-----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, TPvGrqFbNwsBI4GtqXPL6iG/oSGYvmEy4cbnykiSlIMBULndCBxP0+bX3fwxs9KM U+RZJE+Yfupj+CI0LzPlLA== 0000895755-98-000083.txt : 19980804 0000895755-98-000083.hdr.sgml : 19980804 ACCESSION NUMBER: 0000895755-98-000083 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980803 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-23866 FILM NUMBER: 98676208 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 10QSB 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File No. 0-23866 June 30, 1998 VARI-L COMPANY, INC. (Exact name of Registrant as specified in its charter.) Colorado 06-0679347 ----------------------- ----------------------------------- (State of Incorporation) (I.R.S. Employer identification No.) 4895 Peoria Street Denver, Colorado 80239 ---------------------------------------- (Address of principal executive offices) (303) 371-1560 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of each of the issuer's classes of common stock, as of June 30, 1998: Class of Securities Outstanding Securities ------------------- ---------------------- $0.01 par value 5,459,484 shares Common shares PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VARI-L COMPANY, INC. BALANCE SHEETS JUNE 30, 1998 AND DECEMBER 31, 1997
6/30/1998 12/31/1997 Assets (Unaudited) (Audited) - ------ ------------ ------------ Current Assets: Cash and cash equivalents $ 6,575,612 $ 5,970,582 Trade receivables, less $18,000 allowance for doubtful accounts 4,875,161 5,172,874 Inventories 7,590,178 6,936,890 Prepaid expenses and other 1,701,420 887,272 ------------ ------------ Total Current Assets 20,742,371 18,967,618 ------------ ------------ Property and Equipment: Machinery and equipment 18,164,056 15,730,870 Furniture and fixtures 1,355,744 1,200,453 Leasehold improvements 6,563,614 4,707,324 ------------ ------------ 26,083,414 21,638,647 Less accumulated depreciation and amortization (3,830,139) (3,313,483) ------------ ------------ Net Property and Equipment 22,253,275 18,325,164 ------------ ------------ Other Assets: Long-term inventories 375,000 375,000 Covenant not to compete 49,793 66,389 Patents, net of accumulated amortization of $114,610 and $88,210 531,944 504,895 Other 1,322,325 1,317,238 ------------ ------------ Total Other Assets 2,279,062 2,263,522 ------------ ------------ TOTAL ASSETS $ 45,274,708 $ 39,556,304 ============ ============ (Continued)
See Accompanying Notes to Financial Statements. VARI-L COMPANY, INC. BALANCE SHEETS, CONTINUED JUNE 30, 1998 AND DECEMBER 31, 1997
6/30/1998 12/31/1997 LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) (Audited) - ------------------------------------ ------------ ------------ Current Liabilities: Current installments of long-term debt $ 746,110 $ 596,645 Financed insurance premiums 155,446 23,730 Trade accounts payable 1,557,578 1,851,057 Accrued expenses 523,044 628,718 Income taxes payable 821,020 0 ------------ ------------ Total Current Liabilities 3,803,198 3,100,150 Bank line of credit 3,348,909 1,813,409 Long-term debt 4,919,629 4,464,021 Deferred income taxes 2,259,874 2,343,654 ------------ ------------ Total Liabilities 14,331,610 11,721,234 ------------ ------------ Stockholders' Equity: Common stock, $.01 par value, 50,000,000 shares authorized; 5,459,484 and 5,251,288 shares outstanding, respectively 54,595 52,513 Paid-in capital 22,086,006 20,211,589 Retained earnings 8,821,197 7,589,668 Less loans for purchase of stock (18,700) (18,700) ------------ ------------ Total Stockholders' Equity 30,943,098 27,835,070 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,274,708 $ 39,556,304 ============ ============
See Accompanying Notes to Financial Statements. VARI-L COMPANY, INC. STATEMENTS OF INCOME FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1998 AND JUNE 30, 1997 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND JUNE 30, 1997
Three Months Three Months Six Months Six Months Ended Ended Ended Ended 6/30/1998 6/30/1997 6/30/1998 6/30/1997 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ---------- ---------- ---------- ---------- Net sales $4,331,439 $4,005,162 $8,376,287 $7,304,895 Cost of products sold 1,934,338 2,055,452 3,777,551 3,723,237 ---------- ---------- ---------- ---------- Gross profit 2,397,101 1,949,710 4,598,736 3,581,658 ---------- ---------- ---------- ---------- Other costs and expenses: General and administrative 498,328 403,098 969,380 775,699 Engineering 282,424 219,236 547,163 428,420 Selling 463,476 450,234 939,725 900,456 Interest expense 131,376 206,028 205,521 380,638 Interest income (82,404) (35,243) (158,530) (59,366) Other 16,801 16,220 42,928 45,322 ---------- ---------- ---------- ---------- 1,310,001 1,259,573 2,546,187 2,471,169 ---------- ---------- ---------- ---------- Income before taxes 1,087,100 690,137 2,052,549 1,110,489 Income taxes 434,840 289,857 821,020 466,405 ---------- ---------- ---------- ---------- NET INCOME $652,260 $400,280 $1,231,529 $644,084 - ---------- ========== ========== ========== ========== Basic earnings per share $0.12 $0.10 $0.23 $0.16 ========== ========== ========== ========== Basic weighted average shares outstanding 5,409,085 4,072,992 5,342,860 3,930,000 ========== ========== ========== ========== Diluted earnings per share $0.11 $0.09 $0.21 $0.16 ========== ========== ========== ========== Diluted weighted average shares outstanding 6,166,399 4,701,632 5,846,138 4,245,327 ========== ========== ========== ==========
See Accompanying Notes to Financial Statements. VARI-L COMPANY, INC. STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND JUNE 30, 1997
