-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MF51olpx3R0V8tc/nBvVpG1FXnPuaHE7mhjzKKner7m9nswB9ayto1e6pUTlU666 I+413arFmRPmSh6FlJaWaw== 0000895755-00-000071.txt : 20000331 0000895755-00-000071.hdr.sgml : 20000331 ACCESSION NUMBER: 0000895755-00-000071 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARI L CO INC CENTRAL INDEX KEY: 0000917173 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 060678347 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-23866 FILM NUMBER: 589066 BUSINESS ADDRESS: STREET 1: 4895 PEORIA STREET CITY: DENVER STATE: CO ZIP: 80239 BUSINESS PHONE: 303/371-1560 MAIL ADDRESS: STREET 1: 11101 EAST 51ST AVENUE CITY: DENVER STATE: CO ZIP: 80239 10KSB40 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission File No. 0-23866 VARI-L COMPANY, INC. (Name of Small Business Issuer in its Charter) Colorado 06-0679347 (State or other jurisdiction of incorporation)(I.R.S. Employer I dentification No.) 4895 Peoria Street Denver, Colorado 80239 (303) 371-1560 (Address and Telephone Number of Principal Executive Offices) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Title of Class ----------------- Common Stock, $.01 Par Value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. [X] Yes [ ] No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for the fiscal year ended December 31, 1999: $24,280,827. At March 23, 2000, 7,069,188 shares of Common Stock were outstanding. The aggregate market value of the Common Stock held by non-affiliates on March 23, 2000 was approximately $153,794,552 based on the closing price on the Nasdaq National Market System on that date. DOCUMENTS INCORPORATED BY REFERENCE Portions of the issuer's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year are incorporated by reference in Part III. PART I ITEM 1. BUSINESS Introduction - ------------ Vari-L Company, Inc. (the "Company") designs, manufactures and markets a wide range of signal source and signal processing components and devices which are used in communications equipment and systems, such as cellular telephones and base stations, local area computer networks, and satellite communications equipment, as well as military and aerospace applications, such as advanced radar systems, missile guidance systems, and navigational systems. The Company sells its products primarily to original equipment manufacturers of communications systems. The Company was founded in 1953 in Stamford, Connecticut and relocated to Denver, Colorado in 1969. The Company's corporate headquarters is located at 4895 Peoria Street, Denver, Colorado 80239, and its telephone number is 303/371-1560. The Company also conducts certain portions of its operations at three other buildings within a five-mile radius of its Denver headquarters building. Overview - -------- The Company's products are used in wireless communications equipment. Wireless communication is the transmission of voice and data signals through the air, without a physical connection, such as a metal wire or fiber-optic cable. Information transmitted through wireless communications equipment is transmitted by electromagnetic waves, also known as signals. Electromagnetic waves vary in length, or frequency, and intensity. The range of electromagnetic waves is called the spectrum, which encompasses sound near the low end and light toward the higher end. In between is the radio spectrum which is used in all wireless communications. Radio Frequency ("RF") indicates lower frequencies while "microwave" refers to relatively higher frequencies in the spectrum. Different types of wireless communications systems utilize different frequencies in the spectrum. Frequency is measured in cycles per second, or Hertz. The spectrum currently in use by the various types of wireless communications equipment ranges from 1 kiloHertz (1 thousand cycles per second) to 20 gigaHertz (20 billion cycles per second). In the United States, the Federal Communications Commission allocates portions of the spectrum for different types of wireless communication systems. Wireless communications systems currently in use include cellular telephones and base stations, local multipoint service distribution ("LMDS"), multipoint multimedia service distribution ("MMDS") satellite communications, global positioning systems, local area networks, personal communications systems ("PCS"), pagers, and direct broadcast satellites, as well as radar systems, missile guidance systems and navigational systems. Products - -------- The Company produces a wide range of products which are, in essence, basic building blocks used in many wireless communications systems, and they perform a wide variety of RF and microwave signal source and signal processing functions. The Company's products and technologies are also integrated vertically by the Company into specialized assemblies which perform combinations of signal source and signal processing functions. The Company produces both standard catalog and custom-designed products; however, the majority of products shipped by the Company are custom solutions tailored to individual customers' needs. Signal Source Components ------------------------ One of the Company's major product lines is based on its patented design of the voltage controlled oscillator ("VCO"). Oscillators are components which generate a high quality RF/ microwave signal source within a frequency range. They are widely used in transmitting and receiving equipment. Military/Aerospace Signal Source Components ------------------------------------------- The Company produces several types of VCOs. The Company's Military/Aerospace Signal Source Components are wide-band VCOs which are sophisticated, high reliability components manufactured in a clean-room environment and hermetically-sealed. They are sold for use in both military/aerospace and high-end industrial applications. Commercial Signal Source Component VCO's ---------------------------------------- One of the Company's Commercial Signal Source Component products, the low-cost VCO, was introduced in 1994 into the cellular base-station market. A higher-volume production version of this VCO was introduced in 1998 into the subscriber market for cellular phones and pagers. These products are designed to perform at high levels of efficiency while being priced competitively for commercial applications. Most of the increase in the Company's sales over the past five years is attributable to the low-cost VCO. Since 1997 the Company has made significant investments in automatic manufacturing and test equipment to manufacture low-cost VCOs in its Denver facilities. Besides direct sales to original equipment manufacturers and component suppliers to such manufacturers, the Company's low-cost VCOs are also utilized by the Company as components in its phase locked loop synthesizers, discussed below. Subscriber Signal Source Components ----------------------------------- In 1999, the Company continued the installation of a high-speed, automated production line on the second floor of its corporate headquarters, allowing the Company to compete for new business in expanding subscriber applications markets. This line represents a fivefold increase in the Company's annual capacity for these products. Phase Locked Loop Synthesizers ------------------------------ The Company introduced its first Commercial Signal Source Component product, the phase locked loop synthesizer ("PLL"), in 1993. The PLL is a device made up of a VCO, a loop filter, and integrated circuits. PLLs are utilized in both transmitting and receiving equipment. The PLL's function is to generate a precise, stable frequency source, with accuracy, achieved by locking the generated signal to an accurate reference signal. This function is essential in communications equipment. As compared to its competitors, the Company's PLL exhibits superior phase noise performance and settling time, low power use, operates with an extended life, and is competitively priced. The Company's PLL-300/400 series and low-cost VCOs are designed for use in applications such as cellular telephones and cellular telephone base stations, personal communications networks, personal communication systems, local area computer networks, satellite communications, global positioning systems, and direct broadcast systems. Signal Processing Components - ---------------------------- Military/Aerospace Signal Processing Components ----------------------------------------------- The Company produces a line of RF and microwave signal processing components which are primarily used in military and space applications. Among these products are power dividers and combiners used for directing RF and microwave signals, solid state switches used to change the routing of RF and microwave signals, and transformers used to convert signals between different impedances. The Company also produces mixers and phase detectors which are used to convert the frequency of RF and microwave signals into usable information and data. Military and space applications of these products, as well as the Company's wide-band VCOs, described above, include the radar systems of military aircraft, the guidance systems of anti-aircraft and anti-missile missiles, and military and commercial satellites. The military programs using these products include the Patriot missile, AMRAAM missile, Harm missile, PRC104 Man-Pac radio, F14, F15 and F18 fire control systems, Phoenix missile, F16 radar systems (tail warning) and the Standard Missile II. These components, together with the wide-band VCOs, formed the original product lines of the Company and continue to be the Company's most technically advanced products, often utilizing technologies developed by the Company. They are typically very high reliability, high performance, custom designed components. The production of custom designed components usually entails the modification of existing products to meet the specific performance criteria of the customer, but may, in certain instances, require the design of an entirely new product. In this area, because the components are manufactured to its customers' specifications, the Company is often a sole source supplier. Commercial Signal Processing Components --------------------------------------- Through its Signal Processing Components engineering group, the Company patented technology for a high-impedance ratio, wide-band transformer circuit used in the conversion of radio frequency signals to light wave signals. This patent was approved in April 1997 by the U.S. Patent and Trademark Office. A 1998 patent was awarded for a design improvement to this product. Demand for the "fiber-optic" transformer circuit comes from a variety of applications, including cable access television ("CATV"). Manufacturing - ------------- The Company's Commercial Signal Source Components and Subscriber Signal Source Components products are manufactured with automated "pick and place" assembly equipment. Until 1997, these products were manufactured by third-party contract manufacturers in the United States. In 1997, the Company brought this process in-house with the acquisition of two automated assembly lines. In 1998, additional equipment was purchased to automate other steps in the production and testing processes. Also in 1998, the Company initiated the installation of a high-speed, automated production line in its state-of-the-art manufacturing facility on the second floor of its corporate headquarters, allowing the Company to compete for new business in expanding subscriber applications markets. The new line gives the Company the ability to produce an additional 8 million units annually. This line was utilized at approximately 20% to 25% capacity as of December 31, 1999. The length of the production process for products manufactured through the Company's automated assembly lines is one to three weeks. Manufacturing of the Company's other products, which involves less automated assembly, takes from one to fifty-two weeks. The Company may maintain inventory of the raw materials required for production of its products for a period of up to one year or more. At the present time, the majority of the Company's products are manufactured at the Company's various facilities in Denver, Colorado. Portions of certain commercial signal processing components are assembled at contract manufacturers outside of the United States to benefit from reduced labor costs on certain labor-intensive builds. All of these assemblies are completed and tested in Denver, Colorado. In December 1998, the Company received patent protection from the Chinese government for its products, which clears the way for the Company to proceed with a sales and distribution joint venture with a State-run company in China. Pursuant to a 1996 joint venture agreement, the Company invested significant resources to obtain this patent protection with a strategy of developing a manufacturing facility in China. While the time- consuming patent process was ongoing, the Company installed its new, automated