-----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, WDnbH0CGkN9bEwI2L0aY2pa83XPagK9vckST/qL1/JX82UByPbBJNxQis5VUj8Ub MdvoSzx3M9nBaSlWC6Kg6A== 0000895755-98-000031.txt : 19980312 0000895755-98-000031.hdr.sgml : 19980312 ACCESSION NUMBER: 0000895755-98-000031 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980311 SROS: NASD 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: 10KSB SEC ACT: SEC FILE NUMBER: 000-23866 FILM NUMBER: 98563816 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 10KSB 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, 1997 Commission File No. 0-23866 VARI-L COMPANY, INC. (Name of Small Business Issuer in its Charter) Colorado 06-0679347 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation) 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. [ ] State issuer's revenues for the fiscal year ended December 31, 1997: $17,385,364. The aggregate market value of the Common Stock held by non-affiliates on March 9, 1998 was approximately $45,846,588 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 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 new 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, wireless cable (LMDS), satellite communications, global positioning systems, local area networks, as well as radar systems, missile guidance systems and navigational systems. Communications systems recently launched at the lower end of the spectrum include personal communications systems, or PCS, and direct broadcast satellites. The Company's products are designed for use in all of these applications. 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 processing functions. The Company's products and technologies are also integrated vertically by the Company into specialized assemblies which perform multi- function microwave signal processing, as in the Company's phase locked loop synthesizer, described below. The Company produces both standard catalog and custom-designed products. 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 provide a precise signal source within a frequency range. They are widely used in transmitting and receiving equipment. The Company's patented technology enables its VCOs to operate with approximately 20% of the input power requirements of most of its competitors. This unique feature, combined with the VCO's high quality performance, allows the Company's VCOs to be utilized in battery operated and other low-power applications, such as cellular telephones, with better performance than competing products. The Company produces several types of VCOs. The Company's wide-band VCOs are sophisticated, high reliability components which are manufactured in a clean-room environment and are hermetically-sealed. They are sold for use in both military and high-end commercial applications. One of the Company's Commercial Signal Source Component products, the low-cost VCO, was introduced in May 1994. This surface mount product was the first of an entire product line of very narrow-band VCOs priced at approximately 75% less than the Company's wide-band VCOs. These products are designed to perform at high levels of efficiency while being priced competitively for higher volume commercial applications. Most of the increase in the Company's sales over the past two years is attributable to the low-cost VCO. In June 1997, the Company's patent for a 1.2 volt VCO, which has the lowest energy consumption available at .0035 watts, was approved. Low energy consumption is vital for battery powered applications such as hand- held telephones and pagers. The new patent enhances the Company's position in the subscriber hand-held telephone and pager marketplace. In 1997, the Company also made significant investments in automatic manufacturing and test equipment to manufacture higher volumes of its low cost VCOs than had been possible in prior years. In addition, as part of its new headquarters facility, the Company now has the capability of adding to this already increased manufacturing capacity by further acquisitions of such automated equipment. 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. 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 lock onto stable reference signals and convert them into stable frequencies which may be detected and utilized by the communications equipment. This function is essential in communications equipment. As compared to its competitors, the Company's PLL exhibits superior phase noise performance and uses approximately 20% of the power, operates with an extended life, and is competitively priced. The Company's low-cost PLL was recognized as one of the twelve best new products introduced in 1993 by MICROWAVES & RF MAGAZINE. 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 The Company also 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. FIBER-OPTIC COMPONENTS Through its Signal Processing Components engineering group, the Company recently developed patented technology for a high-impedance ratio, wide-band transformer circuit used in the conversion of light wave signals to and from radio frequency signals. This patent was approved in April 1997 by the U.S. Patent and Trademark Office. Demand for the "fiber- optic" transformer circuit is expected to come from a variety of applications, including cable access television ("CATV"). MANUFACTURING The Company's Commercial 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 addition, a third automated assembly line is under contract, as well as equipment to automate other steps in the production and testing processes. This third assembly line will be dedicated to high volume subscriber products and will exhibit advanced automation and increased capacity. The length of the production process for products manufactured through the Company's automated assembly lines is two 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, all of the Company's products are manufactured at the Company's various facilities in Denver, Colorado. The Company has in the past manufactured some of its products outside of the United States and may do so again in the future. In 1996, the Company entered into an agreement to produce commercial VCOs and PLLs at a facility in Beijing in the Peoples Republic of China. Under the joint venture agreement, the Company would own 51% of the Chinese manufacturing company, which is expected to supply products to the Chinese market as well as to other Pacific Rim markets and elsewhere. Although the Company planned to begin manufacturing there in the summer of 1997, the commencement of production in China has been deferred until the Company receives satisfactory assurances of patent and trade secret protection. SUPPLIERS The Company currently has approximately 150 suppliers and historically has not experienced any unusual supply problems. In recent years, however, as the Company's size and sales volume have increased and various changes have occurred in the telecommunications parts industry, the Company has noted an increase in the number of supplier and supply quality problems. Accordingly, the Company believes that obtaining a secure and competitively priced supply of the components needed to meet anticipated increases in sales is one of its most important challenges over the next several years. Because the Company uses a significant amount of gold in its high reliability product line, the Company's costs of production may be affected by the sometimes volatile market price of gold. Accordingly, in December 1993, the Company made a $203,000 purchase of gold bullion as a hedge against future increases in the price of gold. This purchase, which is roughly equivalent to the amount of gold used by the Company for manufacturing in one year, is still held by the Company as of the date hereof. Recent declines in the price of gold have diminished the value of this investment but the Company plans to continue to hold the bullion as a hedge for the foreseeable future. SALES AND MARKETING In the past, the Company's primary business was to engineer, manufacture and market high performance, high reliability microwave signal processing components used in military applications, such as missile guidance systems, advanced navigational systems and advanced radar systems. In recent years, the Company shifted 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, the Company believes that variances in its business will now be more dependent on general business cycles, changes in market demand for the commercial 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. By 1993, this mix was approximately 50% for commercial applications and 50% for military applications. In 1997, this mix was approximately 82% for commercial applications and 18% for military applications. During 1997, the Company continued to derive a substantial portion of bookings from its international marketing efforts. The $9,980,000 in firm orders from non-U.S. customers in 1997 represented 51% of total firm orders for the year as it did in 1996, when the non-U.S. customers accounted for $6,308,000 in sales. The 51% of firm international orders for 1997 represented 95% for commercial applications and 5% for military applications. The Company's 1997 international business included orders from customers in Sweden, Germany, France, Japan, England, India, China, South Korea and other countries. 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) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Signal Processing Components $ 1,897 $ 1,738 $ 2,345$ 1,542$ 2,394 Fiber-Optic Signal Processing Components 1,392 -0- -0- -0- -0- Wide-Band VCOs 4,957 3,825 3,829 4,363 4,032 Signal Processing Components Combined with Wide-Band VCOs 262 1,025 776 194 283 Commercial Signal Source Components 8,877 5,622 2,518 1,128 218 ----- ----- ---- ----- ----- $17,385 $12,210 $9,468 $7,227 $6,927 ======= ======= ====== ====== ======
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 15 sales representatives covering 25 foreign countries. The Company now employs an East Coast Regional Sales Manager, a West Coast Regional Sales Manager, a Director of Military/Aerospace Sales, a European Regional Sales Manager, a Pacific Rim Regional Sales Manager and a Vice- President of Sales, 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 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 Motorola, Nokia, Ericsson, Lucent Technologies, Samsung, Uniden, Hughes Network Systems, and Siemens in the commercial market, and Raytheon Systems Co., Hughes Space/Com., Lockheed Martin, L3 Communications, Rockwell, Northrup Grumann, NEC, Saab Ericsson, and Matra Defense in the military and aerospace market. In 1996, Ericsson accounted for 11% of the Company's total sales, followed by Raytheon at 8%. The Company's two largest customers in 1997 were Motorola and Nokia, with each accounting for 12% of sales revenues. 