-----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, HX2L2UKm7IbstO+W4+bumem9hfamIijsQ+W0YJ7uQYQAbej4qij4W5aa8P/Ng32t 6a4eQz+DF7+r4JYN0iF+Tg== 0000895755-99-000023.txt : 19990317 0000895755-99-000023.hdr.sgml : 19990317 ACCESSION NUMBER: 0000895755-99-000023 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARI L CO INC CENTRAL INDEX KEY: 0000917173 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 060678347 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-23866 FILM NUMBER: 99565407 BUSINESS ADDRESS: STREET 1: 4895 PEORIA STREET CITY: DENVER STATE: CO ZIP: 80239 BUSINESS PHONE: 303/371-1560 MAIL ADDRESS: STREET 1: 11101 EAST 51ST AVENUE CITY: DENVER STATE: CO ZIP: 80239 10KSB40 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1998 Commission File No. 0-23866 VARI-L COMPANY, INC. (Name of Small Business Issuer in its Charter) Colorado 06-0679347 (State or other (I.R.S. Employer jurisdiction of incorporation) Identification No. ) 4895 Peoria Street Denver, Colorado 80239 (303) 371-1560 (Address and Telephone Number of Principal Executive Offices) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: TITLE OF CLASS Common Stock, $.01 Par Value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for the fiscal year ended December 31, 1998: $18,063,254. At March 8, 1999, 5,477,347 shares of Common Stock were outstanding. The aggregate market value of the Common Stock held by non-affiliates on March 8, 1999 was approximately $31,549,936 based on the closing price on the Nasdaq National Market System on that date. DOCUMENTS INCORPORATED BY REFERENCE Portions of the issuer's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year are incorporated by reference in Part III. PART I ITEM 1. BUSINESS INTRODUCTION Vari-L Company, Inc. (the "Company") designs, manufactures and markets a wide range of signal source and signal processing components and devices which are used in communications equipment and systems, such as cellular telephones and base stations, local area computer networks, and satellite communications equipment, as well as military and aerospace applications, such as advanced radar systems, missile guidance systems, and navigational systems. The Company sells its products primarily to original equipment manufacturers of communications systems. The Company was founded in 1953 in Stamford, Connecticut and relocated to Denver, Colorado in 1969. The Company's corporate headquarters is located at 4895 Peoria Street, Denver, Colorado 80239, and its telephone number is 303/371-1560. The Company also conducts certain portions of its operations at three other buildings within a five-mile radius of its Denver headquarters building. OVERVIEW The Company's products are used in wireless communications equipment. Wireless communication is the transmission of voice and data signals through the air, without a physical connection, such as a metal wire or fiber-optic cable. Information transmitted through wireless communications equipment is transmitted by electromagnetic waves, also known as signals. Electromagnetic waves vary in length, or frequency, and intensity. The range of electromagnetic waves is called the spectrum, which encompasses sound near the low end and light toward the higher end. In between is the radio spectrum which is used in all wireless communications. Radio Frequency ("RF") indicates lower frequencies while "microwave" refers to relatively higher frequencies in the spectrum. Different types of wireless communications systems utilize different frequencies in the spectrum. Frequency is measured in cycles per second, or Hertz. The spectrum currently in use by the various types of wireless communications equipment ranges from 1 kiloHertz (1 thousand cycles per second) to 20 gigaHertz (20 billion cycles per second). In the United States, the Federal Communications Commission allocates portions of the spectrum for different types of wireless communication systems. Wireless communications systems currently in use include cellular telephones and base stations, 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 source and 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, low phase-noise characteristics, 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. MILITARY/AEROSPACE SIGNAL SOURCE COMPONENTS The Company produces several types of VCOs. The Company's Military/Aerospace Signal Source Components are wide-band VCOs which are sophisticated, high reliability components manufactured in a clean-room environment and hermetically-sealed. They are sold for use in both military/aerospace and high-end commercial applications. COMMERCIAL SIGNAL SOURCE COMPONENT VCO'S One of the Company's Commercial Signal Source Component products, the low-cost VCO, was introduced in 1994 into the cellular base-station market. A higher-volume production version of this VCO was introduced in 1998 into the subscriber market for cellular phones and pagers. These products are designed to perform at high levels of efficiency while being priced competitively for commercial applications. Most of the increase in the Company's sales over the past four years is attributable to the low-cost VCO. During 1997 and 1998, the Company made significant investments in automatic manufacturing and test equipment to manufacture low-cost VCOs in house, whereas formerly they had been manufactured for the Company by subcontractors. In 1998, the Company finished the second floor of its new corporate headquarters facility to produce products for the subscriber marketplace, augmenting the Company's manufacturing capacity and providing room for further expansion. SUBSCRIBER SIGNAL SOURCE COMPONENTS Also in 1998, the Company installed a high-speed, automated production on the second floor of its corporate headquarters, allowing the Company to compete for new business in expanding subscriber applications markets. The new line gives the Company the ability to produce an additional 8 million units annually and the facility can accommodate several additional lines as demand grows. This installation was substantially completed as of December 31, 1998 and will be in full production in 1999. 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 PLL- 300/400 series and low-cost VCOs are designed for use in applications such as cellular telephones and cellular telephone base stations, personal communications networks, personal communication systems, local area computer networks, satellite communications, global positioning systems, and direct broadcast systems. SIGNAL PROCESSING COMPONENTS MILITARY/AEROSPACE SIGNAL PROCESSING COMPONENTS The Company 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. COMMERCIAL SIGNAL PROCESSING COMPONENTS Through its Signal Processing Components engineering group, the Company patented technology for a high-impedance ratio, wide-band transformer circuit used in the conversion of light wave signals to and from radio frequency signals. This patent was approved in April 1997 by the U.S. Patent and Trademark Office. A 1998 patent was awarded for a design improvement to this product. Demand for the "fiber-optic" transformer circuit comes from a variety of applications, including cable access television ("CATV"). MANUFACTURING The Company's Commercial Signal Source Components products are manufactured with automated "pick and place" assembly equipment. Until 1997, these products were manufactured by third-party contract manufacturers in the United States. In 1997, the Company brought this process in-house with the acquisition of two automated assembly lines. In 1998, additional equipment was purchased to automate other steps in the production and testing processes. In addition, in 1998, the Company initiated the installation of a high-speed, automated production line in its state-of-the-art manufacturing facility on the second floor of its corporate headquarters, allowing the Company to compete for new business in expanding subscriber applications markets. The new line gives the Company the ability to produce an additional 8 million units annually and the facility can accommodate several additional lines as demand grows. This installation was substantially completed as of December 31, 1998 and will be capable of full production in 1999. The length of the production process for products manufactured through the Company's automated assembly lines is one to three weeks. Manufacturing of the Company's other products, which involves less automated assembly, takes from one to fifty-two weeks. The Company may maintain inventory of the raw materials required for production of its products for a period of up to one year or more. At the present time, the majority of the Company's products are manufactured at the Company's various facilities in Denver, Colorado. The Company assembles portions of certain commercial signal processing components at contract manufacturers outside of the United States to benefit from reduced labor costs on certain labor-intensive builds. All of these assemblies are completed and tested