production facility in Denver. The Company is currently focused on sales and distribution in China, although it has not ruled out a Chinese manufacturing facility. Suppliers - --------- The Company currently has approximately 250 suppliers and historically has not experienced any unusual supply problems. There are certain components used in the commercial and subscriber production of VCO's which have become in short supply because of a high, world-wide demand. The Company has actively increased travel to and communications with the manufacturers and distributors of these components, domestically and internationally, in addition to increasing inventory levels on these affected components, to maximize the Company's ability to maintain the highest possible production levels on products which incorporate these components. Sales and Marketing - ------------------- Originally, the Company's primary business was to engineer, manufacture and market high performance, high reliability, RF and microwave signal source and signal processing components used in military applications, such as missile guidance systems, advanced navigational systems and advanced radar systems. In 1993, the Company expanded its focus to the commercial marketplace to lessen the Company's susceptibility to trends in defense spending and to seek a share of the dramatic growth anticipated for commercial wireless communications. As a result of this shift, fluctuations in the Company's business are now more dependent on general business cycles, changes in market demand for the commercial and subscriber products built with the Company's components, and on technological innovations. In 1991, the approximate mix of customer orders was 25% for commercial applications and 75% for military applications. In 1999, this mix was approximately 89% for commercial applications and 11% for military applications. The following table lists the Company's sales revenues for each of the past five years according to the Company's product lines:
Sales Revenues (In thousands) 1999 1998 1997 ---- ---- ---- Mil/Aero Signal Processing Components $ 1,667 $ 2,118 $ 1,897 Commercial Signal Processing Components 1,601 1,060 1,392 Mil/Aero Signal Source Components 2,324 3,211 4,957 Signal Processing Components Special Assemblies 30 185 262 Commercial Signal Source Components 17,226 11,489 8,877 Subscriber Signal Source Components 1,006 -0- -0- Commercial Special Assemblies 427 -0- -0- ------- ------- ------- $24,281 $18,063 $17,385 ======= ======= =======
Sales Revenues (In thousands) 1996 1995 ---- ---- Mil/Aero Signal Processing Components $ 1,738 $2,345 Commercial Signal Processing Components -0- -0- Mil/Aero Signal Source Components 3,825 3,829 Signal Processing Components Special Assemblies 1,025 776 Commercial Signal Source Components 5,622 2,518 Subscriber Signal Source Components -0- -0- Commercial Special Assemblies -0- -0- ------ ------ $12,210 $9,468 ======= ======
The Company's sales are made primarily through independent sales representatives who promote and solicit orders for the Company's products on a commission basis in exclusive marketing territories. The Company selects its sales representatives on the basis of technical and marketing expertise, reputation within the industry, and financial stability. These sales representatives also represent other manufacturers with products complementary to, rather than competitive with, the Company's products. The Company normally engages 15 to 20 sales representative firms in the U.S. and also has 17 sales representatives covering 28 foreign countries. The Company now employs an Eastern Regional Sales Manager, a Western Regional Sales Manager, a Director of Military/Aerospace Sales, a Director of Program Management, a European/Pacific Rim International Sales Manager, a Director of Sales-Ericsson Worldwide Accounts, a Director of Sales-Nokia Worldwide Accounts, and a Vice-President of Sales and Marketing, who is also the acting Director of Sales-Motorola Worldwide Accounts, all of whom work together to manage and coordinate the activities of the sales representatives. In addition to the efforts of its independent sales representatives, the Company uses various methods to directly promote its products, including field visits to customers, advertising in trade journals, authoring technical articles for publication in trade journals, and participation in trade show product seminars and exhibitions. Customers - --------- The Company sells primarily to original equipment manufacturers of communications equipment in either the commercial or military marketplace. Many of those customers are larger Fortune 500 companies with world-wide operations or prime contractors for military work. Management believes it has a strong reputation with these and other customers for high performance products and solutions. Key customers of the Company include Adaptive Broadband, Glenayre Technologies/Wireless Access, Ericsson, LGIC, Lucent Technologies, Motorola, Neopoint, Netro, Newbridge Networks, Nokia, Siemens, Sharewave and SpectraPoint in the commercial and subscriber markets, and Harris, Hughes, Lockheed Martin, Mitsubishi, NEC, Northrop Grumman, Raytheon and Saab Ericsson in the military and aerospace market. In 1998, Motorola and Nokia accounted for 16% and 11% of sales revenues, respectively. The Company's two largest customers in 1999 were also Motorola and Nokia, with 22% and 15% of sales revenues, respectively. Notwithstanding this concentration, the Company does not believe that its business is dependent on any one of its customers. The Company's customers have historically bought products from the Company on the basis of purchase orders, rather than long-term supply contracts. The Company enters into long term purchase agreements with some of its larger commercial customers. These agreements establish preferred vendor status for the Company and, in certain cases, set minimum amounts which will be purchased by the customer over the term of the agreement. Competition - ----------- The Company is subject to active competition in the sale of virtually all of its products. Many of its competitors, including divisions of major corporations, have significantly greater resources than those currently available to the Company. Additionally, some of the Company's customers compete with the Company by manufacturing certain components themselves, rather than purchasing them from the Company. While some large foreign firms, principally Japanese, still have the ability to manufacture competitive products in larger production runs than the Company, the Company's expanded capacity has materially increased its own mass production capabilities. The Company believes that its surface mount products for commercial applications compete with other manufacturers' products on the basis of their unique features, price and performance. The Company believes that its products manufactured for military applications, including its Signal Processing Components and Wide-Band VCOs, compete on the basis of quality and performance. These products are typically high performance, high reliability components which are required to meet high quality system standards. The Company believes Merrimac and Stellex Microwave are its largest competitors in the signal processing components market. The Company believes that Mini-Circuits, M/A-Com and Z-Comm are its largest competitors in the commercial signal source components market and that Murata, Panasonic, Fujitsu and Alps are its largest competitors in the subscriber signal source components market. Remec/Magnum competes with the Company primarily in the wide-band, hermetically-sealed VCO marketplace. PLL competitors include Panasonic, M/A-Com and Synergy. While many of these competitors have significantly greater financial and other resources than the Company, the Company believes that it will continue to be able to successfully compete in these markets because of the strength of its existing technology and its ongoing commitment to technological innovation. Research and Development - ------------------------ The Company's products are marketed in a highly competitive and rapidly changing technological environment. Consequently, the Company has historically invested heavily in its research and development programs. For the years ended December 31, 1999 and 1998, the Company expended approximately $1,675,000 and $1,155,000, respectively, on such programs. Joseph H. Kiser, Chief Scientific Officer, directs the research and development efforts of the Company. Mr. Kiser has been largely responsible for many of the technological successes and innovations of the Company over the past 41 years and is the author of the Company's VCO patent. He heads up a 51 member team of engineers and other technically trained personnel who perform research and development in addition to providing process and production assistance to other departments. Patents - ------- The patent on the Company's wide-band VCO was issued in the U.S. on November 4, 1986, in Canada on April 17, 1990, and by the European Patent Office on April 3, 1992. The U.S. patent will expire in 2005. The Canadian patent will expire in 2007 and the European patents will expire in 2006. In December of 1998, the Company received Chinese patent approval on components used in base stations, handsets and pagers. The Company also owns U.S. patents for (i) a Broadband Mixer with Coplanar Balun, expiring in 2000, (ii) a High Impedance Ratio Wideband Transformer Circuit expiring in 2015, (iii) a 1.2 Volt Voltage Controlled Oscillator expiring in 2016 and (iv) an Unbalanced to Balanced High Impedance Ratio Wide-Band Transformer Circuit, expiring in 2015. Additionally during 1999, the Company received approval from the U.S. Patent and Trademark Office on five new patents which expire in 2017. In January, the Company announced two patents for a "Sliver Board Orthoganal Mounted Substrate Resonator" and a "Continually Adjustable Resonator". This breakthrough technology enables high-volume, automated production of advanced high-frequency components. In June, the Company announced a "Multiple Single-Layer Monolithic Passive Integrated Circuits and Method" patent. This technology improves the manufacturing process of VCOs for subscriber applications such as wireless phones and pagers by lowering material costs and shortening assembly times by integrating multiple components into a single unit during production. In July, the Company announced patents for a "Switched Mode Oscillator" and a "Passive Switched Oscillator Output Circuit". Both patents apply to critical improvements of the Company's dual-band VCOs. The Switched Mode Oscillator allows the VCOs to operate on two significantly different frequencies with only a single transistor. The Passive Switched Oscillator Output Circuit enables two oscillators to be integrated into a single unit with a minimum of added circuitry. These patents bring improvements to production cost, and, in the case of the Passive Switched Oscillator Output Circuit, reduces component size. Including the China patent, the Company has earned a total of nine patents since the beginning of 1997, many of which cover technology significantly improving commercial and subscriber products and the methods by which they are manufactured. To the Company's knowledge, there are no asserted claims by other parties against the Company's patents or its other proprietary technologies. In the absence of patents, the Company relies upon nondisclosure agreements and trade secret laws to protect its confidential and proprietary information. Due to the rapid rate of technological change in its markets, the Company believes that the ability to innovate is of greater importance to its business than availability of patents and proprietary rights. Barriers to competitor entry for non-patented technology include the time and expense to design and manufacture components and the difficulty of selling to those customers who have already designed the Company's components into their equipment. Government Regulation - --------------------- In many instances, the Company has been required to obtain export licenses before filling foreign orders. United States Export Administration regulations control high technology exports like the Company's products for reasons of national security, compliance with U.S. foreign policy, protection of domestic reserves of products in short supply and, under certain circumstances, for the security of a destination country. Any foreign sales of the Company's products requiring export licenses must comply with these general policies. During 1998, the U.S. State Department restricted certain exports, including many of the Company's products, to India due to nuclear testing by, and resulting tensions between, India and Pakistan. In 1999, the restrictions remained in place and continued to hinder the Company's sales in that market. Employees - --------- As of December 31, 1999, the Company had 219 full-time