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. Recently, the Company has entered 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, have the ability to manufacture competitive products in much larger production runs than the Company, the Company believes that its 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 the 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 Remec are its largest competitors in the Signal Processing Components market. Murata, Fujitsu, ALPS and Z- Comm compete in the lower-priced commercial VCO marketplace. Remec/Magnum competes with the Company primarily in the wide-band, hermetically-sealed VCO marketplace. PLL competitors include ALPS, Panasonic, Ma/Com and Synergy. While most 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, 1997 and 1996, the Company expended approximately $1,026,000 and $695,000, 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 38 years and is the author of the Company's VCO patent. He heads up a 35-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 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 2006. The Company also owns three other U.S. patents for (i) a Frequency Translator, expiring 1998, (ii) Broadband High Frequency Baluns and Mixer, expiring 1998, and (iii) Broadband Mixer with Coplanar Balun, expiring in 2002. During 1997, the Company received approval from the U.S. Patent and Trademark Office on two new patents. In April 1997, the Company's patent for a high impedance ratio wide-band transformer circuit, used in the conversion of light wave signals to and from radio frequency signals, was approved. In early June, the Company's patent for a 1.2 volt VCO, which has the lowest energy consumption available at .0035 watts, was approved. To the Company's knowledge, there are no asserted claims by other parties to the Company's products or patents. During the third quarter of 1997, the Company also announced it had developed a new 5.8 gigaHertz VCO to be used in a variety of applications for the third ISM license-free frequency-band market, which includes intelligent highway vehicle systems and other advanced technologies. This VCO has state-of-the art phase noise performance and the lowest energy consumption of any product in its class. 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 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. If the China joint venture goes forward, the Company will contribute a license of its proprietary processes and its manufacturing, marketing and business expertise. The Company is under no obligation to contribute such a license or otherwise proceed until all necessary government approvals, including satisfactory assurances of patent and trade secret protection, have been obtained. 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. Although the Company has not experienced significant export licensing problems, such problems may arise in the future, particularly since so many of the Company's products have actual or potential military and other governmental applications. EMPLOYEES As of December 31, 1997, the Company had 202 full-time employees and two part-time employees, including 31 engaged in management and administration, 35 in engineering, 128 in production and testing, and 10 in sales. The Company believes that its employee relations are good. ITEM 2. DESCRIPTION OF PROPERTY The Company began leasing its new corporate headquarters ("Building 4") in Denver, Colorado during November of 1997. Building 4 has approximately 30,874 square feet and houses the Company's administration, sales, personnel, quality assurance and finance. It will also be the site of some of the Company's new, highly automated pick and place assembly lines for products aimed at the subscriber market. The lease expires on September 1, 2013, and provides for a monthly base rental of $41,204 through August 31, 2003 with possible increases each year thereafter. The Company is also obligated to pay taxes, insurance, 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. The Company is in the process of remodeling its former headquarters building, an approximately 20,200 square foot facility in Denver ("Building 1"). When the remodeling is completed, it will house all aspects of the Company's Wide-Band VCO and Signal Processing Component operations in a single facility. The Building 1 lease, which expires on June 30, 2002, provides for a monthly base rental of $9,907 through June 30, 1998 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 expires on October 24, 2000, and provides for a monthly base rental of $6,634 through September 30, 1998, and $4,000 per month thereafter for the remainder of the lease term. 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 and advanced products engineering. Building 3 has approximately 8,836 square feet and the lease expires August 1, 1998. 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. As part of its severance arrangements with a former officer, the Company rents residential properties in Colorado and Mexico from the former officer. The Company has not exercised its tenancy rights on those properties and does not intend to do so in the future. These leases expire March 31, 1998 and June 30, 1998. ITEM 3. LEGAL PROCEEDINGS No 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, 1997. 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 ---- ---- 1996 - ---- Fiscal quarter ended March 31, 1996 $17-1/2 $12-1/4 Fiscal quarter ended June 30, 1996 $15-3/4 $10-1/2 Fiscal quarter ended September 30, 1996 $12-1/4 $6-1/4 Fiscal quarter ended December 31, 1996 $10-7/8 $7-5/8 1997 - ---- Fiscal quarter ended March 31, 1997 $11-7/8 $8 Fiscal quarter ended June 30, 1997 $9 $6-3/4 Fiscal quarter ended September 30, 1997 $11-7/16 $6-7/8 Fiscal quarter ended December 31, 1997 $12-7/8 $7-5/16 HOLDERS As of December 31, 1997, there were approximately 143 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 Sales of the Company's products increased approximately $5.2 million, or 42%, from 1996 to 1997. Manufacturing costs as a percent of sales decreased approximately 5% from 1996 to 1997, due primarily to improvements in production processing that have increased personnel efficiencies and reduced labor and material costs. Approximately 63% of the increased revenues resulted from shipments of commercial products. During 1997, Vari-L had three significant successes associated with its commercial product line: 1) The Company received approval from the U.S. Patent and Trademark Office of a patent on a new 1.2 volt VCO, which has the lowest energy consumption available in the industry at .0035 watts. Because low energy consumption is a crucial element of battery powered applications such as hand-held telephones and pagers, the new patent enhances the Company's position in the subscriber hand-held telephone and pager marketplace. 2) During the third quarter, the Company announced the development of a new 5.8 gigaHertz VCO suitable for a variety of applications in the third ISM license-free frequency-band market, including intelligent highway vehicle systems and other advanced technologies. The 5.8 Ghz VCO has state-of-the art phase noise performance and the lowest energy consumption of any product in its class. 3) The Company estimates that, as a result of its sales efforts, its market share of the cellular infrastructure, purchased-VCO market in Western Europe has increased from approximately 20% in 1995 to as much as 75% in 1997. Approximately 37% of the increase in revenues over 1996 resulted from other corporate successes during the year, including the introduction of fiber-optic products in the Signal Processing Components line. The Company's patent for this product was approved in April of 1997 by the U.S. Patent and Trademark Office. The patent is for a high-impedance ratio, wide-band transformer circuit used in the conversion of light wave signals to and from radio frequency signals. Demand for the transformer circuit is expected to come from a variety of applications, including CATV. During 1997, the Company brought the high-speed, automated assembly process utilized for its commercial products in house with the purchase of two pick and place assembly lines. Previously, the manufacturing cost for this production process was provided by contract manufacturers and averaged 4.5 cents per placement. The in-house lines have reduced this cost to approximately 1.5 cents per placement, a 67% reduction. Certain other production processes which had been manually performed were also automated during 1997. These improvements have allowed the Company to increase its product shipments without a corresponding increase in production personnel and related expenses. Similar technological advances in manufacturing processes will be applied to the Company's non-commercial assemblies. In addition, a fully-automated assembly line is being acquired for its newest product entry into the subscriber market. The Company is continuing to work toward developing a manufacturing facility in China through its Chinese joint venture agreement. Direct investments of capital and other resources in China have been limited, however, because of unanticipated delays in the receipt of Chinese patents on the Company's intellectual property. Under the agreement, production will not begin until satisfactory Chinese patent protection has been obtained. The Company has taken steps to minimize the impact that these delays could have had on future shipments of high-volume commercial products. In particular, as described above, the Company has automated and refined its domestic manufacturing systems and procedures to reduce labor costs and diminish the economic advantages of overseas manufacturing. Construction on the Company's newest U.S. facility, its corporate headquarters which houses sales, administration, personnel, quality assurance and finance, was completed in November 1997. The space formerly occupied by those departments is being remodeled to accommodate all of the manufacturing and engineering functions related to the Company's Signal Processing Components and Wide-Band VCO product lines. In addition, the Company is finishing the second floor of its new corporate headquarters building for implementation of a fully automated production line for its newest product entry aimed at the subscriber market for hand-held telephone and pager components. RESULTS OF OPERATIONS OPERATING REVENUES Sales revenues increased approximately $5.2 million (42%) in 1997, from $12.2 million in 1996 to $17.4 million in 1997. This includes a 37% increase in military/aerospace/industrial shipments (8% of which derives from the Company's new fiber-optic components products) and a 63% increase in commercial shipments. Revenues from the Company's Commercial Signal Source Components were approximately $8.9 million, or 51% of revenues, in 1997 as compared to $5.6 million, or 46%, in 1996. Revenues from the Company's Signal Processing Components product line were approximately $3.3 million, or 19% of revenues, in 1997 as compared to $1.7 million, or 14%, in 1996. Revenues from sales of the Company's wide-band VCO products were approximately $5.0 million, or 29% of revenues, in 1997 as compared to $3.8 million, or 31%, in 1996. Revenues from sales of products that combine the Company's Signal Processing Components with wide-band VCOs were approximately $.3 million in 1997, or 2% of revenues, as compared to $1 million, or 8% of revenues, in 1996. COST OF GOODS SOLD Cost of goods sold, as a percent of sales revenues, was 48% in 1997 and 51% in 1996. Gross profit margins were 52% for 1997 and 49% for 1996. The decrease in the cost of goods sold in 1997 reflects improvements in production processing that have increased personnel efficiencies and reduced labor and material costs. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased approximately $524,000, or 42%, from $1,237,000 in 1996 to $1,761,000 in 1997. Increases to G & A primarily reflect additional staffing in the personnel, accounting and management information systems departments, in line with the growth of the Company, as well as increasing shareholder and investor relations expenses. ENGINEERING EXPENSES Engineering expenses increased approximately $331,000, or 48%, from $695,000 in 1996 to $1,026,000 in 1997, reflecting increased costs for engineering personnel and expenses and equipment costs to expand and support development of the Company's product lines. SELLING EXPENSES Selling expenses increased approximately $610,000, or 41%, from $1,472,000 in 1996 to $2,082,000 in 1997. Certain selling expenses, such as sales commissions, are directly related to the amount of product shipped and sales revenue generated. Revenues increased 42% from 1996 to 1997. INTEREST INCOME AND EXPENSE The Company manages its credit facility and interest bearing investments in tandem. Interest expense increased approximately $299,000, or 64%, from $468,000 in 1996 to $767,000 in 1997. The increase in interest expense primarily reflects interest paid on the $7.5 million of convertible debentures sold in a March 1997 private offering, prior to their conversion to common stock. Interest income increased approximately $39,000, or 27%, from $146,000 in 1996 to $185,000 in 1997. The Company's investment in a mutual fund of U.S. Government securities, from which interest income is earned, was approximately $5.88 million and $1.18 million at December 31, 1997 and 1996, respectively. DEPRECIATION AND AMORTIZATION Depreciation and amortization increased approximately $291,000, or 69%, from $425,000 in 1996 to $716,000 in 1997. The increase reflects depreciation on increased investments in property, equipment and leasehold improvements. 