Six Months Six Months Ended Ended 6/30/1998 6/30/1997 (Unaudited) (Unaudited) ---------- ---------- Net cash provided by ( used in) operating activities (Note 8) $ 1,532,133 $ (988,400) ------------ ------------ Cash flows from investing activities: Net purchases of property and equipment (4,444,767) (2,122,497) ------------ ------------ Net cash used in investing activities (4,444,767) (2,122,497) ------------ ------------ Cash flows from financing activities: Lease acquisition costs reimbursed (advanced) 0 45,232 Net increase (repayments) in long-term debt 605,073 (285,178) Net repayments of capital lease obligations 0 (8,237) Net borrowings (repayments) under bank line of credit 1,535,500 (247,000) Net proceeds under insurance financing 131,716 29,718 Net proceeds from warrant conversion 807,500 4,562,500 Loans for purchase of stock 0 (123,710) Net proceeds from stock issuances 437,875 137,600 ------------ ------------ Net cash provided by financing activities 3,517,664 4,110,925 ------------ ------------ Net increase in cash 605,030 1,000,028 Beginning cash 5,970,582 1,224,727 ------------ ------------ ENDING CASH $ 6,575,612 $ 2,224,755 ============ ============ Supplemental disclosure of cash flows information: Cash paid for interest $ 206,365 $ 340,580 ============ ============ Cash paid for income taxes $ 0 $ 0 ============ ============
See Accompanying Notes to Financial Statements. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS Vari-L Company, Inc. (the Company) was founded in 1953 and is a manufacturer of electronic components. The Company's products are used in commercial and military communication systems where electrical processing of radio frequency signals is required. NOTE 1 - FINANCIAL PRESENTATION These financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 1997 and notes thereto. In the opinion of management, the accompanying interim, unaudited financial statements contain all the adjustments necessary to present fairly the financial position of the Company as of June 30, 1998, and the results of its operations, and its cash flows for the three-month and six- month periods ended June 30, 1998 and June 30, 1997. All adjustments made are of a normal recurring nature. NOTE 2 - INVENTORIES Inventories consist of the following:
6/30/1998 12/31/1997 (Unaudited) (Audited) ----------- ----------- Finished goods $ 1,152,906 $ 1,173,847 Work in process 2,403,806 2,405,396 Raw materials 3,875,528 3,202,454 Gold bullion 157,938 155,193 ----------- ----------- $ 7,590,178 $ 6,936,890 =========== =========== Long-term inventories $ 375,000 $ 375,000 =========== ===========
NOTE 3 - INCOME TAXES Income tax expense reflects effective tax rates of 40% for 1998 and 42% for 1997. NOTE 4 - CREDIT FACILITY The Company has two credit facilities. The first consists of a line of credit. The second consists of a term loan and a revolving equipment term loan. On April 23, 1998, the Company renegotiated its line of credit. The line of credit now provides for borrowings of up to $5.0 million. Interest is payable monthly, calculated at prime. The line of credit matures April 30, 2000. At June 30, 1998, the outstanding balance due under the line of credit was $3,348,909. 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 June 30, 1998, the balance due under the term loan was $4,273,189. The revolving equipment term loan provides for borrowings up to $2.5 million. Interest accrues on the outstanding principal balance of the revolving equipment term loan at prime plus .25% when advances are made under the revolver. These borrowings can be converted to term notes at rates which adjust to the 3-year treasury note rate plus 1.95%. When converted, the term debt requires monthly principal and interest payments calculated on a seven-year amortization basis with a 42 month maturity. The revolving loan matures on August 13, 1998. As of June 30, 1998, the balance of the five advances under the revolving loan that had been converted to term notes totaled $1,351,821. Interest accrues on the outstanding principal balances of these term notes at rates ranging from 7.3% to 7.72% and monthly principal and interest payments totalling $21,552 are required. Continued VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED NOTE 5 - SECURITIES PURCHASE AGREEMENT On March 4, 1997, the Company entered into an agreement to sell up to 75 units of debentures and warrants. The units consisted of an aggregate of $7,500,000 in 4-year, 7%, 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. All of the debentures plus accrued interest were converted into common stock during 1997. As of June 30, 1998, 85,000 of the warrants had been exercised and 665,000 warrants were still outstanding. NOTE 6 - STOCK COMPENSATION PLANS The Company has three stock-based compensations plans: a stock option plan, an employee stock purchase plan and a stock grant plan. Stock Option Plan - ----------------- The Company has reserved 3,000,000 shares of its common stock for issuance upon exercise of rights and options under the stock option 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. In April 1998, the Company granted 262,500 options pursuant to the plan. 39,066 options were exercised and 1,740 options were cancelled in the quarter. Employee Stock Purchase Plan - ---------------------------- Under the Company's employee stock purchase plan, 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 value of the stock on specified dates. A total of 800,000 shares were reserved under the plan and the maximum number of shares to be issued is 200,000 per year. For the plan year 1997, a total of 13,530 shares were issued in January 1998 at $6.91 per share. 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 the second quarter of 1998, the nonmanagement members of the Compensation Committee received grants totalling 300 shares and key officers received grants totalling 25,000 shares. Compensation cost was measured by the fair market value of the stock on the date of the grants and is being charged to operations over the period of service. Continued VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED NOTE 7 - EARNINGS PER SHARE The following is a reconciliation of the net income (numerator) and number of shares (denominator) for the computations of basic and diluted earnings per shares:
For the quarter ended June 30, 1997 Income Shares Per Share - ----------------------------------- (Numerator) (Denominator) Amount ---------- ---------- ---------- Basic earnings per share $ 400,280 4,072,992 $0.10 ========== Effect of dilutive stock options, and debentures 39,235 628,640 ---------- ---------- Diluted earnings per share $ 439,515 4,701,632 $0.09 ========== ========== ========== For the quarter ended June 30, 1998 Income Shares Per Share - ----------------------------------- (Numerator) (Denominator) Amount ---------- ---------- ---------- Basic earnings per share $ 652,260 5,409,085 $0.12 ========== Effect of dilutive stock options and warrants 0 757,314 ---------- ---------- Diluted earnings per share $ 652,260 6,166,399 $0.11 ========== ========== ========== For the six months ended June 30, 1997 Income Shares Per Share - -------------------------------------(Numerator)(Denominator) Amount ---------- ---------- ---------- Basic earnings per share $ 644,084 3,930,000 $0.16 ========== Effect of dilutive stock options and debentures 52,583 315,327 ---------- ---------- Diluted earnings per share $ 696,667 4,245,327 $0.16 ========== ========== ========== For the six months ended June 30, 1998 Income Shares Per Share - --------------------------------------(Numerator)(Denominator) Amount ---------- ---------- ---------- Basic earnings per share $ 1,231,529 5,342,860 $0.23 ========== Effect of dilutive stock options and warrants 0 503,278 ---------- ---------- Diluted earnings per share $ 1,231,529 5,846,138 $0.21 ========== ========== ==========
At June 30, 1998, the Company had 5,459,484 common shares outstanding. During the six months ended June 30, 1998, the Company issued 208,196 shares. For purposes of computing earnings per share, the shares issued during the period were weighted for the period of time they were outstanding. Continued VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED NOTE 8 - RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES The reconciliation of net income to net cash provided by (used in) operating activities for the six-month periods ended June 30, 1998 and June 39, 1997 is as follows:
Six Months Six Months Ended Ended 6/30/1998 6/30/1997 (Unaudited) (Unaudited) ---------- ---------- Net Income $ 1,231,529 $ 644,084 ------------ ------------ Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 516,656 324,270 Amortization of covenant not to compete 16,596 16,596 Changes in assets and liabilities: Decrease (increase) in accounts receivable 297,713 (941,871) Increase in inventories (653,288) (500,082) Increase in prepaid expenses and other current assets (266,804) (290,247) Increase in patents and other assets (32,136) (307,437) Decrease in accounts payable (293,479) (149,006) Decrease in accrued expenses (105,674) (210,663) Decrease in amounts due to related parties 0 (40,449) Increase in income taxes payable 821,020 466,405 ---------- ---------- Total adjustments 300,604 (1,632,484) ---------- ---------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 1,532,133 $ (988,400) ========== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The Company achieved record financial results in the three-month period ended June 30, 1998. Net sales were up 8%, to $4.3 million, over the same quarter last year. Net income was up 63%, to $652,000, over the same quarter last year. Basic and diluted earnings per share were 12 cents and 11 cents per share, respectively, versus 10 cents and 9 cents per share, respectively, for the same quarter last year, notwithstanding an increase in weighted average shares outstanding of more than 30% from the prior year. Bookings for the six months ended June 30, 1998 and 1997 were $6.1 million and $6.3 million, respectively. The Company received $2.2 million in firm customer orders during the second quarter, down 31% from the second quarter of 1997, when the Company received two large, multi-year orders which caused a spike in bookings, balancing a weaker first quarter in 1997. Commercial orders continued to drive growth during the period, accounting for $1.4 million in the quarter, while military/aerospace orders totaled $800,000. Domestic orders were $1.5 million and international orders accounted for $700,000 in the three-month period. During the quarter, the Company completed the process of preparing a production facility for its new line of products being developed for the subscriber (pagers and handsets) marketplace. These subscriber products are expected to carry a lower profit margin but have the potential for much higher volumes. In anticipation of this new business area, the Company has been installing high-speed, automated assembly equipment on the second floor of its corporate headquarters facility. The Company plans to commence production in the third quarter and hopes to have full utilization of the new production line by year end. During the quarter, the Company was awarded a patent for an "Unbalanced to Balanced High Impedance Ratio Wideband Transformer Circuit". The patent represents an improvement to a transformer circuit design originally patented by the Company in 1997. The transformer circuit provides for enhanced system performance of a wide variety of RF and fiberoptic applications, including CATV platforms. RESULTS OF OPERATIONS