in Denver, Colorado. In December 1998, the Company received patent protection from the Chinese government for its products, which clears the way for the Company to proceed with a sales and distribution joint venture with a State-run company in China. Pursuant to a 1996 joint venture agreement, the Company invested significant resources to obtain this patent protection with a strategy of developing a manufacturing facility in China. While the time- consuming patent process was ongoing, the Company installed its new, automated production facility in Denver. The Company is currently focused on sales and distribution in China, although it has not ruled out a Chinese manufacturing facility. SUPPLIERS The Company currently has approximately 250 suppliers and historically has not experienced any unusual supply problems. SALES AND MARKETING Originally, the Company's primary business was to engineer, manufacture and market high performance, high reliability, RF and microwave signal source and signal processing components used in military applications, such as missile guidance systems, advanced navigational systems and advanced radar systems. In 1993, the Company expanded its focus to the commercial marketplace to lessen the Company's susceptibility to trends in defense spending and to seek a share of the dramatic growth anticipated for commercial wireless communications. As a result of this shift, fluctuations in the Company's business are now more dependent on general business cycles, changes in market demand for the commercial products built with the Company's components, and on technological innovations. In 1991, the approximate mix of customer orders was 25% for commercial applications and 75% for military applications. In 1998, this mix was approximately 87% for commercial applications and 13% for military applications. While the Company continued to derive a substantial portion of bookings from its international marketing in 1998, firm customer orders from U.S. companies rose a dramatic 70%, increasing from $9,957,000 in 1997 to $16,227,000 in 1998 and representing 72% of new customer orders in 1998. Like the Company's overall mix of commercial and military business, 1998 domestic orders were comprised of 87% for commercial applications and 13% for military applications. These orders evidence the long-awaited PCS rollout in the U.S. 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) 1998 1997 1996 1995 1994 Mil/Aero Signal Processing Components $ 2,118 $ 1,897 $ 1,738 $ 2,345 $ 1,542 Commercial Signal Processing Components 1,060 1,392 -0- -0- -0- Mil/Aero Signal Source Components 3,211 4,957 3,825 3,829 4,363 Signal Processing Components Special 185 262 1,025 776 194 Assemblies Commercial Signal Source Components 11,489 8,877 5,622 2,518 1,128 ------- ------- ------- ------- ------- $18,063 $17,385 $12,210 $ 9,468 $ 7,227 ======= ======= ======= ======= =======
The Company's sales are made primarily through independent sales representatives who promote and solicit orders for the Company's products on a commission basis in exclusive marketing territories. The Company selects its sales representatives on the basis of technical and marketing expertise, reputation within the industry, and financial stability. These sales representatives also represent other manufacturers with products complementary to, rather than competitive with, the Company's products. The Company normally engages 15 to 20 sales representative firms in the U.S. and also has 17 sales representatives covering 28 foreign countries. The Company now employs an East Coast Regional Sales Manager, a West Coast Regional Sales Manager, a Director of Military/Aerospace Sales, an International Sales Manager, a Director of Program Management and a Vice- President of Sales and Marketing, 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, Stanford Telecom, Wireless Access, 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 1997, Motorola and Nokia each accounted for 12% of sales revenues. The Company's two largest customers in 1998 were also Motorola and Nokia, with 16% and 11% of sales revenues, respectively. The Company does not believe that its business is dependent on any one of its customers. The Company's customers have historically bought products from the Company on the basis of purchase orders, rather than long-term supply contracts. The Company enters into long term purchase agreements with some of its larger commercial customers. These agreements establish preferred vendor status for the Company and, in certain cases, set minimum amounts which will be purchased by the customer over the term of the agreement. COMPETITION The Company is subject to active competition in the sale of virtually all of its products. Many of its competitors, including divisions of major corporations, have significantly greater resources than those currently available to the Company. Additionally, some of the Company's customers compete with the Company by manufacturing certain components themselves, rather than purchasing them from the Company. While some large foreign firms, principally Japanese, still have the ability to manufacture competitive products in larger production runs than the Company, the Company's expanded capacity has materially increased its own mass production capabilities. The Company believes that its surface mount products for commercial applications compete with other manufacturers' products on the basis of their unique features, price and performance. The Company believes that its products manufactured for military applications, including 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, 1998 and 1997, the Company expended approximately $1,155,000 and $1,026,000, 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 40 years and is the author of the Company's VCO patent. He heads up a 36 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 2005. The Canadian patent will expire in 2007 and the European patents will expire in 2006. The Company also owns U.S. patents for (i) a Broadband Mixer with Coplanar Balun, expiring in 2000, (ii) a High Impedance Ratio Wideband Transformer Circuit expiring in 2015, and (iii) a 1.2 Volt Voltage Controlled Oscillator expiring in 2016. During 1998, the Company received approval from the U.S. Patent and Trademark Office on three new patents. In early 1998, the Company's Unbalanced to Balanced High Impedance Ratio Wide-Band Transformer Circuit, an improvement to the 1997 patented design used in the conversion of light wave signals to and from radio frequency signals, was approved. This patent will expire in 2015. In late 1998, the Company was awarded two patents entitled "Orthoganal Mounted Substrate Resonator" and "Continually Adjustable Resonator." The development for these patents was announced in the third quarter of 1997. The technology under these two patents allows the Company to manufacture high frequency RF components, in the range of three to six gigahertz, using low-cost, commercial materials and processes while maintaining excellent performance. The two patents will both expire in 2017. In December of 1998, the Company received Chinese patent approval on components used in base stations, handsets and pagers. To the Company's knowledge, there are no asserted claims by other parties to the Company's products or patents. 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. GOVERNMENT REGULATION In many instances, the Company has been required to obtain export licenses before filling foreign orders. United States Export Administration regulations control high technology exports like the Company's products for reasons of national security, compliance with U.S. foreign policy, protection of domestic reserves of products in short supply and, under certain circumstances, for the security of a destination country. Any foreign sales of the Company's products requiring export licenses must comply with these general policies. During 1998, the U.S. State Department restricted certain exports, including many of the Company's products, to Pakistan and India due to nuclear testing by, and resulting tensions between, the two countries. The Company estimates that this restriction reduced the Company's 1998 military/aerospace sales revenues by approximately $1 million. EMPLOYEES As of December 31, 1998, the Company had 192 full-time employees and 11 part-time employees, including 30 engaged in management and administration, 36 in engineering, 125 in production and testing, and 12 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 1997. Building 4 has approximately 30,800 square feet and houses, on the first floor, the Company's administration, sales, personnel, quality assurance, finance, and management information systems departments. The second floor is the site of the Company's new, highly-automated pick and place assembly line for products aimed at the subscriber market. The lease expires on September 1, 2013, and provides for a monthly base rental of $43,203, which includes a $2,000 per