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 $67,000, or 30%, from $223,000 in 1996 to $156,000 in 1997, due to full amortization in 1996 of costs related to a 1992 covenant not to compete. The decrease was partially offset by the amortization of a 1996 covenant not to compete. NET INCOME Net income increased $857,000, or 73%, from $1,178,000 in 1996 to $2,035,000 in 1997. The increase in net income was due principally to the growth in net sales from 1996 to 1997. EARNINGS PER SHARE Basic earnings per share increased 13 cents, or 41%, from $.32 in 1996 to $.45 in 1997 on weighted average outstanding shares that increased 791,907 shares, or 21%, from 3,736,516 shares in 1996 to 4,528,423 shares in 1997. Diluted earnings per share increased 13 cents, or 43%, from $.30 in 1996 to $.43 in 1997 on weighted average shares outstanding and dilutive securities that increased 913,488, or 23%, from 3,912,027 in 1996 to 4,825,515 in 1997. FINANCIAL CONDITION ASSETS Total assets increased approximately $11.4 million during 1997. The increase resulted primarily from the Company's capital investments in its infrastructure and the proceeds received from its March 1997 convertible debenture offering. Cash and cash equivalents increased approximately $4.8 million from December 31, 1996 to December 31, 1997. The increase resulted principally from the issuance of convertible debentures which were subsequently converted into common shares. Net proceeds from the offering were approximately $6.5 million. Property and equipment increased approximately $5.9 million as the result of extensive capital improvements and acquisitions during 1997. This included the commencement of the retooling and remodeling of the military/aerospace manufacturing facility, the acquisition of high-speed test and automated production equipment for commercial assemblies, and costs related to the leasehold and furnishing of the new corporate headquarters building. Trade accounts receivable increased approximately $2.4 million, or 89%, from December 31, 1996 to December 31, 1997. This was due principally to the timing of the approximately $5.6 million in fourth quarter shipments. In 1997, the Company was reimbursed for lease acquisition costs of approximately $641,000 which had been advanced to the contractor who constructed the Company's new corporate headquarters. Inventories decreased approximately $761,000, or 9%, during 1997. Components of the decrease were approximately $137,000 in finished goods, $784,000 in work in process and $48,000 in the value of gold bullion (adjusted for the market value which was below cost at December 31, 1997), offset by an increase in raw materials of approximately $207,000. The Company anticipates that the inventory quantities will level off or continue to decrease as more automation of materials planning is implemented. LIABILITIES Total liabilities increased approximately $1.6 million during 1997, $1.3 million of which was attributable to the increase in deferred income taxes. STOCKHOLDERS' EQUITY Common stock and paid-in capital increased approximately $7.8 million during 1997 due to the exercises of stock options, the issuance of shares under the employee stock purchase plan, and the conversion of $7.5 million in subordinated debentures, plus accrued interest, to common stock. LIQUIDITY At December 31, 1997, the Company's working capital was $15.9 million compared to $8.4 million at December 31, 1996. The Company's current ratio was 6.1 to 1 as of December 31, 1997 and 2.7 to 1 at December 31, 1996. The increase in working capital was due to several factors. Cash and cash equivalents increased $4.7 million from the investment of the proceeds of the $7.5 million debenture offering, net of offering costs, and after utilization of funds for capital improvements. Trade accounts receivable increased $2.4 million, due principally to the later timing of the shipments in the fourth quarter ($5.6 million), which increased approximately $1.2 million from 1996 to 1997. The Company reduced the outstanding amount of its bank line of credit by $.3 million and reclassified the balance as a long-term liability because of its April 30, 1999 maturity date. These increases were partially offset by the repayment of the lease acquisition costs that had been advanced to the contractor for the construction of the Company's new corporate headquarters building ($.6 million), by decreases in inventory ($.8 million) and prepaid expenses ($.1 million), and by increases in trade payables and other accrued liabilities ($.3 million). CAPITAL RESOURCES On August 13, 1997, the Company restructured its credit facilities, renewing its line of credit agreement with its present banking institution, which is secured by accounts receivable, inventory and general intangibles, and taking its existing term loan, plus increasing its credit facility, which is secured by all of the Company's fixed assets, to a second banking institution. The line of credit agreement was renewed and provides for borrowings of up to $3.5 million and matures April 30, 1999. Interest is payable monthly, calculated at prime. At December 31, 1997, the outstanding balance of the line of credit was $1,813,409. The Company has two separate loans under its term loan agreement. The first loan is a conventional term loan. Interest accrues on the outstanding principal balance of the term loan at 8.01 percent and monthly principal and interest payments of $73,279 are required. Unpaid principal and accrued interest are due February 13, 2001. The balance of the term loan at December 31, 1997 was $4,532,976. Proceeds of this loan were used to pay off the term loan at the first banking institution. The second loan is a revolving equipment loan which provides for borrowings up to $2,500,000. Interest accrues on the outstanding principal balance of the revolving line at prime plus .25%. Borrowings can be converted to term notes which bear interest at a rate which adjusts to the 3-year treasury note rate plus 1.95%. When converted, the new term debt requires monthly principal and interest payments calculated on a seven-year amortization basis with a 42 month maturity. The revolving loan matures on August 13, 1998. As of December 31, 1997, $500,000 had been advanced and converted to a term note. Interest accrues on the outstanding principal balance of this loan at 7.72 percent and monthly principal and interest payments of $7,550 are required. The Company has financed the purchase of vehicles with promissory notes bearing interest rates ranging from 7.20 percent to 9.25 percent. Monthly principal and interest payments totaling $1,879 are required. The notes mature from 1998 through 2000. The outstanding balance of these notes at December 31, 1997 was $32,178. The Company finances certain of its annual insurance premiums through a financing company. The amounts due under these loans totaled $23,730 as of December 31, 1997 and are paid in monthly installments of $8,051 with an interest rate of 7.24%. On March 4, 1997, the Company entered into an agreement to sell up to an aggregate of $7.5 million in four year, 7% convertible debentures together with 750,000 non-redeemable common stock purchase warrants exercisable at $9.50 per share for a period of three years. The unpaid principal balance and accrued interest of the debentures could be converted into shares of the Company's common stock at the election of the holder thereof at $9.50 per share or 84% of the 10-day average closing bid price prior to the date of receipt by the Company of the holder's written request, whichever was less. As of December 31, 1997 the Company had sold $7,500,000 of debentures and 750,000 of related warrants, and had converted the $7,500,000 in debentures plus accrued interest into 1,264,778 shares of $.01 par value Common Stock. All 750,000 warrants remained outstanding as of December 31, 1997. 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, as the result of the sales of the convertible debentures, it has adequate capital resources to continue its growth plans. BACKLOG Total backlog of unfilled firm customer orders ("backlog") at December 31, 1997 was $16.6 million compared with $14.4 million at December 31, 1996. The increase was due to an increase in new firm customer orders in 1997 of $7.1 million, net of increased shipments in 1997 of $5.2 million. The increase in firm customer orders reflects the Company's success in capturing an estimated 75% of the market for cellular infrastructure, purchased-VCOs in Western Europe during 1997. 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-24 for this information. Vari-L Company, Inc. Index to Financial Statements December 31, 1997 and 1996 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-24 HAUGEN, SPRINGER & CO. Certified Public Accountants 9250 East Costilla Avenue Robert S. Haugen, C.P.A. Suite 150 Charles K. Springer, C.P.A. Englewood, Colorado 80012 (303) 799-6969 FAX (303) 799-6974 INDEPENDENT AUDITOR'S REPORT ---------------------------- 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, 1997 and 1996, 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, 1997 and 1996, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/Haugen, Springer & Co. HAUGEN, SPRINGER & CO. February 24, 1998 Denver, Colorado VARI-L COMPANY, INC. BALANCE SHEETS
December 31, ------------------------- 1997 1996 ----------- ---------- Assets - ------ Current Assets: Cash and cash equivalents $5,970,582 $1,224,727 Accounts receivable: Trade, less $18,000 and $4,000 allowance for doubtful accounts 5,172,874 2,744,180 Lease acquisition costs - 641,486 Inventories 6,936,890 7,740,976 Prepaid expenses and other 887,272 990,130 ----------- ----------- Total Current Assets 18,967,618 13,341,499 ----------- ----------- Property and Equipment: Machinery and equipment 15,730,870 11,772,250 Furniture and fixtures 1,200,453 993,822 Leasehold improvements 4,707,324 2,993,081 ----------- ----------- 21,638,647 15,759,153 Less accumulated depreciation and amortization (3,313,483) (2,654,405) ----------- ----------- Net Property and Equipment 18,325,164 13,104,748 ----------- ----------- Other Assets: Long-term inventories 375,000 332,000 Covenant not to compete (Note 11) 66,389 99,581 Patents, net of accumulated amortization of $88,210 and $31,010 504,895 337,963 Other 1,317,238 899,572 ----------- ----------- Total Other Assets 2,263,522 1,669,116 ----------- ----------- TOTAL ASSETS $39,556,304 $28,115,363 ============ =========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS VARI-L COMPANY, INC. BALANCE SHEETS (Continued)