Three months ended - ------------------ June 30, 1998 and June 30, 1997 - ------------------------------- and the Six months ended - ------------------------ June 30, 1998 and June 30, 1997 - ------------------------------- TOTAL REVENUES Sales revenues increased approximately $326,000 (8%) in the three months ended June 30, 1998 as compared with the three months ended June 30, 1997, from $4,005,162 to $4,331,439. Sales revenues increased approximately $1,071,000 (15%) in the six months ended June 30, 1998 as compared with the six months ended June 30, 1997, from $7,304,895 to $8,376,287. The growth in sales revenues continues to reflect the Company's ongoing success in selling to the commercial marketplace with its narrow-band VCOs and PLLs while maintaining its existing markets in military products. The Company has six major product lines, including the new subscriber line which is currently expected to begin production during the third quarter of 1998: 1. Discrete signal processing components for industrial, military and aerospace. 2. Hybrid signal source components, primarily wide-band VCOs, for industrial, military and aerospace. 3. Assemblies that combine Discrete signal processing and Hybrid signal source components. 4. Commercial signal source components including PLLs and narrow-band VCOs. 5. Optoelectronic components and subassemblies used in magnetic and fiberoptic products for CATV applications. 6. Subscriber products components used in hand-held telephone sets, pagers and other consumer-oriented products. This line is currently expected to commence production in the third quarter of 1998. In the first six months of 1998, the composition of sales revenues was 11% Discrete, 25% wide-band VCOs, 1% "Combination" sales of wide-band VCO and Discrete products, 54% narrow-band VCOs, 5% PLL and 4% Optoelectronic products. In the first six months of 1997, the composition of sales revenues was 18% Discrete, 31% wide-band VCOs, 0% "Combination" sales of wide-band VCO and Discrete products, 41% narrow-band VCOs, 5% PLLs and 5% Optoelectronic products. COST OF GOODS SOLD Cost of goods sold, as a percent of sales revenues, was 45% and 51% in the three months ended June 30, 1998 and 1997, respectively. Cost of goods sold, as a percent of sales revenues, was 45% in the six months ended June 30, 1998 and 51% in the six months ended June 30, 1997. The improvement in these ratios for the three and six month periods ended June 30, 1998 resulted from the Company's continuing efforts to streamline its processes and automate production. SELLING AND ENGINEERING EXPENSE Selling expenses increased approximately $13,000, or 3%, for the three months ended June 30, 1998 as compared to the three months ended June 30, 1997. Selling expenses increased approximately $39,000, or 4%, for the six months ended June 30, 1998 as compared to the six months ended June 30, 1997. These increases primarily reflect commissions paid on increased sales revenues. The Company continues to actively advertise and travel to promote its product lines; however, these expenses have increased at a rate less than the increase in revenues. Engineering expenses increased approximately $63,000, or 29%, for the three months ended June 30, 1998 as compared to the three months ended June 30, 1997. Engineering expenses increased approximately $119,000, or 28%, for the six months ended June 30, 1998 as compared to the six months ended June 30, 1997. These increases reflect ongoing improvements to the engineering department, and related equipment costs and expenses, to support new product development and expansion of existing product lines. GENERAL AND ADMINISTRATIVE AND OTHER EXPENSES General and administrative expenses increased approximately $95,000, or 24%, for the three months ended June 30, 1998 as compared to the three months ended June 30, 1997. General and administrative expenses increased approximately $194,000, or 25%, in the six months ended June 30, 1998 as compared with the six months ended June 30, 1997. Increases to G&A primarily reflect increased staffing costs in the personnel and accounting departments, as well as increasing shareholder and other expenses related to being a public company. Other expenses were approximately $16,000 in the three months ended June 30, 1998 and the three months ended June 30, 1997. Other expenses decreased approximately $2,000 (5%) in the six months ended June 30, 1998 as compared with the six months ended June 30, 1997. INTEREST INCOME AND EXPENSE The Company manages its credit facility and mutual fund in tandem. Interest income is earned on the Company's short-term investments in a U.S. government securities mutual fund purchased with proceeds from the March 1997 convertible debenture and warrant offering. Interest income increased approximately $47,000, to approximately $82,000, in the three months ended June 30, 1998 compared to the three months ended June 30, 1997. Interest income increased approximately $99,000, to approximately $159,000, in the six months ended June 30, 1998 compared to the six months ended June 30, 1997. This increase reflects higher levels of these mutual fund investments during 1998. Interest expense decreased approximately $75,000 (36%) for the three months ended June 30, 1998 as compared with the three months ended June 30, 1997. Interest expense decreased approximately $175,000 (46%) for the six months ended June 30, 1998 as compared with the six months ended June 30, 1997. The decrease is primarily attributable to the elimination of interest expense on $5,000,000 in subordinated debentures that were converted to common stock during 1997. DEPRECIATION AND AMORTIZATION Depreciation and amortization increased approximately $192,000 (59%) for the six months