month property tax and insurance accrual, through August 31, 2003 with possible increases each year thereafter. The Company is also obligated to pay maintenance and other expenses on the facility for the term of the lease. The lease may be extended at the option of the Company for two additional terms of five years each. The Company remodeled its former headquarters building, an approximately 20,200 square foot facility in Denver, Colorado (Building 1). This building houses all aspects of the Company's military/aerospace signal processing components and signal source components operations and commercial signal processing components operations in a single facility. The Building 1 lease, which expires on June 30, 2002, provides for a monthly base rental of $9,907 through June 30, 1999 with increases each year thereafter up to $10,920 per month during the final year. The Company is obligated to pay taxes, insurance, maintenance and other expenses for the term of the lease. After 2002, the lease may be extended at the option of the Company for two additional terms of two years each. The Company leases another facility in Denver of approximately 13,650 square feet (Building 2) which currently houses all of the Company's engineering, purchasing and production operations for its commercial signal source component products. The Company's two pick and place assembly lines for the commercial infrastructure market, including VCOs used in cellular and PCS base stations, are in Building 2. The lease, as amended during 1998 to current market levels, expires on October 31, 2005, and provides for a monthly base rental of $10,801 per month. Prior to being amended effective November 1, 1998, the lease provided for a monthly base rental of $6,634 through October 31, 1998, and $4,000 per month thereafter for the remainder of the lease term which was to expire on October 24, 2000. 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 amended terms are substantially similar to leases of comparable commercial properties in the same area. The Company believes that that the amounts to be paid to the partnership under the new lease are no greater than would be paid in an arms-length transaction. 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 8,800 square feet and the lease, as amended, expires August 1, 2003. The monthly base rental is $3,279 plus taxes, insurance, maintenance and other expenses. The facility is leased from Joseph H. Kiser, an executive officer of the Company. As part of its severance arrangements with a former officer, the Company rented residential properties in Colorado and Mexico from the former officer. These leases expired 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, 1998. 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 ------ ----- 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 1998 - ---- Fiscal quarter ended March 31, 1998 $10-5/8 $7-3/8 Fiscal quarter ended June 30, 1998 $14-3/4 $8 Fiscal quarter ended September 30, 1998 $10-5/8 $5-1/8 Fiscal quarter ended December 31, 1998 $9-3/4 $4-15/16
HOLDERS As of December 31, 1998, there were approximately 155 holders of record and in excess of 1,000 beneficial owners of the Company's common stock. DIVIDENDS The Company has never declared or paid a cash dividend on its common stock. The Board of Directors presently intends to retain all earnings for use in the Company's business and, therefore, does not anticipate paying cash dividends in the foreseeable future. The declaration of cash dividends, if any, in the future would be subject to the discretion of the Board of Directors, which may consider such factors as the Company's results of operations, financial condition, capital needs, and any contractual or other restrictions. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION OVERVIEW Net income for 1998 increased 33%, to $2.7 million, or 50 cents per basic share and 48 cents per diluted share, compared with net income of $2.0 million, or 45 cents per basic share and 43 cents per diluted share, for 1997. Sales of the Company's products increased approximately $.7 million, or 4%, from 1997 to 1998. While shipments of commercial products were up 24% from 1997, that gain was offset by reduced sales of military/aerospace products, partially due to newly-imposed export restrictions and softening demand. Commercial shipments are expected to continue to improve in 1999 as the Company further penetrates the subscriber applications market. Military/aerospace shipments are also expected to rebound, irrespective of whether the export restrictions are lifted in 1999. Manufacturing costs as a percent of sales decreased approximately 7% from 1997 to 1998, due primarily to continued improvements in production processing and materials purchasing and handling costs. Net income, as described above, increased as a result of these and other improvements from 1997 to 1998. During 1998, Vari-L had significant successes in its various product lines, furthering the Company's goals for quality growth and profitability: - - The Company's commercial production operation received ISO 9001 certification. This highly visible designation, which assures customers that Vari-L has acted to ensure consistent levels of durability and excellence in its commercial components operations, significantly enhances the Company's reputation and the marketability of its products. - - A state-of-the art manufacturing facility was installed on the second floor of its corporate headquarters, allowing the Company to compete for new business in the expanding subscriber applications markets. - - The Company entered into an agreement to be the sole-source provider with the Wireless Access group of Glenayre Technologies of a minimum of 840,000 VCOs for use in a new wireless messaging device. This agreement represents the Company's first significant, high-volume order from the subscriber marketplace. - - The Chinese government granted the Company patent protection for its commercial products, clearing the way for the Company to proceed with a sales and distribution joint venture with a Chinese, State-run company. - - The Company was awarded two U.S. patents covering breakthrough technology that enables lower-cost, high-volume production of advanced, high-frequency components formerly manufactured in a high- cost, labor-intensive environment. - - The Company was awarded a U.S. patent for a high-impedance, wide-band transformer circuit, strengthening the Company's technological base for expanding into the fiber-optic marketplace. - - The Company entered into an agreement to be the sole-source provider of VCOs for the construction of base station equipment in two Lucent Technologies digital wireless communications programs underway in Europe. - - The Company retooled and remodeled its former headquarters building to consolidate all of the manufacturing and engineering operations for its military/aerospace products and its commercial signal processing products. RESULTS OF OPERATIONS OPERATING REVENUES Sales revenues increased approximately $.7 million (4%) in 1998, from $17.4 million in 1997 to $18.1 million in 1998. Revenues from the Company's commercial signal source components were approximately $11.5 million, or 64% of revenues, in 1998 as compared to $8.9 million, or 51%, in 1997. Revenues from sales of the Company's military/aerospace signal source components products were approximately $3.2 million, or 18% of revenues, in 1998 as compared to $5.0 million, or 29%, in 1997. Revenues from the Company's military/aerospace signal processing components products were approximately $2.1 million, or 12% of revenues, in 1998 as compared to $1.9 million, or 11%, in 1997. Revenues from the Company's commercial signal processing components products were approximately $1.0 million, or 6% of revenues, in 1998 as compared to $1.4 million, or 8%, in 1997. Revenues from sales of products that combine the Company's signal processing components and signal source components were approximately $.2 million in 1998, or 1% of revenues, as compared to $.3 million, or 2% of revenues, in 1997. COST OF GOODS SOLD Cost of goods sold, as a percent of sales revenues, was 45% in 1998 and 48% in 1997. Gross profit margins were 55% for 1998 and 52% for 1997. The increase in the 1998 gross profit margin reflects on-going 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 $195,000, or 11%, from $1,761,000 in 1997 to $1,956,000 in 1998. The increase to G & A primarily resulted from increased travel and expenses to support and communicate with shareholders and investors during 1998. In 1997, the Company made a commitment to step up its shareholder and investor relations effort in 1998, which effort proved to be timely as problems in the Asian economy caused instability in the U.S. stock market for high technology stocks. ENGINEERING EXPENSES Engineering expenses increased approximately $129,000, or 13%, from $1,026,000 in 1997 to $1,155,000 in 1998, reflecting increased staffing and recruiting costs and equipment depreciation costs. SELLING EXPENSES Selling expenses were approximately $2,080,000 for both 1997 and 1998. The costs associated with the increase in sales personnel in 1998 was offset by a decrease in 1998 in the amount of travel to the Far East. INTEREST INCOME AND EXPENSE The Company manages its credit facility and interest bearing investments in tandem. Interest expense decreased approximately $104,000, or 14%, from $767,000 in 1997 to $663,000 in 1998. The decrease reflects the net of the decrease in interest paid on debentures which were converted to stock in mid-1997, and the increase in interest for long-term debt used to finance capital improvements and fixed assets purchases during 1998. Interest income increased approximately $143,000, or 77%, from $185,000 in 1997 to $328,000 in 1998. The Company's investment in a mutual fund of U.S. Government securities, from which interest income is earned, was approximately $6.5 million and $5.9 million at December 31, 1998 and 1997, respectively. The level of monies in the fund was in excess of $5.0 million for all twelve months of 1998, versus three months in 1997, which resulted in significantly more interest income in 1998. DEPRECIATION AND AMORTIZATION Depreciation and amortization increased approximately $467,000, or 60%, from $773,000 in 1997 to $1,240,000 in 1998. 