employees and 10 part-time employees, including 41 engaged in management and administration, 51 in engineering, 122 in production and testing, and 15 in sales. The Company believes that its employee relations are good. ITEM 2. DESCRIPTION OF PROPERTY The Company began leasing its corporate headquarters (Building 4) in Denver, Colorado in November 1997. Building 4 has approximately 30,800 square feet and houses the Company's administration, sales, personnel, quality assurance, finance, and management information systems departments on its first floor. The second floor of Building 4 is the site of the Company's highly-automated pick and place assembly line for products aimed at the subscriber market, the assembly facility for the Company's commercial special assembly products, the commercial and subscriber engineering and advanced design departments, the Company's process engineering and automated test equipment fabrication facility, and a training facility. The Building 4 lease expires on September 1, 2013, and provides for a monthly base rental of $44,890, which includes approximately $2,000 per month for a property tax and insurance accrual, through August 31, 2003, with possible increases each year thereafter. The Company is also obligated to pay maintenance and other expenses on the facility for the term of the lease. The lease may be extended at the option of the Company for two additional terms of five years each. In 1998 the Company remodeled its former headquarters building, an approximately 20,200 square foot facility in Denver, Colorado (Building 1). This building houses all aspects of the Company's military/aerospace signal processing components and signal source components operations and commercial signal processing components operations in a single facility. The Building 1 lease, which expires on June 30, 2002, provides for a monthly base rental of $10,333 through June 30, 2000 with increases each year thereafter up to $10,920 per month during the final year. The Company is obligated to pay taxes, insurance, maintenance and other expenses for the term of the lease. After 2002, the lease may be extended at the option of the Company for two additional terms of two years each. The Company leases another facility in Denver of approximately 13,650 square feet (Building 2) which currently houses all of the Company's engineering, purchasing and production operations for its commercial signal source component products. The Company's two pick and place assembly lines for the commercial infrastructure market, including VCOs used in cellular and PCS base stations, are in Building 2. The lease, as amended during 1998, expires on October 31, 2005, and provides for a monthly base rental of $10,801 per month. The Company is responsible for payment of taxes, insurance, maintenance and other expenses. The facility is leased from a partnership in which an executive officer of the Company, Joseph H. Kiser, is a partner. The Company leases a fourth facility (Building 3) in Denver which houses the Company's machine shop. Building 3 has approximately 8,800 square feet and the lease, as amended, expires August 1, 2003. The monthly base rental is $3,279 plus taxes, insurance, maintenance and other expenses. The facility is leased from Joseph H. Kiser, an executive officer of the Company. The Company also leases an apartment in Denver, near its administrative offices, which serves as corporate housing for certain managers whose primary residences are outside of the state but who spend a significant amount of time in Denver. This unit can house up to four individuals at a time and is subject to a one-year lease which expires September 30, 2000. The monthly base rental is $1,245. ITEM 3. LEGAL PROCEEDINGS The Company has recently brought a collection action against the successor to a former customer for nonpayment of two longstanding invoices totaling approximately $550,000. No other material legal proceedings to which the Company is a party or to which the property of the Company is subject are pending and no such proceedings are known by the Company to be contemplated. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders of the Company during the fiscal quarter ended December 31, 1999. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market - ------ The Company's common stock is traded under the symbol "VARL" on the Nasdaq National Market. The following table sets forth the high and low prices for the common stock for the periods indicated:
High Low ---- ---- 1998 - ---- Fiscal quarter ended March 31, 1998 $10-5/8 $7-3/8 Fiscal quarter ended June 30, 1998 $14-3/4 $8 Fiscal quarter ended September 30, 1998 $10-5/8 $5-1/8 Fiscal quarter ended December 31, 1998 $9-3/4 $4-15/16 1999 - ---- Fiscal quarter ended March 31, 1999 $8-3/8 $5-3/4 Fiscal quarter ended June 30, 1999 $9-5/8 $5-60/64 Fiscal quarter ended September 30, 1999 $14-3/16 $8-29/64 Fiscal quarter ended December 31, 1999 $35 $9-7/8
Holders - ------- As of December 31, 1999, there were approximately 210 holders of record and in excess of 1,000 beneficial owners of the Company's common stock. Dividends - --------- The Company has never declared or paid a cash dividend on its common stock. The Board of Directors presently intends to retain all earnings for use in the Company's business and, therefore, does not anticipate paying cash dividends in the foreseeable future. The declaration of cash dividends, if any, in the future would be subject to the discretion of the Board of Directors, which may consider such factors as the Company's results of operations, financial condition, capital needs, and any contractual or other restrictions. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Overview - -------- Net income for 1999 increased 26%, to $3.4 million, or 60 cents per basic share and 57 cents per diluted share, compared with net income of $2.7 million, or 50 cents per basic share and 48 cents per diluted share, for 1998. Sales of the Company's products increased approximately $6.2 million, or 34%, from 1998 to 1999. Shipments of commercial products were up $7.7 million, or 61%, from 1998 to 1999. A portion of that gain was offset by reduced sales of military/aerospace products which declined approximately $1.5 million, or 27%, from 1998 to 1999. Commercial shipments are expected to continue to improve in 2000 as the Company further penetrates the subscriber applications market. Military/aerospace shipments are also expected to improve. In the early part of 1999, military/aerospace operations were downsized due to reduced orders even while military/aerospace engineering was upsized to re-engineer the product designs, resulting in reduced production costs and sales price improvements for our military/aerospace customers. By the end of the year, bookings of firm customer orders for military/aerospace products had increased 10% over the prior year. Shipments are expected to increase in the future due to those efforts, the Company's successful ISO 9001 certification for its military/aerospace operations, and increased federal defense spending. Manufacturing costs as a percent of sales remained approximately 45% in 1998 and 1999. Net income, as a percent of revenue, decreased slightly from 1998 to 1999, from 15% to 14%, due primarily to the combination of a decrease in interest income (.7%), an increase in contributions to the Company's pension and profit sharing plan (.8%), and a decrease in other expenses (-.3%). During 1999, Vari-L had significant successes in its various product lines, furthering the Company's goals for quality growth and profitability: o The Company's military/aerospace production operations received ISO 9001 certification. This highly visible designation, which assures customers that Vari-L has acted to insure consistent levels of durability and excellence in its military/aerospace components operations, significantly enhances the Company's reputation and bolsters the marketability of its products, particularly with non-U.S. customers. o Installation of a state-of-the art manufacturing facility was completed on the second floor of its corporate headquarters, allowing the Company to compete for new business in the expanding subscriber applications markets. At December 31, 1999, this facility was operating at approximately 20% to 25% capacity. o The Company received approval from the U.S. Patent and Trademark Office on five new patents. -- In January, the Company announced two patents for a "Sliver Board Orthoganal Mounted Substrate Resonator" and a "Continually Adjustable Resonator". This breakthrough technology enables high- volume, automated production of advanced high-frequency components. -- In June, the Company announced a "Multiple Single-Layer Monolithic Passive Integrated Circuits and Method" patent. This technology improves the manufacturing process of VCOs for subscriber applications such as wireless phones and pagers by lowering material costs and shortening assembly times by integrating multiple components into a single unit during production. -- In July, the Company announced patents for a "Switched Mode Oscillator" and a "Passive Switched Oscillator Output Circuit". Both patents apply to critical improvements of the Company's dual-band VCOs. The Switched Mode Oscillator allows the VCOs to operate on two significantly different frequencies with only a single transistor. The Passive Switched Oscillator Output Circuit enables two oscillators to be integrated into a single unit with a minimum of added circuitry. These patents bring improvements to production cost, and, in the case of the Passive Switched Oscillator Output Circuit, reduce component size. o The Company entered into several purchase agreements for the delivery of commercial, broadband components used in more complex subassemblies for the Local Multipoint Distribution Service (LMDS) and Multipoint Multimedia Distribution Service (MMDS) networks that are the backbone of "last-mile" wireless communications. While these agreements will account for only a small percentage of expected near-term revenue from our commercial business, they do demonstrate the potential for substantial growth in this market as consumer demand for broadband services grows. -- The Company entered into agreements with Netro, a division of RO Computers Devices Pty Limited, and Stanford Wireless Broadband, Inc., a subsidiary of Stanford Telecommunications, to produce, in combination, $2.4 million in broadband communications products. Netro will integrate the Company's signal source components into products that offer multipoint, high-speed networking for Internet, voice and frame-relay traffic. Stanford is purchasing subassemblies for its new Local Multipoint Distribution Service (LMDS), which gives communication providers a faster, more cost-effective way to deliver internet access and video and voice services. -- The Company entered into a $1.l million agreement with Adaptive Broadband, Inc. to produce components for wireless microwave radio networks, including point to point networks. Pursuant to this agreement, the Company is to deliver narrow-frequency VCOs over the next two years beginning with the fourth quarter of 1999. Results of Operations - --------------------- Operating Revenues ------------------ Sales revenues increased approximately $6.2 million (34%) in 1999, from $18.1 million in 1998 to $24.3 million in 1999. Revenues from the Company's commercial signal source components were approximately $17.2 million, or 71% of revenues, in 1999 as compared to $11.5 million, or 64%, in 1998. Revenues from sales of the Company's military/aerospace signal source components products were approximately $2.3 million, or 10% of revenues, in 1999 as compared to $3.2 million, or 18%, in 1998. Revenues from the Company's military/aerospace signal processing components products were approximately $1.7 million, or 7% of revenues, in 1999 as compared to $2.1 million, or 12%, in 1998. Revenues from the Company's commercial signal processing components products were approximately $1.6 million, or 6% of revenues, in 1999 as compared to $1.0 million, or 5%, in 1998. Revenues from sales of products that combine the Company's signal processing components and signal source components were approximately $.1 million in 1999, or less than 1% of revenues, as compared to $.2 million, or 1% of revenues, in 1998. Revenues from sales from subscriber signal source components products were approximately $1.0 million, or 4%, in 1999, as compared to less than 1% in 1998. Revenues from sales from commercial special assembly components products were approximately $.4 million, or 2%, in 1999, as compared to less than 1% in 1998. Cost of Goods Sold ------------------ Cost of goods sold, as a percent of sales revenues, was 45% in 1999 and 1998. Gross profit margins were 55% for 1999 and 1998. It is anticipated that cost of goods sold and gross profit margins will continue to be relatively constant in the near future as the amortization of the costs of new