hubbert
Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 12, 2000 By: Carroll E. Williams
Date Carroll E. Williams
President and Chief
Executive Officer
27