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 $86,000, or 55%, from $156,000 in 1997 to $70,000 in 1998, due to the final payment in June 1998 of costs related to a 1992 covenant not to compete. The decrease was partially offset by the amortization of a 1997 covenant not to compete. NET INCOME Net income increased approximately $662,000, or 33%, from $2,035,000 in 1997 to $2,697,000 in 1998. The increase in net income was due principally to improvements in the gross margin, increases in interest income, and decreases in interest and other expenses from 1997 to 1998. EARNINGS PER SHARE Basic earnings per share increased 5 cents, or 11%, from $.45 in 1997 to $.50 in 1998 on weighted average outstanding shares that increased 878,719 shares, or 19%, from 4,528,423 shares in 1997 to 5,407,142 shares in 1998. Diluted earnings per share increased 5 cents, or 12%, from $.43 in 1997 to $.48 in 1998 on weighted average shares outstanding and dilutive securities that increased 784,756, or 16%, from 4,825,515 in 1997 to 5,610,271 in 1998. FINANCIAL CONDITION ASSETS Total assets increased approximately $11.1 million during 1998. The increase resulted primarily from the Company's capital investments in its infrastructure, patents and ISO 9001 registration, and changes in inventory management. Property and equipment increased approximately $10 million as the result of extensive capital improvements and acquisitions during 1998. This included the retooling and remodeling of the military/aerospace manufacturing facility, the tenant finish of the second floor of the Company's headquarters and the related acquisition of high-speed test and automated production equipment for the assembly of the Company's newest line of products being sold into the subscriber marketplace. Patents increased approximately $.7 million in 1998. The Company obtained approval for three new patents during the year, in addition to obtaining patent protection on its products to be distributed in China. Other assets, which include costs for the Company's registration under ISO 9001, increased approximately $.5 million. The Company received ISO 9001 certification for its commercial operations in January 1998 and began the process of registration for its military/aerospace operations. Inventories increased approximately $1.1 million, or 15%, during 1998. Components of the increase were approximately $1.1 million in finished goods and $1.0 million in work in process, offset by a decrease in raw materials of approximately $1.0 million. Finished goods and work in process have increased as a result of the Company's decision to provide a faster turnaround of products to its customers by shortening the lead times on deliveries; raw materials have decreased as a result of improved purchasing procedures, including vendor turnaround and support. Trade accounts receivable decreased approximately $.8 million, or 15%, from December 31, 1997 to December 31, 1998. This was due principally to the timing of approximately $4.9 million in fourth quarter shipments. Cash and cash equivalents increased approximately $.5 million from December 31, 1997 to December 31, 1998. LIABILITIES Total liabilities increased approximately $6.5 million during 1998, $4.6 million of which was attributable to the long-term financing of capital improvements and $1.6 million of which was attributable to an increase in deferred income taxes. STOCKHOLDERS' EQUITY Common stock and paid-in capital increased approximately $1.9 million during 1998 due to the exercise of stock warrants from the Company's 1997 convertible debenture offering, the exercise of stock options, the issuance of shares under the employee stock purchase plan, and the issuance of shares under the Company's stock grant plan. LIQUIDITY At December 31, 1998, the Company's working capital was $16.4 million compared to $15.9 million at December 31, 1997. The Company's current ratio was 5.4 to 1 at December 31, 1998 and 6.1 to 1 at December 31, 1997. The increase in working capital was due to several factors. Inventories increased approximately $1.1 million, cash and cash equivalents increased approximately $.5 million and prepaid expenses increased approximately $.3 million. These increases were partially offset by a decrease in trade accounts receivable ($.8 million), an increase in current maturities of long-term debt ($.2 million), and an increase in trade payables ($.3 million.) CAPITAL RESOURCES The Company has credit facilities with two banking institutions. The first consists of a $5.0 million line of credit agreement. The second consists of two agreements, a $4.1 million term loan agreement and a $4.0 million revolving equipment term loan agreement. The line of credit was restructured April 1998 to provide for borrowings of up to $5.0 million. Interest is payable monthly, calculated at prime. The line of credit matures April 30, 2000. At December 31, 1998, the outstanding balance due under the line of credit was $4,755,909. The Company's accounts receivable, inventory, and general intangible assets secure the line of credit. On August 21, 1998, the Company renegotiated its term loan and revolving equipment term loan. The Company extended its term loan for an additional year and converted the loan to a floating rate of Libor plus 1.5% and then obtained fixed rate protection by executing an interest rate swap which resulted in an all-in fixed rate of 7.75% through the maturity date of February 24, 2002. Monthly principal and interest payments of approximately $64,000 are required. At December 31, 1998, the balance due under the term loan was $4,113,763. The Company renewed its revolving equipment term loan for one year and increased the borrowing provision to $4.0 million. Interest accrues on the outstanding principal balance of the revolving equipment term loan at prime plus .25 percent when advances are made under the revolver. These borrowings can be converted to term notes at rates which adjust to the three-year treasury note rate plus 1.95 percent. When converted, the term debt requires monthly principal and interest payments calculated on a seven-year amortization basis with a 42-month maturity. The revolving loan matures on August 13, 1999. As of December 31, 1998, the balance of the outstanding advances under the revolving loan that had been converted to term notes totaled $2,551,815. Interest accrues on the outstanding principal balances of these term notes at rates ranging from 6.10 percent to 7.72 percent, and monthly principal and interest payments totaling $36,671 are required. The Company's property and equipment secure the term loan and revolving equipment term loan. The Company has financed the purchase of vehicles with promissory notes bearing interest at rates ranging from 7.75 percent to 8.50 percent. Monthly principal and interest payments totaling $2,262 are required. The notes mature from 1999 through 2002. The Company finances certain of its annual insurance premiums through a financing company. The amount due under these loans totaled $21,424 as of December 31, 1998 and is paid in monthly installments of $7,141 with an interest rate of 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 December 31, 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 December 31, 1998 was $18.1 million compared with $16.6 million at December 31, 1997. The increase in firm customer orders reflects the Company's success in capturing a substantial portion of the market for cellular infrastructure, purchased-VCOs in Western Europe, and increases in commercial domestic markets. YEAR 2000 ISSUES The Company has given serious attention to the potential problems that could arise from the