and expanded manufacturing facilities are offset by increased sales and decreases in the personnel cost of manufacturing across all of the Company's product lines. General and Administrative Expenses ----------------------------------- General and administrative expenses increased approximately $535,000, or 27%, from $1,956,000 in 1998 to $2,491,000 in 1999. The increase to G & A primarily resulted from increased personnel and staffing costs, increased board of director and committee activity, and related legal and accounting costs, some of which can be attributed to management's commitment to meet or exceed the newly adopted requirements imposed by the "Blue Ribbon Committee" of the SEC and Nasdaq concerning increased scrutiny of financial reporting, and an increase of $100,000 in the reserve for uncollectible receivables. Engineering Expenses -------------------- Engineering expenses increased approximately $520,000, or 45%, from $1,155,000 in 1998 to $1,675,000 in 1999, primarily reflecting the expansion of the engineering team, plus the related costs of recruiting, equipment depreciation, and other expenses of this increasing emphasis on building the Company's team of technical experts and innovators. Selling Expenses ---------------- Selling expenses increased approximately $665,000, or 32%, from $2,085,000 in 1998 to $2,750,000 in 1999, reflecting the sales commissions on increased revenue of $6.2 million and a 25% increase in personnel in the Sales Department, including the hiring of a Director of Sales-Ericsson Worldwide Accounts and a Director of Sales-Nokia Worldwide Accounts. Interest Income and Expense --------------------------- The Company manages its credit facility and interest bearing investments in tandem. Interest expense increased approximately $236,000, or 36%, from $663,000 in 1998 to $899,000 in 1999. The increase reflects the increase in interest for long-term debt used to finance capital improvements and fixed assets purchased during 1999. Interest income decreased approximately $66,000, or 20%, from $328,000 in 1998 to $262,000 in 1999. The Company's investment in a money- market mutual fund of U.S. Government securities, from which interest income is earned, was approximately $9.0 million at December 31, 1999 and $6.5 million at December 31, 1998. During the fourth quarter of 1999, a significant portion of the proceeds from the exercises of warrants and employee stock options were invested in the money fund. The amount of monies in the fund averaged $6.9 million per month in 1998, versus an average of $5.7 million per month in 1999. Profit Sharing Plan Contribution -------------------------------- During 1990, the Company adopted a qualified profit sharing plan for its employees. Annual contributions to the plan, which may be in the form of cash or shares of the Company's stock, are determined by the Board of Directors at its sole discretion. During 1998, $4,000 of cash contributions were made to the plan. During 1999, shares of the Company's common stock, valued at approximately $101,000, and cash contributions of approximately $87,000, were contributed to the plan. Depreciation and Amortization ----------------------------- Depreciation and amortization increased approximately $637,000, or 51%, from $1,240,000 in 1998 to $1,877,000 in 1999. The increase reflects depreciation on increased investments in property, equipment and leasehold improvements and amortization of costs pertaining to ISO certification and patents. Depreciation and amortization expense is expected to continue to increase as a result of these and future capital investments. Other Expenses -------------- Other expenses decreased approximately $38,000, or 54%, from $70,000 in 1998 to $32,000 in 1999, due primarily to the final payment in June 1998 of costs related to a 1992 covenant not to compete. Net Income ---------- Net income increased approximately $707,000, or 26%, from $2,696,000 in 1998 to $3,403,000 in 1999. The increase in net income was due principally to increased revenues of $6.2 million from 1998 to 1999. Earnings Per Share ------------------ Basic earnings per share increased 10 cents, or 20%, from $.50 in 1998 to $.60 in 1999 on weighted average outstanding shares that increased 265,000 shares, or 5%, from 5,407,000 shares in 1998 to 5,672,000 shares in 1999. Diluted earnings per share increased 9 cents, or 19%, from $.48 in 1998 to $.57 in 1999 on weighted average shares outstanding and dilutive securities that increased 407,000, or 7%, from 5,610,000 in 1998 to 6,017,000 in 1999. Financial Condition ------------------- Assets ------ Total assets increased approximately $16.7 million during 1999. The increase resulted from a significant increase in cash from stock option and warrant exercises in the fourth quarter of the year, and investments in increased inventories and capital investments in the Company's infrastructure, patents and ISO 9001 registration. Cash and cash equivalents increased approximately $8.3 million, reflecting the exercises, during the fourth quarter of 1999, of stock options for approximately 500,000 shares and warrants for 657,000 shares of the Company's common stock. Trade accounts receivable increased approximately $.3 million, net of the allowance for doubtful accounts, or 8%, from December 31, 1998 to December 31, 1999, reflecting shipments in the fourth quarter of 1999 that were higher than the shipments in the fourth quarter of 1998. Inventories increased approximately $2.4 million, or 30%, during 1999. Components of the increase were approximately $1.0 million in finished goods and $1.6 million in raw materials, offset by a decrease in work in process of approximately $0.2 million. Finished goods increased as a result of the Company's decision to provide a faster turnaround of products to its customers by shortening the lead times on deliveries; raw materials increased as a result of the Company's decision to supplement inventory levels of certain components, used in the commercial and subscriber production of signal source products, which have become in short supply because of a high, world-wide demand for them; work in process inventories decreased due to improved processes which enable placing covers, testing, labeling and packaging products to be completed more quickly. Property and equipment increased approximately $5 million as a net result of extensive capital improvements and acquisitions and depreciation during 1999. This included the expanded tenant finish of the second floor of the Company's headquarters to house the assembly facility for the Company's commercial special assembly products, the commercial and subscriber engineering and advanced design departments, the Company's process engineering and automated test equipment fabrication facility, and a training facility, in addition to the final installation of the high- speed test and automated production equipment for the assembly of the Company's line of products being sold into the subscriber marketplace. Patents increased approximately $.6 million in 1999. The Company obtained approval for five new patents during the year. Other assets, which include costs for the Company's registration under ISO 9001, increased approximately $.3 million, net of amortization, during 1999. The Company received ISO 9001 certification for its military and aerospace operations in August 1999. Liabilities ----------- Total liabilities decreased approximately $700,000 during 1999, primarily due to approximately $1.1 million in decreased trade payables and deferred income taxes and repayments on the line of credit, offset by approximately $400,000 in increased term debt. Stockholders' Equity -------------------- Common stock and paid-in capital increased approximately $14.0 million during 1999 due to the exercise of stock warrants from the Company's 1997 convertible debenture offering, the exercise of stock options, the issuance of shares under the employee stock purchase plan, and the issuance of shares under the Company's stock grant plan. Liquidity --------- At December 31, 1999, the Company's working capital was $27.4 million compared to $16.4 million at December 31, 1998. The Company's current ratio was 8.4 to 1 at December 31, 1999 compared to 5.4 to 1 at December 31, 1998. The increase in working capital was due to several factors. Cash and cash equivalents increased approximately $8.3 million, inventories increased approximately $2.5 million, trade accounts receivable increased approximately $.3 million, and trade payables and accrued expenses decreased approximately $.2 million. These improvements were partially offset by an increase in current maturities of long-term debt ($.2 million), and a decrease in prepaid expenses ($.1 million.) Capital Resources ----------------- The Company has credit facilities with two banking institutions. The first consists of a $6.0 million line of credit agreement. The second consists of two agreements, a $4.1 million term loan agreement and a $4.0 million revolving equipment term loan agreement. The line of credit was restructured on May 18, 1999 to provide for borrowings of up to $6.0 million. Interest is payable monthly, calculated at prime. The line of credit matures April 30, 2001. At December 31, 1999, the outstanding balance due under the line of credit was $4,016,112. The Company's accounts receivable, inventory, and general intangible assets secure the line of credit. The Company's term loan has a floating rate of Libor plus 1.5% with fixed rate protection through an interest rate swap agreement which results in an all-in fixed rate of 7.75% through the maturity date of February 24, 2002. Monthly principal and interest payments of approximately $65,000 are required. At December 31, 1999, the balance due under the term loan was $3,589,393. The revolving equipment term loan provides for borrowings up to $4.0 million. Interest accrues on the outstanding principal balance of the revolving equipment term loan at prime plus .25 percent when advances are made under the revolver. These borrowings can be converted to term notes at rates which adjust to the three-year treasury note rate plus 1.95 percent. When converted, the term debt requires monthly principal and interest payments calculated on a seven-year amortization basis with a 42- month maturity. The revolving loan maturity date has been extended to February 13, 2000. As of December 31, 1999, the balance of the outstanding advances under the revolving loan that had been converted to term notes totaled $3,497,903. Interest accrues on the outstanding principal balances of these term notes at rates ranging from 6.10 percent to 7.72 percent, and monthly principal and interest payments totaling $57,486 are required. The Company's property and equipment secure the term loan and revolving equipment term loan. The Company has separately financed the purchase of motor vehicles with promissory notes bearing interest at rates ranging from 7.75 percent to 8.50 percent. Monthly principal and interest payments totaling $2,826 are currently required. The notes mature from 2002 through 2003. The Company finances certain of its annual insurance premiums through a financing company. The amount due under these loans totaled $38,175 as of December 31, 1999 and is paid in monthly installments of $6,692 with an interest rate of 8.3%. On March 4, 1997, the Company entered into an agreement to sell up to 75 units of debentures and warrants. The units consisted of an aggregate of $7.5 million in four year, 7% convertible debentures and 750,000 non- redeemable common stock purchase warrants exercisable at $9.50 per share for a period of three years. All of the debentures plus accrued interest were converted into common stock during 1997 and 85,000 warrants were exercised by the end of 1998. During 1999, the last 665,000 warrants were exercised. The Company believes that it has sufficient financial resources available to meet its short-term working capital needs through cash flows generated by operating activities and through the management of its sources of financing. The Company also believes that, partially as the result of the recent warrant and stock option exercises, it has adequate capital resources to continue its growth plans. Backlog ------- Total backlog of unfilled firm customer orders at December 31, 1999 was $22.6 million compared with $18.1 million at December 31, 1998. The increase in firm customer orders reflects the Company's success in capturing a substantial portion of the market for cellular infrastructure, purchased-VCOs in Western Europe, and increases in commercial domestic markets. Year 2000 Issues ---------------- The Company gave serious attention to the potential problems that could have arisen from the rollover of computer clocks with two-digit year fields when the year 2000 arrives. By December 31, 1999, the Company had successfully completed all of its Year 2000 preparedness measures. The costs that the Company incurred which were specific to the assessment