ended June 30, 1998 as compared with the six months ended June 30, 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. FINANCIAL CONDITION LIQUIDITY At June 30, 1998, the Company's working capital was $16.9 million compared to $15.9 million at December 31, 1997. The Company's current ratio was 5.5 to 1 as of June 30, 1998 and 6.1 to 1 at December 31, 1997. The reduction in the Company's current ratio from December 31, 1997 to June 30, 1998 is primarily attributable to the current provision in the period for corporate income taxes. CAPITAL RESOURCES On August 13, 1997, the Company restructured its credit facilities, renewing its line of credit agreement, which is secured by accounts receivable, inventory and general intangibles, with its present banking institution 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. In April 1998, the Company renegotiated its line of credit agreement increasing the available line and extending the maturity date. The line of credit provides for borrowings of up to $5 million and matures April 30, 2000. Interest is payable monthly, calculated at prime. At June 30, 1998, the outstanding balance of the line of credit was $3,348,909. 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 on the term loan at June 30, 1998 was $4,273,189. 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 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 June 30, 1998, the balance of the five advances under the revolving loan that had been converted to term notes totaled $1,351,821. Interest accrues on the outstanding principal balances of these term notes at rates ranging from 7.3% to 7.72% and monthly principal and interest payments totaling $21,552 are required. The Company finances certain of its annual insurance premiums through a financing company. The amounts due under these loans totaled $155,446 as of June 30, 1998 and are paid in monthly installments of $16,781 with interest rates of 6.86% and 8.41%. On March 4, 1997, the Company entered into an agreement to sell up to 75 units of debentures and warrants. The units consisted of an aggregate of $7.5 million in four year, 7% convertible debentures and 750,000 non- redeemable common stock purchase warrants exercisable at $9.50 per share for a period of three years. All of the debentures plus accrued interest were converted into common stock during 1997. During April 1998, 85,000 warrants were exercised. 665,000 warrants remained outstanding as of June 30, 1998. 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 June 30, 1998 was $14.4 million compared with $13.4 million at June 30, 1997. Backlog at December 31, 1997 was $16.6 million. 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. VARI-L COMPANY, INC. PART II--OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS ----------------- None ITEM 2 CHANGES IN SECURITIES --------------------- None ITEM 3 DEFAULTS UPON SENIOR SECURITIES ------------------------------- None ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- The Company's annual meeting of shareholders was held on June 19, 1998. At the meeting Joseph H. Kiser, David G. Sherman, Sarah L. Booher, David A. Lisowski and Anthony B. Petrelli were elected as directors. The shareholders also ratified the appointment of Haugen, Springer & Co. as the Company's independent public accountants for the year ending December 31, 1998. The number of votes cast for, withheld or broker nonvotes for each director nominee was as follows: Broker Nominee For Against Nonvotes ------- --- ------- -------- Joseph H. Kiser 4,868,098 19,079 0 David G. Sherman 4,868,098 19,079 0 Sarah L. Booher 4,840,838 46,339 0 David A. Lisowski 4,842,598 44,579 0 Anthony B. Petrelli 4,867,898 19,279 0 The number of votes cast for, against, abstentions and broker nonvotes for ratification of auditors was as follows: For Against Abstain Broker Nonvotes --- ------- ------- --------------- 4,839,250 33,680 14,247 0 Because the election of directors and ratification of auditors were considered routine under applicable stock exchange rules, all proxy shares held in the names of brokers as nominees which were not voted at the meeting by the shareholders were voted by the brokers at their discretion. ITEM 5 OTHER INFORMATION ----------------- None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits Exhibit 10 Letter Agreement between the Company and Norwest Bank, Colorado, N.A., dated April 30, 1998. Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VARI-L COMPANY, INC. Date: July 31, 1998 By:/s/Jon L. Clark ------------- Jon L. Clark, V.P. Finance and Principal Financial Officer EXHIBIT INDEX ------------- EXHIBIT METHOD OF FILING - ------- ---------------- 10 Letter Agreement between the Company and Norwest Bank, Colorado, N.A., dated April 30, 1998. Filed herewith electronically 27 Financial Data Schedule Filed herewith electronically EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VARI-L'S UNAUDITED FINANCIAL STATEMENTS PREPARED AS OF JUNE 30, 1998 AND FOR THE SIX-MONTH PERIOD THEN ENDED, INCLUDED WITH ITS 10-QSB FILING WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE QUARTER ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 6-MOS DEC-31-1998 JUN-30-1998 6,576 0 4,893 18 7,590 20,742 26,083 3,830 45,275 3,803 0 0 0 55 30,888 45,275 8,376 8,535 3,778 3,778 2,498 0 206 2,053 821 1,232 0 0 0 1,232 .23 .21