rollover of computer clocks with two-digit year fields when the year 2000 arrives. Assessment of the affect on both IT (information technology) and non-IT issues is progressing rapidly. IT assessment is substantially complete. Non-IT assessment is also substantially complete except for suppliers, for which we have had a 52% response rate to date. The Company currently expects to have all assessment, remediation and testing completed by the end of August 1999. Fortunately, in the area of business and operations, the Company has completed most of its automation in recent years. Accordingly, the computers and software that have been acquired during those years incorporated Year 2000 compliant technology. This compliance is being continuously confirmed in the Company's various business applications as a byproduct of another technology project the Company initiated early this year, a licensing audit designed to ensure that all software utilized by Company personnel is properly licensed by the software provider. The same software used to verify the software installed on each PC also verifies Year 2000 readiness. The Company has also instituted a policy prohibiting the purchase of any new computers or other devices that have clocks without empirical proof that they can recognize the year 2000 without malfunctioning. In the non-IT area, which includes test equipment, the Company's principal hardware vendor has provided certification and warranty as to Year 2000 compliance. In addition, as routine, scheduled maintenance and calibration is performed on this equipment, veracity of that certification is tested and confirmed. To address the other non-IT issues, such as elevators, heating systems, utilities, etc., an outside consultant will be brought in by the Company to run independent tests of these systems and the various vendors will be providing certification as to Year 2000 compliance. In addition, the Company will continue to investigate whether its customers and vendors are also becoming Year 2000 compliant. Like other businesses, the Company has been providing information to its customers, upon their request, concerning the Company's efforts in this matter. To date, the costs that the Company has incurred which are specific to the assessment and remediation of Year 2000 issues have not been material. No special expenditures have been required in the area of software or hardware. Some legal fees and educational expenses have been incurred to heighten awareness and to help organize business activities to incorporate assessment and remediation. For the most part, however, Year 2000 issues have been incorporated into other management routines, thereby minimizing extraordinary costs. It is presently anticipated that future, separately identifiable costs of assessment and remediation will also be nominal, and it is very likely that such costs will be less than $50,000 in 1999. In order to minimize the impact of any unanticipated Year 2000 "non- readiness" problems, the Company plans to have manual backup systems in place to forestall any interruption of operations resulting from the failure of automated systems. In addition, the data generated and collected in those systems is continuously being archived as a part of the Company's existing business practices. The Company does not foresee any serious Year 2000 problems occurring with its vendors or customers. While it is not possible to predict what kinds of minor Year 2000 issues might arise that have not been addressed as a priority by the Company, or by some other company with which the Company does business, the Company believes that it has multiple sources for the vast majority of the raw materials and services that it presently procures from vendors or third-party contractors. Unless a major problem of a national or global scope occurs, the Company believes it will be able to maintain sufficient inventory levels to continue production while it seeks to rectify any smaller problems that may arise. The Company continues to follow up on Year 2000 compliance with those suppliers who have not yet responded, as well as those who have indicated that their Year 2000 compliance is not yet complete. With respect to the Company's customer base, substantially all of the Company's most significant customers are very large, well-capitalized, multi-national companies with substantial resources. The Company believes that these customers are doing everything possible to protect themselves and, indirectly, the Company, from business losses resulting from Year 2000 issues. While there is no guarantee that the Company will reach Year 2000 compliance by the necessary deadline, the Company believes that it is applying the resources and effort sufficient to do so. FORWARD LOOKING STATEMENTS Some of the statements contained in this document are forward-looking statements. The accuracy of these statements cannot be guaranteed as they are subject to a variety of risks including, but not limited to the success of the products into which the Company's products are integrated, governmental action relating to wireless communications licensing and regulation, internal projections as to the demand for certain types of technological innovation, competitive products and pricing, the success of new product development efforts, the timely release for production and the delivery of products under existing contracts, future economic conditions generally, as well as other factors. ITEM 7. FINANCIAL STATEMENTS. See pages F-1 through F-28 for this information. Vari-L Company, Inc. Index to Financial Statements December 31, 1998 and 1997 Independent Auditor's Report F-1 Balance Sheets F-2 - F-3 Statements of Income F-4 Statements of Stockholders' Equity F-5 Statements of Cash Flows F-6 Notes to Financial Statements F-7 - F-28 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Vari-L Company, Inc. We have audited the accompanying balance sheets of Vari-L Company, Inc. as of December 31, 1998 and 1997, 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, 1998 and 1997, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. HAUGEN, SPRINGER & CO., P.C. January 29, 1999 Denver, Colorado VARI-L COMPANY, INC. BALANCE SHEETS
December 31, ------------ Assets 1998 1997 ---- ---- Current Assets: Cash and cash equivalents $ 6,515,061 $ 5,970,582 Trade accounts receivable, less $23,000 and $18,000 allowance for doubtful accounts 4,416,865 5,172,874 Inventories 7,901,034 6,936,890 Prepaid expenses and other 1,235,493 887,272 ----------- ----------- Total Current Assets 20,068,453 18,967,618 ----------- ----------- Property and Equipment: Machinery and equipment 22,299,396 15,730,870 Furniture and fixtures 1,498,619 1,200,453 Leasehold improvements 7,797,303 4,707,324 ----------- ----------- 31,595,318 21,638,647 Less accumulated depreciation and amortization 4,444,244 3,313,483 ----------- ----------- Net Property and Equipment 27,151,074 18,325,164 ----------- ----------- Other Assets: Long-term inventories 475,000 375,000 Covenant not to compete 33,197 66,389 Patents, net of accumulated amortization of $141,010 and $88,210 1,172,765 504,895 Other 1,770,531 1,317,238 ----------- ----------- Total Other Assets 3,451,493 2,263,522 ----------- ----------- TOTAL ASSETS $50,671,020 $39,556,304 ============ =========== ===========
See Accompanying Notes to Financial Statements VARI-L COMPANY, INC. BALANCE SHEETS
December 31, ------------- 1998 1997 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current installments of long-term debt $ 831,705 $ 596,645 Financed insurance premiums 21,424 23,730 Trade accounts payable 2,147,313 1,851,057 Accrued expenses 684,366 628,718 ----------- ---------- Total Current Liabilities 3,684,808 3,100,150 Bank line of credit 4,755,909 1,813,409 Long-term debt 5,901,205 4,464,021 Deferred income taxes 3,904,386 2,343,654 ----------- ----------- Total Liabilities 18,246,308 11,721,234 ----------- ---------- Commitments and Contingencies (Notes 9, 10, 11, and 12) Stockholders' Equity: Common stock, $.01 par value, 50,000,000 shares authorized, 5,464,134 and 5,251,288 shares issued and outstanding, respectively 54,641 52,513 Paid-in capital 22,102,533 20,211,589 Retained earnings 10,286,238 7,589,668 Less loans for purchase of stock (18,700) (18,700) ----------- ------------- Total Stockholders' Equity 32,424,712 27,835,070 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $50,671,020 $39,556,304 ====================== =========== ===========
VARI-L COMPANY, INC. STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1998 1997 ---- ---- Net sales $18,063,254 $17,385,364 Cost of products sold 8,100,164 8,365,555 ----------- ----------- Gross profit 9,963,090 9,019,809 Other income and expenses: General and administrative 1,955,510 1,761,111 Engineering 1,155,128 1,026,009 Selling 2,085,432 2,082,336 Profit sharing plan contribution 4,027 17,803 Interest expense 663,401 767,061 Interest income (328,482) (185,175) Other 69,704 155,515 ----------- ------------ 5,604,720 5,624,660 ----------- ----------- Income before taxes 4,358,370 3,395,149 Income taxes 1,661,800 1,360,300 ----------- ----------- NET INCOME $ 2,696,570 $ 2,034,849 =========== =========== Basic earnings per share $0.50 $0.45 Diluted earnings per share $0.48 $0.43