and remediation of Year 2000 issues were not material. No special expenditures were required in the area of software or hardware; the Company's growth over the last several years had enabled the Company to purchase hardware and software that met Year 2000 compliance criteria. Some legal fees and educational expenses were incurred to heighten awareness and to help organize business activities to incorporate assessment and remediation. For the most part, however, Year 2000 issues were incorporated into other management routines, thereby minimizing extraordinary costs. The Company was very diligent to monitor the effects prior to and with the advent of the clock rollover to January 1, 2000 and subsequent time periods. The impact, if any, was negligible. The Company has not seen any negative effects of the rollover in the business it does with either its vendors or customers. While there is no guarantee that there will be no residual effect from the Year 2000 rollover, the Company believes that it would be minimal and within the ability of the Company to manage it without any noticeable impact to operations. Forward Looking Statements -------------------------- Some of the statements contained in this document are forward-looking statements. The accuracy of these statements cannot be guaranteed as they are subject to a variety of risks including, but not limited to the success of the products into which the Company's products are integrated, governmental action relating to wireless communications licensing and regulation, internal projections as to the demand for certain types of technological innovation, competitive products and pricing, the success of new product development efforts, the timely release for production and the delivery of products under existing contracts, future economic conditions generally, as well as other factors. ITEM 7. FINANCIAL STATEMENTS. See pages F-1 through F-28 for this information. Vari-L Company, Inc. Index to Financial Statements December 31, 1999 and 1998 Independent Auditor's Report F-1 Balance Sheets F-2 - F-3 Statements of Income F-4 Statements of Stockholders' Equity F-5 Statements of Cash Flows F-6 Notes to Financial Statements F-7 - F-28 Financials inserted here with separate page numbering F-1 to F-28. REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Stockholders Vari-L Company, Inc. We have audited the accompanying balance sheets of Vari-L Company, Inc. as of December 31, 1999 and 1998, and the related statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vari-L Company, Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. HAUGEN, SPRINGER & CO., P.C. March 14, 2000 Denver, Colorado VARI-L COMPANY, INC. BALANCE SHEETS (000'S OMITTED)
December 31, ------------ 1999 1998 ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 14,883 $ 6,515 Trade accounts receivable, less $123 and $23 allowance for doubtful accounts 4,762 4,417 Inventories 10,255 7,901 Prepaid expenses and other 1,160 1,235 -------- -------- Total Current Assets 31,060 20,068 -------- -------- Property and Equipment: Machinery and equipment 27,949 22,299 Furniture and fixtures 1,776 1,499 Leasehold improvements 8,544 7,797 -------- -------- 38,269 31,595 Less accumulated depreciation and amortization 6,112 4,444 -------- -------- Net Property and Equipment 32,157 27,151 -------- -------- Other Assets: Long-term inventories 475 475 Covenant not to compete - 33 Patents, net of accumulated amortization of $258 and $141 2,065 1,529 ISO registration costs and other, net of accumulated amortization of $149 and $58 1,616 1,415 -------- -------- Total Other Assets 4,156 3,452 -------- -------- TOTAL ASSETS $ 67,373 $ 50,671 ============ ======== ========
(Continued) SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS VARI-L COMPANY, INC. BALANCE SHEETS (000'S OMITTED)
(Continued) December 31, ------------ 1999 1998 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current installments of long-term debt $ 1,070 $ 832 Financed insurance premiums 38 22 Trade accounts payable 1,996 2,147 Accrued expenses 602 684 -------- -------- Total Current Liabilities 3,706 3,685 Bank line of credit 4,016 4,756 Long-term debt 6,099 5,901 Deferred income taxes 3,730 3,904 -------- -------- Total Liabilities 17,551 18,246 -------- -------- Commitments and Contingencies (Notes 9, 10, 11, and 12) Stockholders' Equity: Common stock, $.01 par value, 50,000 shares authorized; 6,945 and 5,454 shares issued and outstanding, respectively 69 54 Paid-in capital 36,064 22,085 Retained earnings 13,689 10,286 -------- -------- Total Stockholders' Equity 49,822 32,425 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 67,373 $ 50,671 ====================== ======== ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS VARI-L COMPANY, INC. STATEMENTS OF INCOME (000'S OMITTED, EXCEPT FOR PER SHARE AMOUNTS)
Years Ended December 31, ------------------------ 1999 1998 ---- ---- Net sales $ 24,281 $ 18,063 Cost of products sold 11,007 8,100 -------- -------- Gross profit 13,274 9,963 -------- -------- Other income and expenses: General and administrative 2,491 1,956 Engineering 1,675 1,155 Selling 2,750 2,085 Profit sharing plan contribution 188 4 Interest expense 899 663 Interest income (262) (328) Other 32 70 -------- -------- 7,773 5,605 -------- -------- Income before taxes 5,501 4,358 Income taxes 2,098 1,662 -------- -------- NET INCOME $ 3,403 $ 2,696 ========== ======== ======== Basic earnings per share $ 0.60 $ 0.50 ======== ======== Diluted earnings per share $ 0.57 $ 0.48 ======== ========
See Accompanying Notes to Financial Statements VARI-L COMPANY, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (000'S OMITTED)
Total Stock- Number Common Paid-In Retained holders' of Shares Stock Capital Earnings Equity --------- ------ ------- -------- -------- Balances 12/31/97 5,251 $ 52 $ 20,193 $ 7,590 $27,835 Stock options exercised 48 1 390 - 391 Stock warrants exercised 130 1 1,120 - 1,121 Issued under employee stock purchase plan 14 - 94 - 94 Issued under stock grant plan 26 - 315 - 315 Shares repurchased (5) - (27) - (27) Net income - - - 2,696 2,696 ------- ------- ------- ------- ------- Balances 12/31/98 5,464 54 22,085 10,286 32,425 Stock options exercised 780 8 7,416 - 7,424 Stock warrants exercised 665 7 6,311 - 6,318 Issued under employee stock purchase plan 13 - 82 - 82 Issued under stock grant plan 14 - 92 - 92 Issued to profit sharing plan 13 - 101 - 101 Shares repurchased (4) - (23) - (23) Net income - - - 3,403 3,403 ------- ------- ------- ------- ------- Balances 12/31/99 6,945 $ 69 $36,064 $13,689 $49,822 ======= ======= ======= ======= =======
See Accompanying Notes to Financial Statements VARI-L COMPANY, INC. STATEMENTS OF CASH FLOWS (000'S OMITTED)
Years Ended December 31, ------------------------ 1999 1998 ---- ---- Net cash provided by operating activities (Note 15) $ 3,801 $ 4,398 ------- -------- Cash flows from investing activities: Purchases of property and equipment (6,674) (9,957) ------- -------- Net cash (used in) investing activities (6,674) (9,957) ------- -------- Cash flows from financing activities: Proceeds from long-term debt 1,402 2,236 Repayments of long-term debt (966) (564) Proceeds from bank line of credit 1,680 4,434 Repayments of bank line of credit (2,420) (1,491) Net borrowings for insurance financing 16 (2) Net proceeds from stock issuances 11,551 1,517 Acquisition of treasury stock (22) (27) ------- -------- Net cash provided by financing activities 11,241 6,103 ------- -------- Net increase in cash 8,368 544 Beginning cash 6,515 5,971 ------- -------- Ending cash $14,883 $ 6,515 ======= ======== Supplemental disclosure of cash information: Cash paid for interest $ 855 $ 707 ======= ========
See Accompanying Notes to Financial Statements VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Organization and Nature of Operations ------------------------------------- Vari-L Company, Inc. is a manufacturer of electronic components and was founded in 1953. The Company's business is the design, manufacture, and marketing of microwave signal processing components and devices used in the communications industry. The Company's products are sold to original equipment manufacturers of communication equipment, either in the military or commercial marketplace in the United States and internationally. 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents ------------------------- Cash and cash equivalents include a money market mutual fund which is convertible to a known amount of cash. Inventories ----------- Inventories are stated at the lower of cost method or market. Cost is determined using the first-in, first-out method. Property and Equipment ---------------------- Property and equipment are recorded at cost. Depreciation and amortization for the principal components of property and equipment are computed using straight-line and accelerated methods over 1 to 12 year estimated useful lives. Other components of property and equipment are depreciated using units-of-production methods which recognize the productive lives of the underlying assets. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ------------------------------------------------------ Stock Compensation Plans ------------------------ The Company applies Accounting Principles Board (ABP) Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its stock compensation plans. The Company discloses the fair value of those plans pursuant to Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Income Taxes ------------ The Company uses the asset and liability method as identified in SFAS No. 109, Accounting for Income Taxes. Earnings Per Share ------------------ Basic earnings per common share are based upon the weighted average shares outstanding. Outstanding stock options and warrants are treated as common stock equivalents for purposes of computing diluted earnings per share and represent the difference between basic and diluted weighted average shares outstanding. Research and Development Costs ------------------------------ Research and development costs are charged to expense when incurred. Research and development expense for the years 1999 and 1998 totaled $1,675,000 and $1,155,000, respectively. Valuation of Long-Lived Assets ------------------------------ The Company reviews long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company establishes guidelines for determining fair value based on undiscounted future net cash flows for the use of the asset and for the measurement of an impairment loss. Any impairment loss is recorded in the period in which the recognition criteria are first applied and met. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ------------------------------------------------------ Revenue Recognition ------------------- The Company generally recognizes revenue when products are shipped. Occasionally, certain military/aerospace customers may request that they take delivery of products at the Company's facilities. Revenue for these orders is recognized when the products are ready for delivery. There were no significant amounts of these revenues at December 31, 1999 or 1998. Reclassifications ----------------- Certain 1998 amounts have been reclassified as to conform with 1999 presentation. NOTE 2 - INVENTORIES ----------- Inventories consisted of the following:
December 31, ------------ 1999 1998 ---- ---- (000's omitted) Finished goods $ 3,181 2,174 Work in process 3,087 3,365 Raw materials 3,836 2,211 Gold bullion 151 151 -------- -------- $ 10,255 $ 7,901 ======== ======== Long-term inventories $ 475 $ 475 ======== ========