EX-10 3 NORWEST BANKS April 30, 1998 Mr. David Sherman President Vari-L Company, Inc. 4895 Peoria Denver, Colorado 80239 Dear David: This letter agreement (the "Agreement") is made as of April 30, 1998 between NORWEST BANK COLORADO, NATIONAL ASSOCIATION (the "Bank") and VARI- L COMPANY, INC. (the "Borrower"). The Bank and the Borrower hereby enter into a Credit Agreement providing for a revolving line of credit in the amount of $5,000,000 (the "Credit") to expire April 30, 2000. The Bank is willing to take such action upon and subject to the following terms and commitments: Maximum Amount $5,000,000 or the Borrowing Base, if less. The Borrowing Base shall mean the sum of 75% of Borrower's eligible accounts receivable and 50% of Borrower's eligible inventory, provided that eligible inventory may not exceed 50% of the total Borrowing Base, as set forth and calculated in a monthly Borrowing Base Certificate delivered to Bank in connection herewith. The form of such Certificate is attached as Exhibit A. Ineligible account receivable includes those over 90 days old from invoice date, disputed accounts, accounts subject to offset, federal government accounts, foreign accounts unless insured by the Export-Import Bank of the United States under a Multi-Buyer Export Credit Insurance Policy or secured by a letter of credit benefiting Borrower, affiliate accounts, accounts covering booked but unfilled orders, contra accounts, credit balances over 90 days, doubtful accounts, and accounts in which Bank does not have a perfected first priority security interest. Ineligible inventory includes inventory which is work in process, obsolete, damaged, defective, classified by Borrower as long term inventory, or in which Bank does not have a perfected first priority security interest. Purpose: Finance accounts receivable and inventory. Interest Rate: Base Rate, floating. Base Rate shall mean the "base" or "prime" rate of interest as announced by Bank as in effect from time to time. Fee: $13,000 payable at closing. Compensation Balance: None. Repayment Terms: Accrued interest payable monthly and at Final Maturity, principal payable at Final Maturity, subject to acceleration upon default. Principal may be repaid and reborrowed prior to Final Maturity. Final Maturity: April 30, 2000. Guarantors: None. Security: First priority security interests in all accounts, general intangibles, and inventory, now owned or hereafter acquired by Borrower and in all proceeds thereof ("Collateral"). Documentation/ Conditions to Effectiveness: The commitment of Bank to make any advance under this Credit is subject to the satisfaction of the following conditions: a) Borrower will execute and deliver to Bank a Credit promissory note ("Note") and the security agreements, UCC filing forms, and other collateral documents deemed necessary by Bank ("Collateral Documents"), each on Bank's forms; b) Bank will have received (1) a certified corporate resolution authorizing Borrower to borrow on these terms and to grant security; (2) a Secretary of State's certificate of good standing; (3) a current Borrowing Base Certificate; (4) evidence of Life Insurance as defined below; and c) Bank will have received Borrower's payment of the Fee. Affirmative Covenants: So long as any indebtedness of Borrower to Bank remains unpaid or Bank has any commitment to lend hereunder, Borrower will: a) deliver to Bank (1) annually, within 90 days of Borrower's fiscal year end, annual financial statements audited by a certified public accountant ("CPA") approved by Bank, copy of CPA management report, and copy of Borrower's 10K report; (2) annually, within 90 days of Borrower's fiscal year end, accounts payable aging, accounts receivable aging, and inventory listing; (3) quarterly, within 45 days of quarter end, internally prepared financial statements and compliance certificate in the form of Exhibit B attached hereto, (4) monthly, within 45 days of month end, Borrowing Base Certificate and accounts receivable aging summary page; (5) such other information as Bank may reasonably request; b) maintain adequate hazard insurance; c) maintain its properties in good repair and working order; d) comply with all applicable statutes, ordinances and regulations, including, without limit, any relating to taxation and environmental protection; e) at all reasonable times permit Bank to examine books, records, properties of Borrower, including accounts receivable and inventory collateral audits to be paid by Borrower; f) comply with all terms of all Collateral Documents; g) maintain present executive management of Borrower; h) maintain primary deposit accounts at the Bank; and i) maintain Borrower's financial condition so that it meets the following requirements at all times, determined in accordance with GAAP; (1) a minimum tangible net worth ("Minimum Adjusted TNW") of not less than $25,500,000; (2) a maximum ratio of debt to tangible net worth ("Maximum Leverage") of not more than 1.0 to 1.0. The ratio shall be calculated by dividing Borrower's liabilities, by Borrower's tangible net worth plus debt subordinated to Bank; (3) a minimum ratio of current assets less officer and employee receivables and prepaid expenses to current liabilities ("Minimum Current Ratio") of 1.5 to 1.0; (4) a minimum ratio ("Minimum Quick Ratio") of .5 to 1.0. Negative Covenants: Without consent of Bank, Borrower will not: a) incur any debt except debt to Bank, trade debt, equipment debt to Bank One, debt subordinated to bank, and debt under existing capital leases; b) create or permit any lien or encumbrance against Borrower's property except those created under the Collateral Documents, equipment liens created under equipment debt to Bank One, liens for existing capital leases; c) guarantee, indorse, or become surety for the obligations of others; d) make loans or advances to any person or entity except temporary advances in the ordinary course of business; e) declare or pay any dividends or distributions, or redeem, acquire, or retire any of its capital stock; f) distribute any death benefits from Life Insurance; or g) merge or consolidate or sell, lease or dispose of substantially