See Accompanying Notes to Financial Statements VARI-L COMPANY, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
Number Common Paid-In of Shares Stock Capital --------- ------ ------- Balance 12/31/96 3,806,138 $38,061 $12,422,232 Issued from conversion of debentures 1,264,778 12,648 6,465,983 Stock options exercised 171,705 1,717 1,260,939 Issued under employee stock purchase plan 7,467 75 51,522 Issued under stock grant plan 1,200 12 10,913 Net income - - - -------- ------- ----------- Balance 12/31/97 5,251,288 52,513 20,211,589 Stock options exercised 47,816 478 390,307 Stock warrants exercised 130,000 1,300 1,119,842 Issued under employee stock purchase plan 13,530 135 93,357 Issued under stock grant plan 26,500 265 314,419 Shares repurchased (5000) (50) (26,981) Net income - - - --------- ------- ------------ Balances 12/31/98 5,464,134 $54,641 $22,102,533 ========= ======= ===========
Total Loans for Stock- Retained Purchase Holders' Earnings of Stock Equity -------- -------- -------- Balance 12/31/96 $ 5,554,819 $(18,700) $17,966,412 Issued from conversion of debentures - - 6,478,631 Stock options exercised - - 1,262,656 Issued under employee stock purchase plan - - 51,597 Issued under stock grant plan - - 10,925 Net income 2,034,849 - 2,034,849 ------------ ---------- ----------- Balance 12/31/97 7,589,668 (18,700) 7,835,070 Stock options exercised - - 390,785 Stock warrants exercised - - 1,121,142 Issued under employee stock purchase plan - - 93,492 Issued under stock grant plan - - 314,684 Shares repurchased - - (27,031) Net income 2,696,570 - 2,696,570 ------------ ---------- ----------- Balances 12/31/98 $ 10,286,238 $ (18,700) $32,424,712 ============ ========== ===========
VARI-L COMPANY, INC. STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------ 1998 1997 ---- ---- Net cash provided by operating activities (Note 15) $ 4,398,283 $ 1,846,726 ------------ ------------ Cash flows from investing activities: Purchases of property and equipment (9,956,671) (5,879,494) ------------ ------------ Net cash (used in) investing activities (9,956,671) (5,879,494) ------------ ------------ Cash flows from financing activities: Lease acquisition cost repaid - 641,486 Net increase in long-term debt 1,672,244 316,611 Repayments of capital lease obligations - (16,266) Borrowings under bank line of credit 4,433,500 1,420,000 Repayments under bank line of credit (1,491,000) (1,732,000) Net repayments for insurance financing (2,306) (9,922) Net proceeds from stock issuances 1,517,460 8,158,714 Acquisition of treasury stock (27,031) - ------------ ------------ Net cash provided by financing activities 6,102,867 8,778,623 ------------ ------------ Net increase in cash 544,479 4,745,855 Beginning cash 5,970,582 1,224,727 Ending cash $ 6,515,061 $ 5,970,582 ============ ============ Supplemental disclosure of cash information: Cash paid for interest $ 06,842 $ 692,192 ============ ============
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 method or market. Cost is determined using the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization for the principal components of property and equipment are computed using straight-line and accelerated methods over 1 to 12 year estimated useful lives. Other components of property and equipment are depreciated using units- of-production methods which recognize the productive lives of the underlying assets. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK COMPENSATION PLANS The Company applies Accounting Principles Board (ABP) Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its stock compensation plans. The Company discloses the fair value of those plans pursuant to Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. INCOME TAXES The Company uses the asset and liability method as identified in SFAS No. 109, Accounting for Income Taxes. Earnings Per Share Basic earnings per common share are based upon the weighted average shares outstanding. Outstanding stock options, 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 1998 and 1997 totaled $1,155,128, and $1,026,009, 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. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 2 - INVENTORIES Inventories consist of the following:
DECEMBER 31, 1998 1997 ---- ---- Finished goods $ 2,174,094 $ 1,173,847 Work in process 3,364,833 2,405,396 Raw materials 2,210,833 3,202,454 Gold bullion 151,274 155,193 ----------- ----------- $ 7,901,034 $ 6,936,890 =========== =========== Long-term inventories $ 475,000 $ 375,000 =========== ===========
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 3 - PROPERTY, EQUIPMENT, AND OTHER ASSETS During 1998 and 1997, the Company invested significant amounts in the remodeling of its leased facilities and expansion of its automated production capacity. The Company has capitalized certain direct and overhead costs related to these projects. Patents are carried at cost less accumulated amortization which is calculated on a straight-line basis over the estimated useful lives, which is generally 17 years. Other assets at December 31, 1998 and 1997 included costs related to the Company's efforts to obtain ISO 9001 registration for its commercial products and military/aerospace operations. These costs consisted of wages, travel, training, consulting, and related overhead costs. Registration of the Company's commercial operations was successful in January 1998 and those costs (approximately $887,000 at December 31, 1998 and 1997, respectively) are being amortized over a fifteen-year period. Accumulated amortization at December 31, 1998 was approximately $57,000. Registration costs for the Company's military and aerospace operations totaled approximately $467,000 at December 31, 1998. Those costs will be amortized commencing with the date of successful registration. Other assets at December 31, 1998 and 1997 also included approximately $355,000 of costs associated with a joint venture agreement with the Chinese government; see Note 16. NOTE 4 - BANK LINE OF CREDIT AND LONG-TERM DEBT The Company has credit facilities with two banking institutions. The first consists of a $5.0 million line of credit agreement. The second consists of two agreements, a $4.1 million term loan agreement and a $4.0 million revolving equipment term loan agreement. LINE OF CREDIT The line of credit was restructured April 1998 and 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 December 31, 1998, the outstanding balance due under the line of credit was $4,755,909. The Company's accounts receivable, inventory, and general intangible assets secure the line of credit. TERM LOAN On August 21, 1998, the Company renegotiated its term loan and revolving equipment term loan. The Company extended its term loan for an additional year and converted the loan to a floating rate of Libor plus 1.5% and then obtained fixed rate protection by executing an interest rate swap which resulted in an all-in fixed rate of 7.75% through the maturity date of February 24, 2002. Monthly principal and interest payments of approximately $64,000 are required. At December 31, 1998, the balance due under the term loan was $4,113,763. REVOLVING EQUIPMENT TERM LOAN The Company renewed its revolving equipment term loan for one year and increased the borrowing provision to $4.0 million. Interest accrues on the outstanding principal balance of the revolving equipment term loan at prime plus .25 percent when advances are made under the revolver. These borrowings can be converted to term notes at rates which adjust to the three-year treasury note rate plus 1.95 percent. When converted, the term debt requires monthly principal and interest payments calculated on a seven-year amortization basis with a 42-month maturity. The revolving loan matures on August 13, 1999. As of December 31, 1998, the balance of the outstanding advances under the revolving loan that had been converted to term notes totaled $2,551,815. Interest accrues on the outstanding principal balances of these term notes at rates ranging from 6.10 percent to 7.72 percent, and monthly principal and interest payments totaling $36,671 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 7.75 percent to 8.50 percent. Monthly principal and interest payments totaling $2,262 are required. The notes mature from 1999 through 2002. Long-term debt consists of the following:
DECEMBER 31, 1998 1997 ----- ----- Term loan $ 4,113,763 $ 4,532,976 Equipment term loan 2,551,815 495,512 Vehicle notes 67,332 32,178 ----------- ----------- 6,732,910 5,060,666 Less current installments 831,705 596,645 ----------- ----------- Long-term portion $ 5,901,205 $ 4,464,021 =========== ===========