The gold bullion was purchased for purposes of managing the cost of gold consumed in the Company's manufacturing process. The Company's normal operating cycle for certain products may be in excess of one year, and the Company occasionally takes advantage of quantity discounts for raw materials. Also, the Company manufactures some finished goods in anticipation of customer demands. As a result of these factors, the Company maintains certain inventory quantities in excess of one year's supply which are accordingly classified as long-term. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 3 - PROPERTY, EQUIPMENT, AND OTHER ASSETS ------------------------------------- During 1999 and 1998, the Company invested significant amounts in the remodeling of its leased facilities and expansion of its automated production capacity. The Company has capitalized certain direct and overhead costs related to these projects. Patents are carried at cost less accumulated amortization which is calculated on a straight-line basis over the estimated useful lives, which is generally 17 years. Other assets at December 31, 1999 and 1998 included costs related to the Company's efforts to obtain ISO 9001 registration for its commercial and military/aerospace operations. The registration was part of the Company's ongoing efforts to refine and advance the qualities of its products and manufacturing processes. These costs consisted of wages, travel, training, consulting, and related overhead costs. Registration of the Company's military/aerospace operations was successful in August 1999 and those costs totaled approximately $804,000. Registration of the Company's commercial operations was successful in January 1998 and those costs totaled approximately $844,000. These amounts are being amortized over a fifteen-year period beginning with the dates of registration. NOTE 4 - BANK LINE OF CREDIT AND LONG-TERM DEBT -------------------------------------- The Company has credit facilities with two banking institutions. The first consists of a $6.0 million line of credit agreement. The second consists of two agreements, a $4.1 million term loan agreement and a $4.0 million revolving equipment term loan agreement. Line of Credit -------------- The line of credit was restructured on May 18, 1999 to provide for borrowings of up to $6.0 million. Interest is payable monthly, calculated at prime. The line of credit matures April 30, 2001. At December 31, 1999, the outstanding balance due under the line of credit was approximately $4.016 million. The Company's accounts receivable, inventory, and general intangible assets secure the line of credit. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 4 - BANK LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED) -------------------------------------------------- Term Loan --------- The Company's term loan has a floating rate of Libor plus 1.5% with fixed rate protection through an interest rate swap agreement which results in an all-in fixed rate of 7.75% through the maturity date of February 24, 2002. Monthly principal and interest payments of approximately $65,000 are required. At December 31, 1999, the balance due under the term loan was approximately $3.589 million. Revolving Equipment Term Loan ----------------------------- The revolving equipment term loan provides for borrowings up to $4.0 million. Interest accrues on the outstanding principal balance of the revolving equipment term loan at prime plus .25 percent when advances are made under the revolver. These borrowings can be converted to term notes at rates which adjust to the three-year treasury note rate plus 1.95 percent. When converted, the term debt requires monthly principal and interest payments calculated on a seven-year amortization basis with a 42-month maturity. The revolving loan maturity date has been extended to February 13, 2000. As of December 31, 1999, the balance of the outstanding advances under the revolving loan that had been converted to term notes was approximately $3.498 million. Interest accrues on the outstanding principal balances of these term notes at rates ranging from 6.10 percent to 7.72 percent, and monthly principal and interest payments of approximately $57,000 are required. The Company's property and equipment secure the term loan and revolving equipment term loan. Under the credit facilities, the Company must maintain certain financial ratios and obtain the banks' approvals prior to entering into various transactions, including the payment of dividends, disposal of significant assets, changing its executive management, or entering into direct borrowing arrangements or contingent liabilities. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 4 - BANK LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED) -------------------------------------------------- Promissory Notes ---------------- The Company has financed the purchase of vehicles with promissory notes bearing interest at rates ranging from 7.75 percent to 8.50 percent. Monthly principal and interest payments totaling $2,826 are required. The notes mature from 2000 through 2003. Summary of Long-Term Debt ------------------------- Long-term debt consists of the following:
December 31, ------------ 1999 1998 ---- ---- (000's Omitted) Term loan $ 3,589 $ 4,114 Equipment term loan 3,498 2,552 Vehicle notes 82 67 -------- --------- 7,169 6,733 Less current installments 1,070 832 -------- --------- Long-term portion $ 6,099 $ 5,901 ======== =========
Scheduled annual principal payments on the bank line of credit and long-term debt for each of the next five years are as follows (000's omitted): 2000 $ 1,070 2001 5,864 2002 4,060 2003 184 2004 7 NOTE 5 - STOCKHOLDERS' EQUITY -------------------- Warrants exercised during 1999 and 1998 were issued in connection with a 1997 sale of convertible debentures. At December 31, 1999, all of these warrants had been exercised. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 6 - INCOME TAXES ------------ The provisions for income taxes consisted of:
December 31, ------------ 1999 1998 ---- ---- (000's Omitted) Deferred: Federal $ 1,920 $ 1,525 State 178 137 -------- -------- Total tax provisions $ 2,098 $ 1,662 ======== ========
For the years ended December 31, 1999 and 1998, the Company had no current federal or state income tax liabilities due to net operating losses generated during those years. The operating losses resulted primarily from the income tax benefit of stock options exercised and the use of accelerated depreciation rates for tax purposes. The amount of the losses available for carryover at December 31, 1999 were approximately $7.7 million (federal) and $9.5 million (state), and expire in varying amounts through December 31, 2014. Significant components of deferred tax balances as of December 31, 1999 and 1998 were as follows:
1999 1998 ---- ---- (000's Omitted) Deferred tax liabilities: Depreciation and amortization $ 4,874 $ 4,004 Other, net 1,793 799 ------- ------- Total deferred tax liabilities 6,667 4,803 Deferred tax assets: Net operating loss carryovers 2,937 899 ------- ------- Net deferred tax liabilities $ 3,730 $ 3,904 ======= =======
VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 6 - INCOME TAXES (CONTINUED) ------------------------ The differences between the U.S. federal statutory rate and the Company's effective tax rate are as follows:
1999 1998 ---- ---- Federal statutory tax rate 34.000% 34.000% State income taxes, net of federal benefit 3.135 3.300 Officers' life insurance and other 1.005 0.830 ------- ------- Effective tax rate 38.140% 38.130% ======= =======
VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 7 - EARNINGS PER SHARE ------------------ The following is a reconciliation of the net income (numerator) and number of shares (denominator) for the computations of basic and diluted earnings per share:
Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- (000's omitted) --------------- For the year ended ------------------ December 31, 1999: -------------------- Basic earnings per share $ 3,403 5,672 $ .60 ======== Effect of dilutive securities: Stock options - 264 Warrants - 81 -------- -------- Diluted earnings per share $ 3,403 6,017 $ .57 ======== ======== ======== For the year ended ------------------ December 31, 1998 ------------------- Basic earnings per share $ 2,696 5,407 $ .57 ======== Effect of dilutive securities: Stock options - 173 Warrants - 30 -------- -------- Diluted earnings per share $ 2,696 5,610 $ .48 ======== ======== ========
At December 31, 1999, the Company had 6,945,483 common shares outstanding. The Company issued 1,485,199 and purchased 3,850 shares during 1999. For purposes of computing earnings per share, these shares were weighted for the period of time they were outstanding. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 8 - STOCK COMPENSATION PLANS ------------------------ The Company has three stock-based compensation plans which are described below. The Company applies APB No. 25 in accounting for its stock compensation plans. For 1999 and 1998, no compensation cost was recognized for the stock option portion of the plans. Had compensation cost been determined on the basis of fair value pursuant to SFAS No. 123, net income and earnings per share would have been reduced to the following proforma amounts:
1999 1998 ---- ---- Net Income: As Reported $ 3,403 $ 2,696 ========= ========= Pro Forma $ 1,742 $ 1,824 ========= ========= Earnings Per Share: Basic: As Reported $ .60 $ .50 ========= ========= Pro Forma $ .31 $ .34 ========= ========= Diluted: As Reported $ .57 $ .48 ========= ========= Pro Forma $ .29 $ .33 ========= =========
Stock Option Plan ----------------- During 1987, the Company established a nonqualified tandem stock option/stock appreciation rights plan for key employees. The plan, which was amended in 1990, 1994 and 1996, provides for the grant of incentive stock options, nonqualified stock options and stock appreciation rights to officers, directors or employees of, as well as advisers and consultants to, the Company. The Company has reserved 3,270,000 shares of its common stock for issuance upon exercise of rights and options under the plan. Typically, rights and options have been granted subject to a vesting schedule, vesting at the rate of 20 percent per year, becoming fully vested upon the change of control of the Company, and expiring 10 years from the date of issuance. Certain options granted to senior management were vested upon issuance or on a shorter vesting schedule. The exercise price is equal to the fair market value of the Company's common stock on the grant date or the average of that value over a stated period of time prior to such date. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 8 - STOCK COMPENSATION PLANS (CONTINUED) ------------------------------------ Stock Option Plan (Continued) ----------------------------- The fair value of each option grant is estimated on the grant date using a binomial option-pricing model with certain weighted-average assumptions which, for 1999 and 1998 respectively, were: expected volatility of 73 percent and 78 percent, risk-free interest rates of 5.5 percent and 5.5 percent, and zero dividend yields for both years. The expected average remaining life of the options were seven years. The binomial option-pricing valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 8 - STOCK COMPENSATION PLANS (CONTINUED) ------------------------------------ Stock Option Plan (Continued) ----------------------------- Following is a summary of the status of the stock option plan during 1999 and 1998:
Number Weighted Average of Options Exercise Price ------------ --------------- (000's omitted) Outstanding at January 1, 1998 968 $ 8.47 Granted 1,043 7.68 Exercised (49) 6.06 Forfeited (3) 8.61 ------- Outstanding at December 31, 1998 1,959 .78 ======= Options exercisable at December 31, 1998 1,138 7.39 ======= Weighted average fair value of options granted during 1998 $ 2.43 ======= Outstanding at January 1, 1999 1,959 7.78 Granted 565 18.49 Exercised (788) 6.60 Forfeited (29) 7.81 ------- Outstanding at December 31, 1999 1,707 11.68 ======= Options exercisable at December 31, 1999 532 8.47 ======= Weighted average fair value of options granted during 1999 $ 15.01 =======
VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 8 - STOCK COMPENSATION PLANS (CONTINUED) ------------------------------------ Stock Option Plan (Continued) ----------------------------- Following is a summary of the status of stock options outstanding at December 31, 1999 (000's omitted for number of options):
Outstanding Options Exercisable Options ------------------ ------------------- Weighted Average Weighted Weighted Exercise Remaining Average Average Price Contractual Exercise Exercise Range Number Life Price Number Price -------- ------ ----------- -------- ------ --------- $ 2.21 - 2.83 26 3.8 Yrs $ 2.21 26 $ 2.21 2.83 - 5.65 3 5.1 4.73 3 4.73 5.65 - 8.48 384 7.3 7.53 165 8.20 8.48 -11.30 738 7.8 8.90 331 9.00 11.30 -14.13 4 6.6 12.53 4 12.53 14.13 -16.96 1 6.1 15.87 1 15.87 16.96 -19.78 551 10.0 18.76 2 18.26 ---- ---- 1,707 532 ==== ====