all of Borrower's assets other than sales of inventory in the ordinary course of business. Conditions of Default: Upon the occurrence of any of the following events of default: a) Default in any payment of interest or principal on the Note when due and continuance thereof for 15 days; or b) Default in the observance or performance of any agreement of the Borrower herein set forth or in an other agreement between the Bank and the Borrower and continuance thereof for 20 days after written notice by Bank to Borrower; or; c) Default by the Borrower in the payment of any other indebtedness for borrowed money or in the observance or performance of any term, covenant, 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 Bank to Borrower; or d) Any representation or warranty made by the Borrower herein in any statement or certificate furnished by Borrower is untrue in any material respect; e) The occurrence of any litigation or governmental proceeding which is pending or threatened against the 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 f) The occurrence of any extraordinary situation which gives the Bank reasonable grounds to believe that Borrower may not be able to perform under the Note, the Agreement, or any other documents executed in connection with the Credit. then, or at any time thereafter, unless such an event of default is remedied, the Bank may terminate its commitment to make advance on the Credit and may, by notice in writing to the Borrower, declare the Note to be due and payable, whereupon the Note shall immediately become due and payable. Upon the occurrence of the following events of default: The Borrower becomes insolvent or bankrupt, or makes an appointment for the benefit of creditors or consents to or is subject to the appointment of a custodian, trustee, or receiver for itself, or bankruptcy, reorganization, or liquidation proceedings are instituted by or against the Borrower and, if instituted against it, are consented to by it or remain undismissed for 60 days; then the Bank's commitment to make advances on the Credit shall be automatically terminated and the Note shall automatically become due and payable. Representations: Borrower represents and warrants that a) the person signing below is authorized to accept this agreement and execute the Collateral Documents, which will constitute obligations valid and enforceable against the Borrower, b) that all balance sheets, profit and loss statements, and other information furnished to the Bank are true and correct and fairly reflect the financial condition of Borrower on their respective dates, including contingent liabilities of every type, c) that Borrower's financial statement has not changed materially and adversely since those dates, and d) that Borrower maintains a minimum of $1,000,000 life insurance each on David Sherman and Joseph H. Kiser with Borrower as beneficiary. Sincerely, NORWEST BANK COLORADO, NATIONAL ASSOCIATION By: /s/Rhonda Harper Its: Assistant Vice President Accepted and agreed to this 30th day of April, 1998, VARI-L COMPANY, INC. By: /s/David G. Sherman David G. Sherman Its: President and Chief Executive Officer By: /s/ Joseph H. Kiser Joseph H. Kiser Chairman & Chief Scientific Officer CONTINUATION 360 Day Promissory Note NORWEST BANK COLORADO, NATIONAL ASSOCIATION Bank's Address, City, State & Zip Code 1740 BROADWAY, DENVER, CO 80274 [Shaded area] FOR BANK USE ONLY Face Amount Rate (% per year) Note Date Maturity Date Customer No. Loan No. $5,000,000 ** % 04/23/1998 04/30/2000 [End shaded area] Maker Home Phone Residence Phone VARI-L COMPANY, INC. Street Address, City, State, Zip Code 11101 E 51ST AVENUE DENVER, CO 80239 Security ACCOUNTS INVENTORY EQUIPMENT GENERAL INTANGIBLES CROSS-COLLATERALIZED AND CROSS-DEFAULTED WITH OTHER DEBT The captions in the boxes above, and the names, dates, amounts and other information therein, are defined terms and are hereby incorporated in the note provisions below. Maker promises to pay to the order of Bank at Bank's address the Face Amount with interest on the unpaid balance of the Face Amount from the Note Date at the Rate indicated above (based upon a year of 360 days and computed for the actual number of days elapsed). Principal and interest shall be payable as follows: Interest shall be payable monthly on the 30th day of each month beginning 05/30/1998. The balance of principal plus accrued interest shall be payable at maturity. **The interest rate shall be at an annual rate equal to the Norwest Bank Colorado, National Association Prime Rate effective the same day of its change. Prime Rate shall mean the interest rate charged by Norwest Bank Colorado, National Association as announced or published by the Bank form time to time as its Prime Rate, and may not be the lowest interest rate charged by the Bank. THIS NOTE EVIDENCES AN ARRANGEMENT PROVIDING FOR FUTURE ADVANCES THAT IN AGGREGATE AMOUNT OUTSTANDING SHALL AT NO TIME EXCEED THE FACE AMOUNT. This note is a continuation and substitution of that promissory note dated 08/13/1997 and represents a continuation of the indebtedness evidenced thereby. Overdue principal and (to the extent legally enforceable) overdue interest, whether caused by acceleration of maturity or otherwise, shall bear interest at a rate four percentage points above the rate in effect at the time such principal or interest becomes due. At the option of the holder of this note (the "holder") the unpaid balance of this note plus accrued interest and all other obligations of Maker to the holder, direct or indirect, absolute or contingent, now existing or hereafter arising, shall become immediately due and payable without notice or demand if (a) any payment required by this note is not made when due, or (b) a default or