Scheduled annual principal payments on the bank line of credit and long-term debt for each of the next five years are as follows: 1999 $ 831,705 2000 5,653,045 2001 1,671,455 2002 3,332,614 2003 - NOTE 5 - 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. Warrants for the issuance of 85,000 shares were exercised during 1998. In connection with the sale of the units, the Company issued 45,000 warrants to the underwriter. These underwriter warrants were exercised during the first quarter 1998 at an average price of $6.97 per share. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 6 - INCOME TAXES The provisions for income taxes consisted of:
Years Ended December 31, 1998 1997 ---- ---- Deferred: Federal $1,525,000 $1,194,000 State 136,800 166,300 ---------- ---------- Total tax provisions $1,661,800 $1,360,300 ========== ==========
For the years ended December 31, 1998 and 1997, the Company had no current federal or state income tax liabilities due to net operating losses generated during those years. The operating losses resulted primarily from the income tax benefit of stock options exercised and the use of accelerated depreciation rates for tax purposes. The amount of the losses available for carryover at December 31, 1998 were approximately $2.3 million (federal) and $3.8 million (state), and expire in varying amounts through December 31, 2013. Significant components of deferred tax balances as of December 31, 1998 and 1997 were as follows:
1998 1997 ---- ---- Deferred tax liabilities: Depreciation and amortization $4,004,063 $2,719,765 Other, net 798,656 111,549 ---------- ----------- Total deferred tax liabilities 4,802,719 2,831,314 Deferred tax assets: Net operating loss carryovers 898,333 487,660 ---------- ----------- Net deferred tax liabilities $3,904,386 $2,343,654 ========== ==========
VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 6 - INCOME TAXES (CONTINUED) The differences between the U.S. federal statutory rate and the Company's effective tax rate are as follows:
1998 1997 ---- ---- Federal statutory tax rate 34.00% 34.00% State income taxes, net of federal benefit 3.30 3.30 Officers' life insurance and other .83 2.77 ----- ----- Effective tax rate 38.13% 40.07% ===== =====
VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 7 - EARNINGS PER SHARE The following is a reconciliation of the net income (numerator) and number of shares (denominator) for the computations of basic and diluted earnings per share:
Income Shares Per Share (Numerator)(Denominator) Amount ----------------------- ----------- FOR THE YEAR ENDED DECEMBER 31, 1998: Basic earnings per share 2,696,570 5,407,142 $ .50 ========= Effect of dilutive securities: Stock options - 172,588 Warrants - 30,541 ------- Diluted earnings per share $ 2,696,570 5,610,271 $ .48 =========== ========= ======== 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, 1998, the Company had 5,464,134 common shares outstanding. The Company issued 217,846 and purchased 5,000 shares during 1998. For purposes of computing earnings per share, these shares were weighted for the period of time they were outstanding. NOTE 8 - STOCK COMPENSATION PLANS The Company has three stock-based compensation plans which are described below. The Company applies APB No. 25 in accounting for its stock compensation plans. For 1998 and 1997, no compensation cost was recognized for the stock option portion of the plans. Had compensation cost been determined on the basis of fair value pursuant to SFAS No. 123, net income and earnings per share would have been reduced to the following proforma amounts:
1998 1997 ---- ---- Net Income: As Reported $ 2,696,570 $ 2,034,849 =========== =========== Pro Forma $ 1,823,750 $ 1,515,746 =========== =========== Earnings Per Share: Basic: As Reported $ .50 $ .45 =========== =========== Pro Forma $ .34 $ .33 =========== =========== Diluted: As Reported $ .48 $ .43 =========== =========== Pro Forma $ .33 $ .33 =========== ===========
STOCK OPTION PLAN During 1987, the Company established a nonqualified tandem stock option/stock appreciation rights plan for key employees. The plan, which was amended in 1990, 1994 and 1996, provides for the grant of incentive stock options, nonqualified stock options and stock appreciation rights to officers, directors or employees of, as well as advisers and consultants to, the Company. The Company has reserved 3,000,000 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 were vested upon issuance or on a shorter vesting schedule. The exercise price is equal to the fair market value of the Company's common stock on the grant date or the average of that value over a stated period of time prior to such date. 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 1998 and 1997 respectively, were: expected volatility of 78 percent and 55 percent, risk-free interest rates of 5.5 percent and 5.5 percent, and zero dividend yields for both years. The expected average remaining life of the options were seven years. The binomial option-pricing valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Following is a summary of the status of the stock option plan during 1998 and 1997:
Number Weighted Average of Options Exercise Price ---------- -------------- 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 ========= Outstanding at January 1, 1998 967,668 8.47 Granted 1,042,574 7.68 Exercised 47,816) 6.06 Forfeited (3,390) 8.61 --------- Outstanding at December 31, 1998 1,959,036 7.78 ========= Options exercisable at December 31, 1998 1,137,571 7.39 ========= Weighted average fair value of options granted during 1998 $ 2.43 =========
Following is a summary of the status of stock options outstanding at December 31, 1998:
Outstanding Options Exercisable Options ------------------- ------------------- Weighted Average Weighted Weighted Exercise Remaining Average Average Price Contractual Exercise Exercise Range Number Life Price Number Price ----- ------ ---- ----- ------ ----- $ 2.21 - 3.45 87,000 4.8 Yrs $ 2.21 87,000 $ 2.21 3.45 - 5.18 2,500 6.1 4.58 2,500 4.58 5.18 - 6.90 483,250 4.7 6.34 333,250 6.24 6.90 - 8.63 833,351 7.6 8.31 427,285 8.25 8.63 -10.35 532,935 8.6 9.06 275,536 8.91 10.35 -12.08 15,000 4.5 10.93 7,000 10.98 12.08 -13.80 3,500 8.1 12.69 3,500 12.69 13.80 -15.53 500 7.1 14.95 500 14.95 15.53 -17.25 1,000 7.1 17.02 1,000 --------- --------- 1,929,036 1,137,571 ========= =========
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 1998 and 1997. 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 have been reserved under the plan, and the maximum number of shares to be issued is 200,000 per year. Since the plan is noncompensatory, no charges to operations are recorded. EMPLOYEE STOCK PURCHASE PLAN Employee withholdings during 1998 were approximately $82,000 and were used to purchase 12,773 shares which were issued January 1999. Withholdings during 1997 were approximately $94,000. During January 1998, these withholdings were used to purchase 13,530 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 1998 and 1997 was $2.07 and $1.65 per share, respectively. STOCK GRANT PLAN During 1996, the Company adopted a stock grant plan under which stock grants can be made to the Company's officers, directors, employees, consultants, and advisors. The Company reserved 100,000 shares of its common stock for issuance under the stock grant plan. The plan provides for automatic grants of 50 shares per month to nonmanagement members of the Company's Board of Directors. During 1998 and 1997, those members received grants for 1,500 and 1,200 common shares, respectively. Compensation cost charged to operations was measured by the fair market value of the stock on the date of the grants. In connection with the executive employment agreements described in Note 12, the Compensation Committee granted stock bonuses of 25,000 shares to each of the Company's two senior officers. The grants are subject to a vesting schedule whereby one-half of the shares were vested during 1997 and 1998. The remaining shares are scheduled to vest in equal amounts during 1999 and 2000. Additionally, the Company is liable for income and payroll taxes attributable to the stock bonuses. The grants are subject to forfeiture provisions related to fulfillment of various terms of the employment agreements. Accordingly, the Company is amortizing the cost of the stock bonuses over the four-year term of the employment agreements. For 1998, the value of the vested stock bonuses, and the related income and payroll taxes, totaled approximately $559,000. At December 31, 1998, the unamortized portion of this cost was approximately $489,000, and was included in Prepaid Expenses. NOTE 9 - 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: 1999 $ 639,277 2000 643,261 2001 647,383 2002 651,637 2003 656,029 ----------- $ 3,237,587 =========== Rent expense on these leases was $639,101 and $175,049 for 1998 and 1997, 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: 1999 $ 168,957 2000 168,957 2001 168,957 2002 159,565 2003 129,615 --------- $ 796,051 ========= Rent expense on these leases was $127,287 for 1998 and $118,953 for 