The Company obtained an income tax deduction for the difference between the market value of the shares issued and exercise prices of options exercised during 1999 and 1998. The amount of the deduction was approximately $5.984 million for 1999 and $265,000 for 1998. The income tax benefit of the deductions have been credited to paid-in capital. Employee Stock Purchase Plan ---------------------------- The Company adopted an employee stock purchase plan during 1995. Eligible employees may contribute up to 10 percent of their earnings, through payroll deductions, to purchase shares of the Company's common stock. The purchase price is equal to 85 percent of the fair market value of the stock on specified dates. A total of 800,000 common shares have been reserved under the plan, and the maximum number of shares to be issued is 200,000 per year. Since the plan is noncompensatory, no charges to operations are recorded. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 8 - STOCK COMPENSATION PLANS (CONTINUED) ------------------------------------ Employee Stock Purchase Plan (Continued) ---------------------------------------- Employee withholdings during 1998 were approximately $82,000 and were used to purchase 12,773 shares which were issued January 1999. Withholdings during 1999 were approximately $50,000. During January 2000, these withholdings were used to purchase 7,471 shares. Compensation cost for the SFAS No. 123 pro forma amounts was estimated using a binomial option-pricing model with certain assumptions similar to those used for the stock option plan. The weighted-average fair value of those purchase rights granted in 1999 and 1998 was $2.05 and $2.07 per share, respectively. Stock Grant Plan ---------------- During 1996, the Company adopted a stock grant plan under which stock grants can be made to the Company's officers, directors, employees, consultants, and advisors. The Company reserved 100,000 shares of its common stock for issuance under the stock grant plan. The plan provides for automatic grants of 50 shares per month to nonmanagement members of the Company's Board of Directors. During 1999 and 1998, those members received grants for 1,800 and 1,500 common shares, respectively. Compensation cost charged to operations was measured by the fair market value of the stock on the date of the grants. In connection with the executive employment agreements described in Note 12, the Compensation Committee granted stock bonuses of 25,000 shares to each of the Company's two senior officers. The grants are subject to a vesting schedule whereby three-quarters of the shares were vested during 1997, 1998 and 1999. The remaining shares are scheduled to vest in 2000. Additionally, the Company is liable for income and payroll taxes attributable to the stock bonuses. The grants are subject to forfeiture provisions related to fulfillment of various terms of the employment agreements. Accordingly, the Company is amortizing the cost of the stock bonuses over the four-year term of the employment agreements. At December 31, 1999, the unamortized portion of this cost was approximately $437,000, and was included in prepaid expenses. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 9 - COMMITMENTS AND CONTINGENCIES ----------------------------- Nonrelated Party Leases ----------------------- The Company leases certain of its office and manufacturing facilities under long-term operating leases. Minimum future annual lease payments over the next five years are as follows: (000's omitted) 2000 $ 643 2001 647 2002 584 2003 518 2004 518 ------ $2,910 ====== Annual rent expense on these leases was approximately $654,000 for 1999 and $639,000 for 1998. Related Party Leases -------------------- Certain facilities are leased under long-term operating leases from the Company's chairman and from a partnership in which he is a partner. Minimum future annual lease payments over the next five years are as follows: (000's omitted) 2000 $ 169 2001 169 2002 169 2003 169 2004 130 ------ $ 806 ====== Rent expense on these leases was approximately $169,000 for 1999 and $127,000 for 1998. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED) ----------------------------------------- Contingencies ------------- The Company is contingently liable for guarantees of indebtedness owed by senior officers to a former officer. The amount of this contingent liability at December 31, 1999 was approximately $169,000. NOTE 10 - AGREEMENTS WITH FORMER OFFICER ------------------------------ The Company was party to an agreement with one of its former officers. Among other items, the agreement provided for a severance package, a consulting agreement, and a covenant not to compete against the Company. This agreement was dated November 1996 and was entered into in connection with the employment agreements described in Note 12. The Company capitalized $99,581 as the cost of the covenant not to compete, which represented the total amount of severance pay due the former officer. The covenant was being amortized using the straight- line method over the three year life of the covenant. As of December 31, 1999, these amounts were amortized in full. NOTE 11 - RELATED PARTY TRANSACTIONS -------------------------- As described in Note 9, the Company leases certain facilities from the Company's chairman and a partnership in which he is a partner. NOTE 12 - EMPLOYMENT AGREEMENTS --------------------- Effective June 1, 1997, the Company entered into new four-year employment agreements with its two senior officers which provide for (i) automatic annual renewals of their full terms, (ii) minimum annual base salaries during the officers' employment with the Company, and (iii) severance pay after employment. Severance pay will be equal to the greater of the senior officer's annual base salary multiplied by the remaining term of the agreement or 2.99 times the senior officer's average annual compensation over the last five years in the event of involuntary termination of employment by the Company. In the case of voluntary retirement, the senior officer will be entitled to (i) one-half of his annual base salary as severance pay, (ii) be engaged as a consultant for a period of up to five years for a fee equal to 50 percent of his annual base salary, and (iii) a retirement VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 12 - EMPLOYMENT AGREEMENTS (CONTINUED) --------------------------------- benefit of 25 percent of his annual base salary. Each of the agreements provide for a bonus of 25,000 shares of the Company's stock, 75 percent of which was vested on June 1, 1997, April 6, 1998, and March 12, 1999, with the remaining 25 percent vesting on April 15, 2000, if the senior officer achieves performance goals set by the Compensation Committee. All unvested stock bonuses and options and stock appreciation rights previously granted to the senior officers will fully vest in the event of a change of control of the Company or an involuntary termination. In addition, the officers have agreed they will not compete against the Company for a period of one year after termination or expiration of their respective employment agreements, or the period covered by any severance allowance, consulting arrangement or retirement benefit, whichever is greater. The Company's Board of Directors has determined that amounts payable to the officers under the severance pay provisions of the agreements is adequate consideration for the officers' covenants not to compete. As described in Note 10, another senior officer retired during November of 1996. The Company and the retiring officer entered into a consulting and severance agreement providing for nine months salary payable over the first year of a three year consulting relationship in lieu of the benefits provided by the senior officer's employment agreement. NOTE 13 - FINANCIAL INSTRUMENTS AND CONCENTRATIONS ---------------------------------------- OF CREDIT RISK -------------- Financial instruments which potentially expose the Company to concentrations of credit risk, as defined by SFAS No. 105, consist primarily of trade accounts receivable. The Company's products are sold to original equipment manufacturers of communications equipment, either in the military or commercial marketplace. In 1999 and 1998, the Company two largest customers accounted for approximately 37 percent and 27 percent, respectively, of total sales. For 1999, sales to these two customers totaled approximately $5.2 million and $3.6 million, respectively. The accounts receivable at December 31, 1999 for these same two customers was approximately $1,045,000 and $487,000, respectively. The Company performs credit evaluations of its customers but generally does not require collateral. Receivables due from foreign customers are generally insured by a private indemnity company. Otherwise, letters of credit are required of foreign customers. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 13 - FINANCIAL INSTRUMENTS AND CONCENTRATIONS ---------------------------------------- OF CREDIT RISK (CONTINUED) -------------------------- The Company attributes sales to foreign customers based on the country to which products are shipped. During 1999 and 1998, the Company made sales to customers located in 19 different foreign countries, as follows (000's omitted):
1999 1998 ---- ---- England $ 5,920 $ 3,753 Finland 1,698 588 Sweden 1,185 687 Canada 686 194 Other 3,137 2,726 ------- ------- $12,626 $ 7,948 ======= =======
At times, cash balances in operating checking accounts may exceed federally insured limits. At December 31, 1999, the Company had approximately $9 million invested in a U.S. government securities money market fund and a $151,000 gold bullion investment. The money market fund invests in United States government securities and is not otherwise federally insured. The gold bullion investment is held in street name by a national broker and is not federally insured. Disclosure of fair value information about certain financial instruments, whether or not recognized in the balance sheet, is required by SFAS No. 107. The carrying amounts of cash and cash equivalents and gold bullion approximate fair value. The Company estimates the fair value of short- and long-term debt using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar arrangements. The carrying amounts of the Company's short-and long-term debt at December 31, 1999 approximate their fair values. The fair value of contingent liabilities is based on the amounts of the underlying instruments, which approximates the amounts disclosed in Note 9. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 14 - RETIREMENT PLANS ---------------- During 1990, the Company adopted a qualified profit sharing plan for its employees. Annual contributions to the plan, which may be in the form of cash or shares of the Company's stock, are determined by the Board of Directors at its sole discretion. During 1999, the Company contributed stock and cash of $188,000 to the plan. During 1998, the Company contributed cash of $4,000 to the plan. During 1998, the Company adopted a 401(k) plan to which employees may contribute up to 15 percent of their pay. Although the Company may make matching contributions to the plan, none were made in 1999 or 1998. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 15 - RECONCILIATION OF NET INCOME TO NET ----------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES ------------------------------------- The reconciliation of net income to net cash provided by operating activities for the years ended December 31, 1999 and 1998 is as follows:
December 31, ------------ 1999 1998 ---- ---- (000's omitted) Net Income $3,403 $2,696 ------ ------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 1,668 1,131 Amortization of other assets 209 109 Deferred income taxes 2,098 1,662 Amortization of covenant not to compete 33 33 Stock contribution to profit sharing plan 101 - Changes in assets and liabilities: (Increase) decrease in accounts receivable (345) 756 (Increase) in inventories (2,354) (1,064) Decrease (increase) in prepaid expenses and other current assets 167 (47) (Increase) in patents and other assets (946) (1,230) (Decrease) increase in accounts payable (151) 296 (Decrease) increase in accrued expenses (82) 56 ------- ------- Total adjustments 398 1,702 ------ ------- Net cash provided by operating activities $3,801 $4,398 ====== =======
VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 16 - CHINA JOINT VENTURE ------------------- During 1996, the Company entered into a joint venture agreement with Chen-Hui Company, a governmental corporation of the People's Republic of China. The original agreement provided for the creation of a manufacturing company to be owned 51 percent by the Company and 49 percent by Chen-Hui. During December 1998, the agreement was amended to provide for a sales and distribution arrangement whereby the products to be marketed will be manufactured by the Company at its domestic facilities. Also, during December 1998, the Company received patent protection from the Chinese government for its products. The Company had capitalized approximately $356,000 of costs related to this activity through December 31, 1998. Upon receipt of the patent protection, the Company began amortizing these costs over a 17- year period, and these costs are included in patent costs at December 31, 1999 and 1998. NOTE 17 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ---------------------------------------------- In the first quarter of 1999, the Company implemented the following statements of Position (SOP) issued by the American Institute of Certified Public Accountants Accounting Standards Executive Committee: SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which provided guidelines on the accounting for internally developed computer software, and SOP 98- 5, Reporting on the Costs of Start-Up Activities, which required that the costs of start-up activities be expensed as incurred. The adoption of these Statements of Position did not have a material impact on the Company's results of operations or financial position. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities by requiring that all derivatives be recognized at fair value in the balance sheet, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income. The effective date of this pronouncement, originally for fiscal years beginning after June 15, 1999, has been delayed to fiscal years beginning after June 15, 2000, with the issuance of SFAS No. 137 in June 1999. Assuming that the Company's current minimal involvement in derivatives continues after the implementation date of this statement, the Company believes that the future adoption of this statement will not have a material impact on its results of operations or financial position. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB No. 101). SAB No. 101 draws upon the existing accounting rules and explains those rules, by analogy, to other transactions that the existing rules do not specifically address. The Company will adopt SAB No. 101 on January 1, 2000, as required, and does not expect such adoption to have a material impact on its financial statements. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure during the period of this report. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The information required herein is incorporated by reference from the Company's definitive proxy statement for the 2000 annual meeting of shareholders. ITEM 10. EXECUTIVE COMPENSATION The information required herein is incorporated by reference from the Company's definitive proxy statement for the 2000 annual meeting of shareholders. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required herein is incorporated by reference from the Company's definitive proxy statement for the 2000 annual meeting of shareholders. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required herein is incorporated by reference from the Company's definitive proxy statement for the 2000 annual meeting of shareholders. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K Exhibit No. Description ---------- ----------- 3.1a Restated Articles of Incorporation, as Amended, filed as Exhibit 4.1 to the Registrant's Form S-8 Registration Statement (No. 33-88666) and incorporated herein by reference. 3.1b Articles of Amendment to the Articles of Incorporation filed as Exhibit 3.1b to Registrant's Form 10-KSB for the year ended December 31, 1996 and incorporated herein by reference.. 3.2 Restated Bylaws of the Company as adopted by its Board of Directors on November 4, 1992 filed as Exhibit 3.2 to the Registrant's Form SB-2 Registration Statement (No. 33- 74704-D) and incorporated herein by reference 4.1 Specimen Certificate for $.01 par value Common Stock of the Company filed as Exhibit 4.3 to the Registrant's Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference 4.2 Specimen Certificate for Warrant to Purchase Common Stock of the Company filed as Exhibit 4.4 to the Registrant's Form SB-2 Registration Statement (No. 33-74704- D) and incorporated herein by reference 4.3 Rights Agreement with American Securities Transfer, Inc. dated March 15, 1996 filed as Exhibit 4.2 to Registrant's Form 8-A/A Registration Statement (No. 0- 23866) and incorporated herein by reference 4.4 Specimen Certificate for Right to Purchase $.01 par value Common Stock of the Company filed as Exhibit 4.3 to Registrant's Form 8-A/A Registration Statement (No. 0- 23866) and incorporated herein by reference 4.5 Securities Purchase Agreement between the Registrant and certain purchasers dated March 4, 1997 filed as Exhibit 4.5 to Registrant's Form S-3 Registration Statement (No. 333-25173) and incorporated herein by reference 4.6 Form of Convertible Subordinated Debenture issued to the Purchasers under the Securities Purchase Agreement dated March 4, 1997 filed as Exhibit 4.6 to Registrant's Form S-3 Registration Statement (No. 333-25173) and incorporated herein by reference 4.7 Form of Warrant to Purchase Common Stock issued to the Purchasers under the Securities Purchase Agreement dated March 4, 1997 filed as Exhibit 4.7 to Registrant's Form S-3 Registration Statement (No. 333-25173) and incorporated herein by reference 10.1 Executive Employment Agreement with Joseph H. Kiser, dated effective June 1, 1997, filed as Exhibit 10.1 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference 10.2 Executive Employment Agreement with David G. Sherman, dated effective June 1, 1997, filed as Exhibit 10.2 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference 10.3 Executive Employment Agreement with Alwin E. Branson, dated November 12, 1992, filed as Exhibit 10.3 to the Registrant's Form SB-2 Registration Statement (No. 33-74704- D) and incorporated herein by reference 10.4 Amended and Restated Tandem Stock Option and Stock Appreciation Rights Plan, effective as of June 18, 1999 filed as Exhibit 4 to the Registrant's Form S-8 Registration Statement (No. 333-81915) and incorporated herein by reference. 10.5 Equipment Lease Agreement dated May 26, 1993 between the Company and Rossi Hardesty Financial Inc., filed as Exhibit 10.14 to the Registrant's Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference 10.6 Lease Agreement dated January 1, 1987, between the Company and J.C. Enterprises for the facility located at 5165 Peoria Street, Denver, Colorado, as amended on December 6, 1990 and March 23, 1993, filed as Exhibit 10.15 to the Registrant's Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference 10.7 Amended Lease Agreement dated July 1, 1992 between the Company and Bello-1 Partnership for the facility located at 11101 East 51st Avenue, Denver Colorado, filed as Exhibit 10.16 to the Registrant's Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference 10.8 Consulting Agreement between Carolyn Y. Kiser and the Company, dated January 31, 1992, as amended March 23, 1993, filed as Exhibit 10.17 to the Registrant's Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference 10.9 Settlement Agreement between the Company, Joseph H. Kiser, David G. Sherman, Alwin E. Branson and Carolyn Y. Kiser dated January 31, 1992, as amended March 23, 1993, filed as Exhibit 10.18 to the Registrant's Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference 10.10 Warrant Agreement with American Securities Transfer, Inc., filed as Exhibit 10.19 to the Registrant's Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference 10.11 Consulting Agreement between the Company and Neidiger/Tucker/Bruner, Inc. dated April 26, 1994, filed as Exhibit 10.23 to the Registrant's Form SB-2 Registration Statement (No. 33-74704-D and incorporated herein by reference 10.12 Profit Sharing Plan and Trust Agreement, as amended and restated effective April 19, 1994 filed as Exhibit 10.16 to the Registrant's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference 10.13 Assignment of Amended Lease Agreement dated July 1, 1992 between the Company and Bello-1 Partnership from Bello-1 Partnership to Kenneth L. Bettenhausen and Jean M. Bettenhausen dated May 26, 1994 for the facility located at 11101 East 51st Avenue, Denver, Colorado filed as Exhibit 10.18 to the Registrant's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference 10.14 Stock Grant Plan effective as of June 19, 1998 filed as Exhibit 10.8 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference 10.15 Lease Agreement dated July 14, 1995 between the Company and Joseph H. and Nora L. Kiser, as amended September 1, 1995, for the facility located at 15556 East 17th Avenue, Denver, Colorado filed as Exhibit 10.21 to the Registrant's Form 10-KSB for the year ended December 31, 1995 and incorporated herein by reference. 10.16 Term Loan and Credit Agreement between the Company and Norwest Bank Colorado, National Association, dated May 17, 1996 filed as Exhibit 10.1 to the Registrant's Form 10-QSB for the quarter ended June 30, 1996 and incorporated herein by reference. 10.17 Lease Agreement dated March 12, 1997 between the Company and Five K Investments for the facility located at 4895 Peoria Street, Denver, Colorado filed as Exhibit 10 to the Registrant's Form 10-QSB for the quarter ended September 30, 1997 and incorporated herein by reference. 10.18 Business Loan Agreement between the Company and Bank One, Colorado, N.A., dated August 13, 1997 with a maturity date of August 13, 1998 filed as Exhibit 10.18 to the Registrant's Form 10-KSB for the year ended December 31, 1997 and incorporated herein by reference. 10.19 Business Loan Agreement between the Company and Bank One, Colorado, N.A., dated August 13, 1997 with a maturity date of February 13, 2001 filed as Exhibit 10.19 to the Registrant's Form 10-KSB for the year ended December 31, 1997 and incorporated herein by reference. 10.20 Letter Agreement between the Company and Norwest Bank, Colorado N.A., dated April 30, 1998 and filed as Exhibit 10 to the Registrant's Form 10-QSB for the quarter ended June 30, 1998 and incorporated herein by reference. 10.21 Amendment to Business Loan Agreement between the Company and Bank One, Colorado N.A., dated effective August 21, 1998 and filed as Exhibit 10.3 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.22 Amendment to Business Loan Agreement between the Company and Bank One, Colorado N.A., dated effective August 13, 1998 and filed as Exhibit 10.4 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.23 Second Amendment to Lease Agreement dated July 14, 1995 between the Company and Joseph H. Kiser and Nora L. Kiser for the facility located at 15556 East 17th Avenue, Denver, Colorado, as amended September 31, 1995 and July 31, 1998 and filed as Exhibit 10.5 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.24 Third Amendment to Lease Agreement dated January 1, 1987 between the Company and J.C. Enterprises for the facility located at 5165 Peoria Street, Denver, Colorado, as amended December 6, 1990, March 23, 1993, and October 30, 1998 and filed as Exhibit 10.6 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.25 Employment Agreement with Daniel J. Wilmot dated January 1, 1998 and filed as Exhibit 10.9 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.26 Employment Agreement with Derek L. Bailey dated January 1, 1998 and filed as Exhibit 10.10 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.27 Employment Agreement with Jon L. Clark dated January 1, 1998 and filed as Exhibit 10.11 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.28 Employee Stock Purchase Plan effective as of December 31, 1998 filed as Exhibit 10.28 to the Registrant's Form 10-KSB for the year ended December 31, 1998 and incorporated herein by reference. 10.29 Letter Agreement between the Company and Norwest Bank, Colorado, N.A. dated May 18, 1999 as Exhibit 10 to the Registrant's Form 10-QSB for the quarter ended June 30, 1999 and incorporated herein by reference. 23 Consent of Haugen, Springer & Co. to the incorporation by reference of their financial statements in the Registrant's Form S-8 Registration Statements (No. 33- 88666), (No. 33-81045), (No. 333-45137) and (No. 333-81915) and the Registrant's Form S-3 Registration Statement (No. 333-25173). 27 Financial Data Schedule Reports on Form 8-K - -------------------- None. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VARI-L COMPANY, INC. By:/s/David G. Sherman David G. Sherman, President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Joseph H. Kiser Date: March 30, 2000 - --------------------------------------- Joseph H. Kiser, Chairman of the Board, Chief Scientific Officer and Director /s/ David G. Sherman Date: March 30, 2000 - ---------------------------------------- David G. Sherman, President, Chief Executive Officer, Principal Executive Officer and Director /s/ Jon L. Clark Date: March 30, 2000 - ---------------------------------------- Jon L. Clark, Vice President of Finance, Chief Financial Officer and Principal Accounting and Financial Officer /s/ Sarah L. Booher Date: March 30, 2000 - ---------------------------------------- Sarah L. Booher, Director Date: March 30, 2000 David A. Lisowski, Director /s/ Anthony B. Petrelli Date: March 30, 2000 - ---------------------------------------- Anthony B. Petrelli, Director Date: March 30, 2000 Jae Shim, Director EX-23 2 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Vari-L Company, Inc. We consent to the incorporation by reference of our report on the financial statements of Vari-L Company, Inc. as of December 31, 1999 and 1998 and for the years then ended in the Company's Registration Statements on Form S-8 (No. 33-88666), (No. 33-81045), (No. 333-81915), and (No. 333- 45137) and the Registration Statement on Form S-3 (No. 333-25173). /s/Haugen, Springer & Co., P.C. HAUGEN, SPRINGER & CO., P.C. March 29, 2000 EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VARI-L'S AUDITED FINANCIAL STATEMENTS PREPARED AS OF DECEMBER 31, 1999 AND FOR THE TWELVE-MONTH PERIOD THEN ENDED, INCLUDED WITH THE ANNUAL 1999 10-KSB FILING WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1999 DEC-31-1999 14,883 0 4,885 123 10,255 31,060 38,269 6,112 67,373 3,706 0 0 0 69 49,753 67,373 24,281 24,543 11,007 11,007 7,036 100 899 5,501 2,098 3,403 0 0 0 3,403 .60 .57
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