December 31, ------------------------- 1997 1996 ---------- ------------ Liabilities and Stockholders' Equity - ------------------------------------ Current Liabilities: Bank line of credit $ - $2,125,409 Current maturities of: Long-term debt 596,645 588,934 Obligations under capital leases - 10,135 Financed insurance premiums 23,730 33,652 Trade accounts payable 1,851,057 1,499,992 Accrued expenses and other 628,718 584,938 Due to related party - 77,774 ----------- ----------- Total Current Liabilities 3,100,150 4,920,834 Bank line of credit 1,813,409 - Long-term debt 4,464,021 4,155,121 Obligations under capital leases - 6,131 Deferred income taxes 2,343,654 1,036,865 ----------- ----------- Total Liabilities 11,721,234 10,118,951 ----------- ----------- Commitments and Contingencies (Note 10) Stockholders' Equity: Common stock-$0.01 par value, 50,000,000 shares authorized; 5,251,288 and 3,806,138 shares issued and outstanding, respectively 52,513 38,061 Paid-in capital 20,211,589 12,422,232 Retained earnings 7,589,668 5,554,819 Less loans for purchase of stock (18,700) (18,700) ----------- ----------- Total Stockholders' Equity 27,835,070 17,996,412 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $39,556,304 $28,115,363 ================================= =========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS VARI-L COMPANY, INC. STATEMENTS OF INCOME
Years Ended December 31, --------------------------- 1997 1996 ------------ ------------ Net sales $17,385,364 $12,210,517 Cost of products sold 8,365,555 6,226,755 ----------- ----------- Gross profit 9,019,809 5,983,762 ----------- ----------- Other income and expenses: General and administrative expenses 1,761,111 1,237,526 Engineering expenses 1,026,009 695,222 Selling expenses 2,082,336 1,472,543 Profit sharing plan contribution 17,803 1,758 Interest expense 767,061 468,259 Interest income (185,175) (146,102) Other expenses 155,515 222,785 ----------- ----------- 5,624,660 3,951,991 ----------- ----------- Income before income taxes 3,395,149 2,031,771 Income taxes 1,360,300 853,300 ----------- ----------- NET INCOME $2,034,849 $1,178,471 ========== =========== =========== Basic earnings per share $ .45 $ .32 =========== =========== Diluted earnings per share $ .43 $ .30 =========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS VARI-L COMPANY, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
TOTAL LOANS FOR STOCK- COMMON PAID-IN RETAINED PURCHASE HOLDERS STOCK CAPITAL EARNINGS OF STOCK EQUITY ------ ------- -------- -------- -------- Balances 12/31/95 $ 36,249 $11,847,557 $4,376,348 $(18,700)$16,241,454 Stock options exercised 1,128 95,497 - - 96,625 Warrants and units exercised 570 398,430 - - 399,000 Issued under employee stock purchase plan 94 60,785 - - 60,879 Issued under stock grant plan 20 19,963 - - 19,983 Net income - - 1,178,471 - 1,178,471 ------ ---------- --------- ------- ---------- Balances 12/31/96 38,061 12,422,232 5,554,819 (18,700) 17,996,412 Issued from conversion of debentures 12,648 6,465,983 - - 6,478,631 Stock options exercised 1,717 1,260,939 - - 1,262,656 Issued under employee stock purchase plan 75 51,522 - - 51,597 Issued under stock grant plan 12 10,913 - - 10,925 Net income - - 2,034,849 - 2,034,849 ------- ----------- ---------- -------- --------- Balances 12/31/97 $52,513 $20,211,589 $7,589,668 $(18,700)$27,835,070 ======= =========== ========== ======== ==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS VARI-L COMPANY, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ----------- ---------- Net cash provided by (used in) Operating activities (Note 16) $ 1,846,726 $ (803,300) ----------- ----------- Cash flows from investing activities: Purchases of property and equipment (5,879,494) (6,481,480) ------------ ------------ Net cash (used in) investing activities (5,879,494) (6,481,480) ------------ ------------ Cash flows from financing activities: Lease acquisition costs repaid (advanced) 641,486 (641,486) Net increase in long-term debt 316,611 2,533,527 Repayments of capital lease obligations (16,266) (26,490) Borrowings under bank line of credit 1,420,000 2,495,499 Repayments under bank line of credit (1,732,000) (2,217,392) Net (repayments) borrowings for insurance financing (9,922) 33,652 Repayments of debentures - (112,500) Net proceeds from stock issuances 8,158,714 576,487 ----------- ------------ Net cash provided by financing activities 8,778,623 2,641,297 ----------- ------------ Net increase (decrease) in cash 4,745,855 (4,643,483) Cash and cash equivalents at beginning of year 1,224,727 5,868,210 ----------- ----------- Cash and cash equivalents at end of year $5,970,582 $1,224,727 =========== =========== Supplemental disclosure of cash flows information: Cash paid for interest $ 692,192 $ 470,004 =========== ===========
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 mutual fund which is convertible to a known amount of cash. Inventories ----------- Inventories are stated at the lower of cost (first-in, first-out method) or market. 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. 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 ------------------ The Company has adopted SFAS No. 128, Earnings Per Share, resulting in the restatement of earnings per share for 1996. Basic earnings per common share are based upon the weighted average shares outstanding. Outstanding stock options, warrants, and convertible debentures 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 1997 and 1996 totalled $1,026,009, and $695,222, 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 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. Reclassifications ----------------- Certain 1996 amounts have been reclassified so as to conform with 1997 presentation. NOTE 2 - LEASE ACQUISITION COSTS ----------------------- During 1996, the Company advanced $641,486 to a contractor for the acquisition of land on which the contractor was to build an office and manufacturing facility which the Company would lease. During 1997, the facility was completed and the contractor repaid this advance to the Company. NOTE 3 - INVENTORIES ----------- Inventories consist of the following:
December 31, ------------ 1997 1996 ------------ ----------- Finished goods $1,173,847 $1,353,584 Work in process 2,405,396 3,189,200 Raw materials 3,202,454 2,995,138 Gold bullion 155,193 203,054 ---------- ---------- $6,936,890 $7,740,976 ========== ========== Long-term inventories $ 375,000 $ 332,000 ========== ==========
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. NOTE 4 - PROPERTY, EQUIPMENT, AND OTHER ASSETS ------------------------------------- During 1997 and 1996, the Company invested significant amounts in the remodeling of its leased facilities and a management information system including digital communication and computer network systems. 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, 1997 and 1996 included approximately $844,000 and $428,000, respectively, of costs related to the Company's efforts to obtain ISO 9001 registration for its commercial products operation. These costs consisted of wages, travel, training, consulting, and related overhead costs. These costs will be amortized commencing with the date of successful registration, which occurred January 1998. Other assets at December 31, 1997 and 1996 also included approximately $355,000 and $159,000 of costs associated with a joint venture agreement with the Chinese government; see Note 17. These costs will be accounted for as an investment in the joint venture company once that entity has been formally organized. NOTE 5 - BANK LINE OF CREDIT AND LONG-TERM DEBT -------------------------------------- The Company has credit facilities with two banking institutions. The first consists of a $3.5 million line of credit agreement. The second consists of two agreements, a $4.7 million term loan agreement and a $2.5 million revolving equipment term loan agreement. The second credit facility was effective August 1997. Line of Credit -------------- The line of credit was restructured August 1997 and provides for borrowings of up to $3.5 million. Interest is payable monthly, calculated at prime. The line of credit matures April 30, 1999. At December 31, 1997, the outstanding balance due under the line of credit was $1,813,409. The Company's accounts receivable, inventory, and general intangible assets secure the line of credit. Term Loan --------- Interest accrues on the outstanding principal balance of the term loan at 8.01% and monthly principal and interest payments of $73,279 are required. The term loan matures February 13, 2001. At December 31, 1997, the balance due under the term loan was $4,532,976. Proceeds from this loan were used to repay the term loan from the Company's prior credit facility. Revolving Equipment Term Loan ----------------------------- The equipment term loan consists of a $2.5 million revolving line with a conversion feature. Interest accrues on the balance due under the revolving line at prime plus one-quarter percent and is payable monthly. The revolving line component matures August 13, 1998. At December 31, 1997, there were no amounts outstanding under the revolving line. Borrowings under the revolving line can be converted to term notes, which will bear interest at the three-year treasury note rate plus 1.95 percent. Term loans require monthly principal and interest payments calculated on a seven-year amortization basis with a 42-month maturity. During November 1997, the Company borrowed $500,000 under the revolving line and converted it to a term note. Interest accrues on this term note at 7.72 percent and monthly payments of $7,750 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. Promissory Notes ---------------- The Company has financed the purchase of vehicles with promissory notes bearing interest at rates ranging from 7.20 to 9.25 percent. Monthly principal and interest payments totalling $1,879 are required. The notes mature from 1998 through 2000. Long-term debt consists of the following:
December 31, ------------------------------ 1997 1996 ------------- ------------- Term loan $4,532,976 $4,694,307 Equipment term loan 495,512 - Vehicle notes 32,178 49,748 ---------- ---------- 5,060,666 4,744,055 Less current installments 596,645 588,934 ---------- ---------- Long-term portion $4,464,021 $4,155,121 ========== ==========
Scheduled annual principal payments on the bank line of credit and long-term debt for each of the next five years are as follows: 1998 $ 596,645 1999 2,479,451 2000 696,932 2001 993,657 2002 737,407 ---------- $5,504,092 ========== NOTE 6 - STOCKHOLDERS' EQUITY -------------------- During 1997, the Company sold 75 units of debentures and warrants under a securities purchase agreement. The units consisted of $7,500,000 in four-year, seven percent subordinated, convertible debentures and 750,000 non-redeemable warrants to purchase common stock at a price of $9.50 per share, exercisable for a period of three years. The debentures plus accrued interest of approximately $97,000 were subsequently converted into 1,264,778 common shares. Pursuant to the agreement, the number of shares issued upon conversion equaled 84 percent of the 10-day average closing bid price prior to conversion. In connection with the sale of the units, the Company issued 28,900 warrants to the underwriter. The exercise price of the warrants is 84 percent of the 10-day average closing bid price prior to exercise, or $9.50 per share, whichever is less. These warrants expire March 2002. The following is an analysis of the changes in the number of issued and outstanding common shares for the years ended December 31, 1997 and 1996: Number of shares at December 31, 1995 3,624,977 Issued on exercise of stock options 112,845 Issued on exercise of warrants and units 57,000 Issued under employee stock purchase plan 9,366 Issued under stock grant plan 1,950 --------- Number of shares at December 31, 1996 3,806,138 Issued on conversion of debentures 1,264,778 Issued on exercise of stock options 171,705 Issued under employee stock purchase plan 7,467 Issued under stock grant plan 1,200 --------- Number of shares at December 31, 1997 5,251,288 ========= The revised Colorado Business Corporation Act eliminated the concept of treasury stock for Colorado corporations. Prior to the Act, the Company had $2,230 of par value treasury shares outstanding. Accordingly, the Company has reclassified the par value of these shares from common stock to paid-in capital as of December 31, 1995. NOTE 7 - INCOME TAXES ------------ The provisions for income taxes consisted of:
Years Ended December 31, ------------------------- 1997 1996 ------------ ------------- Deferred: Federal $1,194,000 $751,700 State 166,300 101,600 ---------- -------- Total tax provisions $1,360,300 $853,300 ========== ========
For the years ended December 31, 1997 and 1996, the Company had no current federal or state income tax liabilities. Significant components of deferred tax balances as of December 31, 1997 and 1996 were as follows: 1997 1996 ---------- -----------
Deferred tax liabilities: Depreciation and amortization $2,488,326 $1,401,805 ---------- ---------- Deferred tax assets: Loss carryover - benefit of stock option exercises 75,237 288,145 Other, net 69,435 76,795 ---------- ---------- Total deferred tax assets 144,672 364,940 ---------- ---------- Net deferred tax liabilities $2,343,654 $1,036,865 ========== ==========
The Company generated net operating losses during 1996 and 1995 as a result of the income tax benefit of stock options exercised. A portion of these losses were carried back to prior years for federal income tax purposes; such carrybacks are not allowed for state income tax purposes. The amount of the losses available for carryover at December 31, 1997 was approximately $41,000 (federal) and $1.2 million (state). The differences between the U.S. federal statutory rate and the Company's effective tax rate are as follows:
1997 1996 ------ ------ U.S. federal statutory tax rate 34.00% 34.00% State income tax rate 5.00% 5.00% Officers' life Insurance and other 1.07% 3.00% ------ ------ Effective tax rate 40.07% 42.00% ===== =====
NOTE 8 - 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 ---------- -------------------- For the year ended December 31, 1996: ------------------------------------ Basic earnings per share $1,178,471 3,736,516 $ .32 ====== Effect of dilutive stock options - 175,511 ---------- --------- Diluted earnings per share $1,178,471 3,912,027 $ .30 ========== ========= ====== For the year ended December 31, 1997: ------------------------------------ Basic earnings per share $2,034,849 4,528,423 $ .45 ====== Effect of dilutive securities: Convertible debentures 58,033 185,895 Stock options - 100,611 Warrants - 10,586 ---------- --------- Diluted earnings per share $2,092,882 4,825,515 $ .43 ========== ========= ======
At December 31, 1997, the Company had 5,251,288 common shares outstanding. As described in Note 6, the Company issued 1,445,150 shares during 1997. For purposes of computing earnings per share, the shares issued during the year were weighted for the period of time they were outstanding. NOTE 9 - 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 1997, no compensation cost was recognized for the stock option portion of the plans. During 1996, approximately $190,000 of compensation cost was charged to operations. 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:
1997 1996 ----------- ----------- Net Income: As Reported $2,034,849 $1,178,471 ========== ========== Pro Forma $1,515,746 $ 776,052 ========== ========== Earnings Per Share: Basic: As Reported $ .45 $ .32 ========== =========== Pro Forma $ .33 $ .21 ========== =========== Diluted: As Reported $ .43 $ .30 ========== =========== Pro Forma $ .33 $ .19 ========== ============
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 3,000,000 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 are fully vested upon issuance. The exercise price is equal to the fair market value of the Company's common stock on the grant date. 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 1997 and 1996 respectively, were: expected volatility of 55 percent and 40 percent, risk-free interest rates of 5.5 percent and six percent, and zero dividend yields for both years. The expected lives of the options were two years for grants to directors and senior management, and five years for all other grants. 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. Following is a summary of the status of the stock option plan during 1997 and 1996:
Weighted Average Number Exercise of Options Price ------------ ----------- Outstanding at January 1, 1996 690,750 $ 6.90 Granted 298,502 8.39 Exercised (140,000) 0.83 Forfeited (17,712) 10.42 -------- Outstanding at December 31, 1996 831,540 7.30 ======== Options exercisable at December 31, 1996 496,950 7.51 ======== Weighted average fair value of options granted during 1996 $ 2.67 ========= Outstanding at January 1, 1997 831,540 7.30 Granted 322,526 10.85 Exercised (171,705) 7.22 Forfeited (14,693) 9.35 --------- Outstanding at December 31, 1997 967,668 8.47 ========= Options exercisable at December 31, 1997 680,126 8.45 ========= Weighted average fair value of options granted during 1997 $ 4.42 =========
Following is a summary of the status of stock options outstanding at December 31, 1997:
Exercisable Outstanding Options Options ------------------- ----------- Weighted Average Weighted Weighted Exercise Remaining Average Average Price Contractual Exercise Exercise Range Number Life Price Number Price ---------- ------- ----------- -------- ------ --------- $2.21 104,500 5.9 years $ 2.21 69,500 $ 2.21 4.25-5.50 3,000 7.1 4.73 3,000 4.73 7.75-10.75 855,168 8.2 9.21 602,626 9.14 11.75-17.25 5,000 8.1 13.58 5,000 13.58 ------- ------- 967,668 680,126 ======= =======
Effective October 1, 1996, the Compensation Committee of the Company's Board of Directors modified the exercise price of certain stock options to $8.25 per share, which was the closing market price of the Company's common stock on that date. This modification applied to substantially all options that had previously been granted at exercise prices in excess of $8.25 per share. 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 1997 and 1996. This deduction resulted in income tax benefits to the Company which 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 has 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. Employee withholdings during 1997 were approximately $94,000 and were used to purchase 13,530 shares which were issued January 1998. Withholdings during 1996 were approximately $52,000. During January 1997, these withholdings were used to purchase 7,467 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 1997 and 1996 was $1.65 and $1.24 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 Compensation Committee of the Company's Board of Directors. During 1997 and 1996, those members received grants for 1,200 and 1,950 common shares, respectively. Compensation cost charged to operations was measured by the fair market value of the stock on the date of the grants. NOTE 10 - COMMITMENTS AND CONTINGENCIES ----------------------------- Nonrelated Party Leases ----------------------- The Company leases certain facilities under long-term operating leases, including a new office and manufacturing facility which the Company occupied November 1997. Minimum future annual lease payments over the next five years are as follows: 1998 $ 611,424 1999 615,282 2000 619,266 2001 623,388 2002 627,642 ---------- $3,097,002 ========== Rent expense on these leases was $175,049 and $109,626 for 1997 and 1996, respectively. Related Party Leases -------------------- Certain facilities are leased under long-term operating leases from the Company's chairman and a partnership in which he is a partner. Minimum future annual lease payments over the next five years are as follows: 1998 $93,657 1999 48,000 2000 40,000 2001 0 2002 0 -------- $181,657 ======== Rent expense on these leases was $118,953 for 1997 and $105,513 for 1996. Contingencies ------------- The Company is contingently liable for guarantees of indebtedness owed by senior officers to a former officer referred to in Note 11. The amount of this contingent liability at December 31, 1997 was approximately $225,484. The Company is also contingently liable as guarantor of the mortgage on the facility it leases from the above- described partnership. The amount of this mortgage at December 31, 1997 was approximately $31,000. NOTE 11 - AGREEMENTS WITH FORMER OFFICERS ------------------------------- The Company is party to agreements with two of its former officers. Among other items, both agreements provided for a severance package, a consulting agreement, and a covenant not to compete against the Company. The first agreement was dated in 1992. Amounts payable under the severance provision of this agreement are expensed by the Company when those amounts become due. As of December 31, 1997, the amount of these future costs was $15,868, payable in 1998. Of this amount, $8,595 is described in the agreement as rent on properties owned by the former officer. The second agreement was dated November 1996 and was entered into in connection with the employment agreements described in Note 13. 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 will be amortized using the straight- line method over the three year life of the covenant. NOTE 12 - RELATED PARTY TRANSACTIONS -------------------------- As disclosed in Note 11, certain amounts required to be paid to a former officer as part of her severance agreement are described in the agreement as rent on properties owned by the former officer. These payments totalled $25,290 for both 1997 and 1996. As described in Note 10, the Company leases certain facilities from the Company's chairman and a partnership in which he is a partner. NOTE 13 - EMPLOYMENT AGREEMENTS --------------------- During November 1992, the Company entered into four-year employment agreements with its three senior officers. These agreements were amended during 1995 to provide for automatic annual renewals of their full terms. The agreements provide for minimum annual base salaries during the officers' employment with the Company, and for severance pay after employment. Severance pay will be equal to two times the annual base salary in event of termination of employment by the Company, or one-third of the annual base salary in the case of voluntary resignation. In the event of an officer's death, the Company will be obligated to pay the officer's estate an amount equal to the annual base salary for the greater of one year or the remaining term of the agreement. 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, 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 11, one of the senior officers 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 14 - 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 1997 and 1996, the Company's two largest customers accounted for approximately 24 percent and 19 percent, respectively, of total sales. Approximately 43 percent of the Company's 1997 sales were to foreign customers. The Company performs credit evaluations of its customers but generally does not require collateral. Receivables due from foreign customers are generally insured with the United States Export-Import Bank. Otherwise, letters of credit are required of foreign customers. At December 31, 1997, the Company had $5,880,627 invested in a mutual fund and a $155,193 gold bullion investment. The mutual 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, 1997 approximate their fair values. The fair value of contingent liabilities is based on the amount of the underlying instruments, which approximates the amounts disclosed in Note 10. NOTE 15 - PROFIT SHARING PLAN ------------------- 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 1997 and 1996, the Company contributed cash of $17,803 and $1,758, respectively, to the plan. NOTE 16 - RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES -------------------------------------------------------------- The reconciliation of net income to net cash provided by (used in) operating activities for the years ended December 31, 1997 and 1996 is as follows:
1997 1996 ----------- ----------- Net income $ 2,034,849 $ 1,178,471 ----------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 716,278 424,812 Deferred income taxes 1,360,300 853,042 Amortization of covenants not to compete 33,192 114,656 Changes in assets and liabilities: (Increase) in trade accounts receivable (2,428,694) (452,012) Decrease (increase) in inventories 761,086 (2,184,992) Decrease (increase) in pre-paid expenses and other current assets 102,858 (253,047) (Increase) patents and other assets (1,050,214) (967,089) Increase in accounts payable 351,065 287,050 Increase in accrued expenses and other 43,780 195,809 (Decrease) in due to related party (77,774) - ----------- ---------- Total adjustments (188,123) (1,981,771) ----------- ---------- Net cash provided by (used in) operating activities $1,846,726 $ (803,300) =========== ==========
NOTE 17 - 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, whereby the Company and Chen-Hui are to form a private joint venture company. The joint venture will be owned 51 percent by the Company and 49 percent by Chen-Hui. In exchange for these ownership interests, the Company is to contribute a license of its proprietary processes and manufacturing, marketing, and business expertise, while Chen-Hui is to contribute the lease of a manufacturing facility in Beijing and necessary government approvals. The joint venture company will manufacture wireless communications components for distribution to Chinese and other markets. The Company will sell equipment and inventory to the joint venture necessary for its operations, as well as provide training for the joint venture's employees. As of December 31, 1997, China had not perfected patents on the Company's intellectual property. This is required before the joint venture activity will commence. NOTE 18 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ---------------------------------------------- In February 1997, the Financial Accounting Standards Board issued Statement No. 129, Disclosure of Information about Capital Structure (SFAS No. 129). In June 1997, the Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income (SFAS No. 130), and Statement No. 131, Disclosure about Segments of an Enterprise and Related Information (SFAS No. 131). The Company is required to adopt these statements in 1998. SFAS No. 129 consolidates the existing guidance from several other pronouncements relating to an entity's capital structure. SFAS No. 130 establishes new standards for reporting and displaying comprehensive income and its components. SFAS No. 131 requires disclosure of certain information regarding operating segments, products and services, geographic areas of operation and major customers. Adoption of these statements is expected to have no impact on the Company's financial position, results of operations, or cash flows. 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 1998 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 1998 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 1998 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 1998 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 4.8 Form of Warrant to Purchase Common Stock issued to Neidiger, Tucker, Bruner, Inc. under the Securities Purchase Agreement dated March 4, 1997 filed as Exhibit 4.8 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 November 12, 1992, filed as Exhibit 10.1 to the Registrant's Form SB-2 Registration Statement (No. 33-74704- D) and incorporated herein by reference 10.2 Executive Employment Agreement with David G. Sherman, dated November 12, 1992, filed as Exhibit 10.2 to the Registrant's Form SB-2 Registration Statement (No. 33-74704- D) 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 January 24, 1997 filed as Exhibit 4.1 to the Registrant's Form S-8 Registration Statement (No. 333-45137) 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 the 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 Employee Stock Purchase Plan effective as of March 10, 1995 filed as Exhibit 4.3a to the Registrant's Form S-8 Registration Statement (No. 33- 81045) and incorporated herein by reference 10.15 Stock Grant Plan dated March 15, 1996 filed as Exhibit 4.3b to the Registrant's Form S-8 Registration Statement (No. 33- 81045) and incorporated herein by reference 10.16 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. 10.17 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. 10.18 Lease Agreement dated March 12, 1997 between the Company and Five K Investments for the facility located at 11900 E. 49th Avenue, 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. 10.19 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 herewith. 10.20 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 herewith. 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) and (No. 333-45137) 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 Act, 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 10, 1998 Joseph H. Kiser, Chairman of the Board, Chief Scientific Officer and Director /s/ David G. Sherman Date: March 10, 1998 David G. Sherman, President, Chief Executive Officer, Principal Executive Officer, Principal Financial Officer and Director /s/Jon L. Clark Date: March 10, 1998 Jon L. Clark, Vice President of Finance and Principal Accounting Officer /s/ Sarah L. Booher Date: March 10, 1998 Sarah L. Booher, Director /s/ David A. Lisowski Date: March 10, 1998 David A. Lisowski, Director /s/ Anthony B. Petrelli Date: March 10, 1998 Anthony B. Petrelli, Director EXHIBIT INDEX Exhibit No. Description Method of Filing 10.19 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 herewith electronically 10.20 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 herewith electronically 23.1 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) and (No. 333-45137) and the Registrant's Form S-3 Registration Statement (No. 333-25173) Filed herewith electronically 27 Financial Data Schedule Filed herewith electronically EX-10.19 2 $2.5 MILLION BUSINESS LOAN AGREEMENT SHADED AREA BEGINS Principal Loan Date Maturity Loan No. Call Collateral Officer $2,500,000.00 08-13-1997 08-13-1998 152 Account Initials SHADED AREA ENDS References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Borrower: VARI-L COMPANY, INC., A COLORADO Lender: BANK ONE, COLORADO, N.A. CORPORATION DENVER BANKING CENTER 11101 EAST 51ST AVENUE 2696 SOUTH COLORADO BLVD. DENVER, CO 80239 DENVER, CO 80222 THIS BUSINESS LOAN AGREEMENT between VARI-L COMPANY, INC., A COLORADO CORPORATION ("Borrower") and BANK ONE, COLORADO, N.A. ("Lender") is made and executed on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans and other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. All such loans and financial accommodations, together with all future loans and financial accommodations from Lender to Borrower, are referred to in this Agreement individually as the "Loan" and collectively as the "Loans." Borrower understands and agrees that: (a) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in this Agreement; (b) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and (c) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of August 13, 1997, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. Borrower. The word "Borrower" means VARI-L COMPANY, INC., A COLORADO CORPORATION. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates." CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability act of 1980, as amended. Cash Flow. The words "Cash Flow" mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization. Collateral. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract or otherwise. Debt. The word "Debt" means all of Borrower's liabilities excluding Subordinated Debt. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled EVENTS OF DEFAULT." Grantor. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral of the Indebtedness, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. Indebtedness. The word "Indebtedness" means and include without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. Lender. The word "Lender" means BANK ONE, COLORADO, N.A., its successors and assigns. Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus Borrower's readily marketable securities. Loan. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. Note. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. Permitted Liens. The words "Permitted Liens" mean: (a) liens and security interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure Indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and significant monetary amount with respect to the net value of Borrower's assets. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. the words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. Subordinated Debt. The words "Subordinated Debt" mean Indebtedness and liabilities of Borrower which have been subordinated by written agreement to Indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets excluding all Intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold Improvements) less total Debt. Working Capital. The words "Working Capital" mean Borrower's current assets, excluding prepaid expenses, less Borrower's current liabilities. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the Initial Loan Advance and each subsequent Loan Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents. Loan Documents. Borrower shall provide to Lender in form satisfactory to Lender the following documents for the Loan: (a) the Note, (b) Security Agreements granting to Lender security interests the Collateral (c) Financing Statements perfecting Lender's Security Interests (d) evidence of insurance as required below; and (e) any other documents required under this Agreement or by Lender or its counsel. Borrower's Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents, and such other authorizations and other documents and instruments as Lender or its counsel, in their sole discretion, may require. Payment of Fees and Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document. Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. No Event of Default. There shall not exist at the time of any advance a condition which would constitute an Event of Default under this Agreement. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: Organization. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Colorado and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. Authorization. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. Financial Information. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Securities Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Taxes. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted by Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. Binding Effect. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. Commercial Purposes. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. Employee Benefit Plans. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. Location of Borrower's Offices and Records. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 11101 EAST 51ST AVENUE, DENVER, CO 80239. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. Information. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. Survival of Representations and Warranties. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: Litigation. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. Financial Records. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. Financial Statements. Furnish Lender with, as soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, Borrower' balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender, and, as soon as available, but in no event later than sixty (60) days after the end of each fiscal quarter, Borrower's balance sheet and profit and loss statement for the period ended, prepared and certified as correct to the best knowledge and belief by Borrower's chief financial officer or other officer or person acceptable to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Additional Information. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payable, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may reasonably request from time to time. Specifically, Borrower shall provide Lender as soon as possible, but no later than ninety (90) days after the end of each fiscal year, a projected balance sheet and income statement for the coming fiscal year. Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible Net Worth of less than 1.00 to 1.00. Total Liabilities shall exclude any subordinated debt; tangible net worth shall include any subordinated debt. Current Ratio. Maintain a ratio of Current Assets to Current liabilities in excess of 1.50 go 1.00. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles applied on a consistent basis, and certified by Borrower as being true and correct. Current assets shall exclude any prepaid expenses and any affiliate or related party receivables. Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (f) the expiration date of the policy. Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. Taxes, charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income or profits. Performance. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Compliance Certificate. Unless waived in writing by Lender, provide Lender within 60 days of the end of each fiscal quarter with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. Environmental Compliance and Reports. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Capital Expenditures. Incur aggregate capital expenditures in excess of five million dollars ($5,000,000) during any fiscal year. Indebtedness and Liens. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender. Continuity of Operations. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock), or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender. OTHER RATIO. MAINTAIN A RATIO OF NET INCOME PLUS INTEREST EXPENSE PLUS DEPRECIATION AND AMORTIZATION DIVIDED BY CURRENT MATURITIES OF LONG TERM DEBT PLUS INTEREST EXPENSE OF NOT LESS THAN 1.4 TO 1.0. SAID RATIO WILL BE CALCULATED ON A ROLLING (4) QUARTER BASIS. EXHIBIT "A". An exhibit, titled "EXHIBIT "A"," is attached to this Agreement and by this reference is made a part of this Agreement just as if all the provisions, terms and conditions of the Exhibit had been fully set forth in this Agreement. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law and to the extent an event of default as defined herein and under Exhibit A shall have occurred, to charge or setoff all sums owing on the indebtedness against any and all such accounts. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Borrower to make any payment when due on the Loans. Other Defaults. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default in Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the indebtedness, or by any governmental agency. This includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or become incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Change in Ownership. Any change in ownership of sixty seven percent (67%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of Colorado. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of DENVER County, the State of Colorado. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Multiple Parties; Corporate Authority. All obligations of Borrower under this Agreement shall be joint and several, and all references to Borrower shall mean each and every Borrower. This means that each of the Borrowers signing below is responsible for all obligations in this Agreement. Costs and Expenses. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may be someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fee for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstance shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. Time is of the Essence. Time is of the essence in the performance of this Agreement. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF AUGUST 13, 1997. BORROWER: VARI-L COMPANY, INC., A COLORADO CORPORATION By:/s/ David G. Sherman By: /s/ Joseph H. Kiser DAVID G SHERMAN, PRESIDENT/CEO JOSEPH H. KISER, CHAIRMAN/CSO/SECRETARY LENDER: BANK ONE, COLORADO, N.A. By: /s/ T.J. Kern Authorized Officer EXHIBIT "A" SHADED AREA BEGINS Principal Loan Date Maturity Loan No. Call Collateral Officer $2,500,000.00 08-13-1997 08-13-1998 152 Account Initials SHADED AREA ENDS References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Borrower: VARI-L COMPANY, INC. Lender: BANK ONE, COLORADO, N.A. A COLORADO CORPORATION DENVER BANKING CENTER 11101 EAST 51ST AVENUE 2696 SOUTH COLORADO BLVD. DENVER, CO 80239 DENVER, CO 80222 This EXHIBIT "A" is attached to and by this reference is made a part of each Business Loan Agreement or Negative Pledge Agreement, dated August 13, 1997, and executed in connection with a loan or other financial accommodations between BANK ONE, COLORADO, N.A. and VARI-L COMPANY, INC., A COLORADO CORPORATION. Notwithstanding the events which have been defined earlier herein as those events which shall constitute a default under this Business Loan Agreement, any of the following shall constitute an Event of Default: 1. Default in any payment of interest or of principal on the Loans when due and continuance thereof for fifteen (15) days; or 2. Default in the observance or performance of any agreement of the Borrower herein set forth or in any other agreement between the Lender and the Borrower and continuance thereof for 20 days after written notice by Bank to Borrower; or 3. Default by the Borrower in the payment of any other Indebtedness or in the observance or performance of any term, covenant or agreement of the Borrower in any agreement relating to any Indebtedness of the Borrower, the effect of which default is to permit the holder of such indebtedness to declare the same due prior to the date fixed for its payment under the terms thereof and failure to cure such default within 30 days after written notice by Lender to Borrower; or 4. Any representation or warranty made by the Borrower herein or in any statement or certificate furnished by the Borrower hereunder, is untrue in any material respect; or 5. The occurrence of any litigation or governmental proceeding which is pending or threatened against Borrower, which could have a material adverse effect on the Borrower's financial condition or business and which is not remedied within a reasonable period of time after notice thereof to the Borrower; or 6. The occurrence of any extraordinary situation which gives the Bank reasonable grounds to believe that Borrower may not be able to perform under the notes, the Agreement or any other documents executed in connection with the Loans; Then or at any time thereafter, unless such event of default is remedied, the Bank or the holder of the Notes may, by notice in writing to the Borrower, declare the Loans to be terminated or the Loans to be due and payable or both, whereupon the Loans shall immediately terminate or the Loans shall immediately become due and payable or both, as the case may be. THIS EXHIBIT "A" IS EXECUTED ON AUGUST 13, 1997. BORROWER: VARI-L COMPANY, INC., A COLORADO CORPORATION By: /s/ David G. Sherman By:/s/ Joseph H. Kiser DAVID G. SHERMAN, PRESIDENT/CEO JOSEPH H. KISER, CHAIRMAN/CSO/SECRETARY LENDER: BANK ONE, COLORADO, N.A. By: /s/ T.J. Kern Authorized Officer EX-10.20 3 $4.7 MILLION BANK1ONE BUSINESS LOAN AGREEMENT SHADED AREA BEGINS Principal Loan Date Maturity Loan No. $4,700,000.00 08-13-1997 02-13-2001 Call Collateral Account Officer Initials 152 SHADED AREA ENDS References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Borrower: VARI-L COMPANY, INC., A Lender: BANK ONE, COLORADO, N.A. COLORADO CORPORATION DENVER BANKING CENTER 11101 EAST 51ST AVENUE 2696 SOUTH COLORADO BLVD. DENVER, CO 80239 DENVER, CO 80222 THIS BUSINESS LOAN AGREEMENT between VARI-L COMPANY, INC., A COLORADO CORPORATION ("Borrower") and BANK ONE, COLORADO, N.A. ("Lender") is made and executed on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans and other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. All such loans and financial accommodations, together with all future loans and financial accommodations from Lender to Borrower, are referred to in this Agreement individually as the "Loan" and collectively as the "Loans." Borrower understands and agrees that: (a) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in this Agreement; (b) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and (c) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of August 13, 1997, and shall continue thereafter until all indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. Borrower. The word "Borrower" means VARI-L COMPANY, INC., A COLORADO CORPORATION. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates." CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. Cash Flow. The words "Cash Flow" mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization. Collateral. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. Debt. The word "Debt" means all of Borrower's liabilities excluding Subordinated Debt. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." Grantor. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. Indebtedness. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. Lender. The word "Lender" means BANK ONE, COLORADO, N.A., its successors and assigns. Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus Borrower's readily marketable securities. Loan. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. Note. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. Permitted Liens. The words "Permitted Liens" mean: (a) liens and security interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure Indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. Subordinated Debt. The words "Subordinated Debt" mean Indebtedness and liabilities of Borrower which have been subordinated by written agreement to Indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. Working Capital. The words "Working Capital" mean Borrower's current assets, excluding prepaid expenses, less Borrower's current liabilities. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the Initial Loan Advance and each subsequent Loan Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents. Loan Documents. Borrower shall provide to Lender in form satisfactory to Lender the following documents for the Loan: (a) the Note, (b) evidence of insurance as required below; and (c) any other documents required under this Agreement or by Lender or its counsel. Borrower's Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents, and such other authorizations and other documents and instruments as Lender or its counsel, in their sole discretion, may require. Payment of Fees and Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document. Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. No Event of Default. There shall not exist at the time of any advance a condition which would constitute an Event of Default under this Agreement. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any indebtedness exists: Organization. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Colorado and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. Authorization. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. Financial Information. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Taxes. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. Binding Effect. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. Commercial Purposes. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. Employee Benefit Plans. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. Location of Borrower's Offices and Records. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 11101 EAST 51ST AVENUE, DENVER, CO 80239. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. Information. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be, incomplete by omitting to state any material fact necessary to make such information not misleading. Survival of Representations and Warranties. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in making the above referenced Loan to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: Litigation. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. Financial Records. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. Financial Statements. Furnish Lender with, as soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender, and, as soon as available, but in no event later than sixty 60) days after the end of each fiscal quarter, Borrower's balance sheet and profit and loss statement for the period ended, prepared and certified as correct to the best knowledge and belief by Borrower's chief financial officer or other officer or person acceptable to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Additional Information. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may reasonably request from time to time. Specifically, Borrower shall provide Lender as soon as possible, but no later than ninety (90) days after the end of each fiscal period, a projected balance sheet and income statement for the coming fiscal year. Financial Covenants and Ratios. Comply with the following covenants and ratios: Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible Net Worth of less than 1.00 to 1.00. Total Liabilities shall exclude any subordinated debt; tangible net worth shall include any subordinated debt. Current Ratio. Maintain a ratio of Current Assets to Current Liabilities in excess of 1.50 to 1.00. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Current assets shall exclude any prepaid expenses and any affiliate or related party receivables. Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans. Borrower will provide Lender with such loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; and (f) the expiration date of the policy. Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. Taxes, Charges and Liens. Pay and discharge when due all of its Indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. Performance. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Compliance Certificate. Unless waived in writing by Lender, provide Lender within sixty (60) days of the end of each fiscal quarter with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. Environmental Compliance and Reports. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Capital Expenditures. Aggregate capital expenditures in excess of five million ($5,000,000) during any fiscal year. Indebtedness and Liens. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) except as allowed as a Permitted Lien, sell. transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender. Continuity of Operations. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock), or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender. OTHER RATIO. MAINTAIN A RATIO OF NET INCOME PLUS INTEREST EXPENSE PLUS DEPRECIATION AND AMORTIZATION DIVIDED BY CURRENT MATURITIES OF LONG TERM DEBT PLUS INTEREST EXPENSE OF NOT LESS THAN 1.4 TO 1.0. SAID RATIO WILL BE CALCULATED ON A ROLLING (4) QUARTER BASIS. EXHIBIT "A". An exhibit, titled "EXHIBIT "A"," is attached to this Agreement and by this reference is made a part of this Agreement just as if all the provisions, terms and conditions of the Exhibit had been fully set forth in this Agreement. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law and to the extent in the event of default as defined herein and in Exhibit A shall have occurred, to charge or setoff all sums owing on the Indebtedness against any and all such accounts. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Borrower to make any payment when due on the Loans. Other Defaults. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default in Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest), at any time and for any reason. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. This includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Change in Ownership. Any change in ownership of sixty-seven percent (67%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of Colorado. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of DENVER County, the State of Colorado. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Multiple Parties; Corporate Authority. All obligations of Borrower under this Agreement shall be joint and several, and all references to Borrower shall mean each and every Borrower. This means that each of the Borrowers signing below is responsible for all obligations in this Agreement. Costs and Expenses. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. Time is of the Essence. Time is of the essence in the performance of this Agreement. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF AUGUST 13, 1997. BORROWER: VARI-L COMPANY, INC., A COLORADO CORPORATION By:/s/ David G. Sherman By:/s/Joseph H. Kiser DAVID SHERMAN, PRESIDENT/CEO CHAIRMAN/CSO/SECRETARY LENDER: BANK ONE, COLORADO, N.A. By:/s/T.J. Kern Authorized Officer EXHIBIT "A" SHADED AREA BEGINS Principal Loan Date Maturity Loan No. $4,700,000.00 08-13-1997 02-13-2001 Call Collateral Account Officer Initials 152 SHADED AREA ENDS References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Borrower: VARI-L COMPANY, INC., A Lender: BANK ONE, COLORADO, N.A. COLORADO CORPORATION DENVER BANKING CENTER 11101 EAST 51ST AVENUE 2696 SOUTH COLORADO BLVD. DENVER, CO 80239 DENVER, CO 80222 This EXHIBIT "A" is attached to and by this reference is made a part of each Business Loan Agreement or Negative Pledge Agreement, dated August 13, 1997, and executed in connection with a loan or other financial accommodations between BANK ONE, COLORADO, N.A. and VARI-L COMPANY, INC., A COLORADO CORPORATION. Notwithstanding the events which have been defined earlier herein as those events which shall constitute a default under this Business Loan Agreement, any of the following shall constitute an Event of Default: 1. Default in any payment of interest or of principal on the Loans when due and continuance thereof for fifteen (15) days; or 2. Default in the observance or performance of any agreement of the Borrower herein set forth or in any other agreement between the Lender and the Borrower and continuance thereof for 20 days after written notice by Bank to Borrower; or 3. Default by the Borrower in the payment of any other Indebtedness or in the observance or performance of any term, covenant or agreement of the Borrower in any agreement relating to any Indebtedness of the Borrower, the effect of which default is to permit the holder of such Indebtedness to declare the same due prior to the date fixed for its payment under the terms thereof and failure to cure such default within 30 days after written notice by Lender to Borrower; or 4. Any representation or warranty made by the Borrower herein or in any statement or certificate furnished by the Borrower hereunder, is untrue in any material respect; or 5. The occurrence of any litigation or governmental proceeding which is pending or threatened against Borrower, which could have a material adverse effect on the Borrower's financial condition or business and which is not remedied within a reasonable period of time after notice thereof to the Borrower; or 6. The occurrence of any extraordinary situation which gives the Bank reasonable grounds to believe that Borrower may not be able to perform under the notes, the Agreement or any other documents executed in connection with the Loans; Then or at any time thereafter, unless such event of default is remedied, the Bank or the holder of the Notes may, by notice in writing to the Borrower, declare the Loans to be terminated or the Loans to be due and payable or both, whereupon the Loans shall immediately terminate or the Loans shall immediately become due and payable or both, as the case may be. THIS EXHIBIT "A" is EXECUTED ON AUGUST 13, 1997. BORROWER: VARI-L COMPANY, INC., A COLORADO CORPORATION By:/s/David G. Sherman By:/s/Joseph H. Kiser DAVID G. SHERMAN, PRESIDENT/CEO JOSEPH H. KISER, CHAIRMAN/CSO/SECRETARY LENDER: BANK ONE, COLORADO, N.A. By:/s/T. J. Kern Authorized Officer PROMISSORY NOTE SHADED AREA BEGINS Principal Loan Date Maturity Loan No. $4,700,000.00 08-13-1997 02-13-2001 SHADED AREA ENDS Call Collateral Account Officer Initials 152 References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Borrower: VARI-L COMPANY, INC., A Lender: BANK ONE, COLORADO, N.A. COLORADO CORPORATION DENVER BANKING CENTER 11101 EAST 51ST AVENUE 2696 SOUTH COLORADO BLVD. DENVER, CO 80239 DENVER, CO 80222 - -------------------------------------------------------------------------- Principal Amount: $4,700,000.00 Interest Rate: 8.010% Date of Note: August 13, 1997 PROMISE TO PAY. VARI-L COMPANY, INC., A COLORADO CORPORATION ("Borrower") promises to pay to BANK ONE, COLORADO, N.A. ("Lender"), or order, in lawful money of the United States of America, the principal amount of Four Million Seven Hundred Thousand & 00/100 Dollars ($4,700,000.00), together with interest at the rate of 8.010% per annum on the unpaid principal balance from August 13, 1997, until paid in full. PAYMENT. Borrower will pay this loan in 41 regular payments of $73,278.63 each and one irregular last payment estimated at $2,768,401.27. Borrower's first payment is due September 13, 1997, and all subsequent payments are due on the same day of each month after that. Borrower's final payment due February 13, 2001, will be for all principal and all accrued interest not yet paid. Payments include principal and interest. Interest on this Note is computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum interest charge of $25.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, they will reduce the principal balance due and may result in Borrower making fewer payments. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower falls to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, do one or both of the following: (a) Increase the interest rate on this Note to 25.000% per annum, and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any increased rate). The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorney's fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post- judgment collection services. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. This Note has been delivered to Lender and accepted by Lender in the State of Colorado. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of DENVER County, the State of Colorado. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other. This Note shall be governed by and construed in accordance with the laws of the State of Colorado. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law and to the extent an event of default as defined under the Business Loan Agreement shall have occurred, to charge or setoff all sums owing on this Note against any and all such accounts. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: VARI-L COMPANY, INC., A COLORADO CORPORATION By:/s/David G. Sherman By:/s/Joseph H. Kiser DAVID G. SHERMAN, PRESIDENT/CEO JOSEPH H. KISER, CHAIRMAN/CSO/SECRETARY EX-23 4 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, 1997 and 1996 and for the years then ended in the Company's Registration Statements on Form S-8 (No. 33-88666), (No. 33-81045), and (No. 333-45137) and the Registration Statement on Form S-3 (No. 333-25173). /s/Haugen, Springer & Co. HAUGEN, SPRINGER & CO. March 9, 1998 EX-27 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VARI-L'S AUDITED FINANCIAL STATEMENTS PREPARED AS OF DECEMBER 31, 1997 AND FOR THE TWELVE-MONTH PERIOD THEN ENDED, INCLUDED WITH ITS 10-KSB FILING WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE QUARTER ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 DEC-31-1997 5,971 0 5,191 18 6,937 18,968 21,639 3,313 39,556 3,100 0 0 0 53 27,782 39,556 17,385 17,571 8,366 8,366 5,043 0 767 3,395 1,360 2,035 0 0 0 2,035 .45 .43 EPS BASIC EARNINGS PER SHARE
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