event of default occurs under any loan or security agreement or instrument executed as security for or in connection with this note, or (c) the holder at any time in good faith believes that the prospect of any payment required by this note is impaired, whether or not such belief is caused by any act or failure to act of any Maker or of any endorser, guarantor or accommodation party of or on this note (hereafter collectively referred to as "any other signer"). Maker and any other signer (1) waive presentment, notice of dishonor and protest, (2) assent to any extension of time with respect to any payment due under this note, to any substitution or release of collateral and to the addition or release of any party, and (3) agree that Bank may apply, as Bank elects, any payment received after default to any portion of Maker's obligations hereunder. No waiver of any payment or other right under this note shall operate as a waiver of any other payment or right. Make and any other signer shall pay all reasonable costs of collection, including attorneys' fees, paid or incurred by the holder in enforcing this note on default. This note (a) is secured by the Security indicated above, if any, and (b) shall be construed under and governed by the laws of Colorado. If there is more than one Maker, all of the provisions of this note shall apply to each and any of them. THE ARBITRATION TERMS AND CONDITIONS ON THE BACK OF THIS PAGE ARE A PART OF AND INCORPORATED INTO THIS NOTE. VARI-L COMPANY, INC. By: /s/Joseph H. Kiser JOSEPH H KISER CHAIRMAN & SCIENTIFIC OFFICER By: /s/David G. Sherman DAVID G SHERMAN PRESIDENT & CHIEF EXECUTIVE OFFICER ARBITRATION 1. Agreement to Arbitration: Subject to the provisions of the next paragraph below, Bank and Maker agree to submit to binding arbitration any and all claims, disputes and controversies between or among them, whether in tort, contract or otherwise (and their respective employees, officers, directors, attorneys, and other agents) arising out of or relating to in any way to the loan and related loan documents which are the subject of this note and its negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, collection, enforcement, default or termination. Nothing in the preceding paragraph, nor the exercise of any right to arbitrate thereunder, shall limit the right of any party hereto (1) to foreclose against any real or personal property collateral by the exercise of the power of sale under a deed of trust, mortgage, or other security agreement, or instrument, or applicable law; (2) to exercise self-help remedies such as setoff or repossession; or (3) to obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment, or appointment of a receiver from a court having jurisdiction before, during or after the pendency of any arbitration proceeding. The institution and maintenance of any action for such judicial relief, or pursuit to provisional or ancillary remedies, or exercise of self-help remedies shall not constitute a waiver of the right or obligation of any party to submit any claim or dispute to arbitration, including those claims or disputes arising from exercise of any such judicial relief, or pursuit of provisional or ancillary remedies, or exercise of self-help remedies. 2. Selection of Arbitrator: If the amount in dispute is $500,000.00 or more, arbitration hereunder shall be before a three-person panel of neutral arbitrators, consisting of one person from each of the following categories: (1) an attorney who has practiced in the area of commercial law in the State of Colorado for at least eight (8) years or a retired judge of the district court or appellate court level from the State of Colorado; (2) a person with at least eight (8) years experience in commercial lending; and (3) a person with at least eight (8) years experience in the DESIGN & MANUF SIGNAL PROC COMPONENTS industry. The parties to the dispute or their representatives shall obtain from AAA a list of persons meeting the criteria outlined above and the parties shall select the person in the manner established by the AAA. If the amount in dispute is less than $500,000.00, the arbitration shall be conducted before one arbitrator who shall be an attorney who has practiced in the area of commercial law for at least eight (8) years or a retired judge at the District Court or an appellate court level. The parties to the dispute or their representatives shall obtain from AAA a list of the persons meeting the criteria outlined above and the parties shall select the person in the manner established by the AAA. 3. Governing Laws and Rules: Such arbitration shall proceed in the State of Colorado in the city or county (if the Bank is not located in a city) wherein the Bank is located, shall be governed by Colorado law, including all applicable statutes of limitations, and shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). Judgement upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. 4. Discovery: In any arbitration hereunder: (1) the arbitrator(s) shall decide (by documents only or with a hearing, at the arbitrators' discretion) any pre-hearing motions which are substantially similar to pre- hearing motions to dismiss for failure to state a claim or motions for summary adjudication; (2) discovery shall be permitted, but shall be limited as provided by Rule 26.1 (c) of the Colorado Rules of Civil Procedure, and shall be subject to the scheduling by the arbitrator(s), and any discovery disputes shall be subject to final determination by the arbitrator(s); and (3) the arbitrator(s) shall award costs and expenses of the arbitration proceeding in accordance with the provisions of the loan agreement, promissory note and/or other loan documents. -----END PRIVACY-ENHANCED MESSAGE-----