1997. Contingencies The Company is contingently liable for guarantees of indebtedness owed by senior officers to a former officer referred to in Note 10. The amount of this contingent liability at December 31, 1998 was approximately $225,000. NOTE 10 - 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 were expensed by the Company when those amounts became due. As of December 31, 1998, these amounts were paid in full. The second agreement was dated November 1996 and was entered into in connection with the employment agreements described in Note 12. The Company capitalized $99,581 as the cost of the covenant not to compete, which represented the total amount of severance pay due the former officer. The covenant is being amortized using the straight- line method over the three year life of the covenant. NOTE 11 - RELATED PARTY TRANSACTIONS Certain amounts required to be paid to a former officer as part of her severance agreement were rent on properties owned by the former officer. These payments totaled $8,595 for 1998 and $25,290 for 1997. As described in Note 9, the Company leases certain facilities from the Company's chairman and a partnership in which he is a partner. NOTE 12 - EMPLOYMENT AGREEMENTS Effective June 1, 1997, the Company entered into new four-year employment agreements with its two senior officers which provide for (i) automatic annual renewals of their full terms, (ii) minimum annual base salaries during the officers' employment with the Company, and (iii) severance pay after employment. Severance pay will be equal to the greater of the senior officer's annual base salary multiplied by the remaining term of the agreement or 2.99 times the senior officer's average annual compensation over the last five years in the event of involuntary termination of employment by the Company. In the case of voluntary retirement, the senior officer will be entitled to (i) one-half of his annual base salary as severance pay, (ii) be engaged as a consultant for a period of up to five years for a fee equal to 50 percent of his annual base salary, and (iii) a retirement benefit of 25 percent of his annual base salary. Each of the agreements provide for a bonus of 25,000 shares of the Company's stock, 50 percent of which was vested on June 1, 1997 and April 6, 1998 with the remaining 50 percent vesting 25 percent on each of April 15, 1999 and April 15, 2000 if the senior officer achieves performance goals set by the Compensation Committee. All unvested stock bonuses and options and stock appreciation rights previously granted to the senior officers will fully vest in the event of a change of control of the Company or an involuntary termination. In addition, the officers have agreed they will not compete against the Company for a period of one year after termination or expiration of their respective employment agreements, or the period covered by any severance allowance, consulting arrangement or retirement benefit, whichever is greater. The Company's Board of Directors has determined that amounts payable to the officers under the severance pay provisions of the agreements is adequate consideration for the officers' covenants not to compete. As described in Note 10, another senior officer retired during November of 1996. The Company and the retiring officer entered into a consulting and severance agreement providing for nine months salary payable over the first year of a three year consulting relationship in lieu of the benefits provided by the senior officer's employment agreement. NOTE 13 - FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially expose the Company to concentrations of credit risk, as defined by SFAS No. 105, consist primarily of trade accounts receivable. The Company's products are sold to original equipment manufacturers of communications equipment, either in the military or commercial marketplace. In 1998 and 1997, the Company two largest customers accounted for approximately 27 percent and 24 percent, respectively, of total sales. For 1998, sales to these two customers totaled approximately $2.9 million and $1.9 million, respectively. The accounts receivable at December 31, 1998 for these same two customers was approximately $814,000 and $159,000, respectively. Approximately 43 percent of the Company's 1998 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 Untied States Export-Import Bank. Otherwise, letters of credit are required of foreign customers. At times, cash balances in operating checking accounts may exceed federally insured limits. At December 31, 1998, the Company had $6,504,722 invested in a mutual fund and a $151,274 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, 1998 approximate their fair values. The fair value of contingent liabilities is based on the amounts of the underlying instruments, which approximates the amounts disclosed in Note 9. NOTE 14 - RETIREMENT PLANS During 1990, the Company adopted a qualified profit sharing plan for its employees. Annual contributions to the plan, which may be in the form of cash or shares of the Company's stock, are determined by the Board of Directors at its sole discretion. During 1998 and 1997, the Company contributed cash of $4,027 and $17,803, respectively, to the plan. During 1998, the Company adopted a 401(k) plan to which employees may contribute up to 15 percent of their pay. Although the Company may make matching contributions to the plan, none were made for 1998. NOTE 15 - RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES The reconciliation of net income to net cash provided by operating activities for the years ended December 31, 1998 and 1997 is as follows:
December 31, ------------ 1998 1997 ---- ---- Net Income $ 2,696,570 $ 2,034,849 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 1,130,761 716,278 Amortization of other assets 108,903 57,200 Deferred income taxes 1,661,800 1,360,300 Amortization of covenant not to compete 33,192 33,192 Changes in assets and liabilities: Decrease (increase) in accounts receivable 756,009 (2,428,694) (Increase) decrease in inventories (1,064,144) 761,086 (Increase) decrease in prepaid expenses and other current assets (46,646) 102,858 (Increase) in patents and other assets (1,230,066) (1,107,414) Increase in accounts payable 296,256 351,065 Increase in accrued expenses 55,648 43,780 (Decrease) in due to related party - (77,774) ------------ ----------- Total adjustments 1,701,713 (188,123) ------------ ----------- Net cash provided by operating activities $ 4,398,283 $ 1,846,726 ============ ===========
NOTE 16 - CHINA JOINT VENTURE During 1996, the Company entered into a joint venture agreement with Chen-Hui Company, a governmental corporation of the People's Republic of China. The original agreement provided for the creation of a manufacturing company to be owned 51 percent by the Company and 49 percent by Chen-Hui. During December 1998, the agreement was amended to provide for a sales and distribution arrangement whereby the products to be marketed will be manufactured by the Company at its domestic facilities. Also, during December 1998, the Company received patent protection from the Chinese government for its products. As described in Note 3, costs associated with the joint venture agreement are included in Other Assets at December 31, 1998 and 1997. With patent protection being received, the Company reclassified these costs as patent costs effective January 1999. NOTE 17 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 129, Disclosure of Information about Capital (SFAS No. 129). In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income (SFAS No. 130), and Statement No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131). 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. The Company has no items of comprehensive income as defined by SFAS No. 130. Also, the Company operates in only one segment as defined by SFAS No. 131. Accordingly, adoption of these statements during 1998 had no impact on the Company's financial position, results of operations, or cash flows. In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities by requiring that all derivatives be recognized at fair value in the balance sheet, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income. SAFS No. 133 is effective for fiscal years beginning after June 15, 1999. The adoption of this statement is expected to have no impact on the Company, as it does not currently hold any derivative instruments or engage in hedging activities. In March 1998, the Accounting Standards Executive Committee released Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP No. 98-1). SOP 98-1 requires companies to capitalize certain costs of computer software developed or obtained for internal use, provided that those costs are not research and development. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The Company is evaluating the requirements of SOP 98-1 and the effects, if any, on the Company's current policies on accounting for software costs. NOTE 18 - YEAR 2000 ISSUES (UNAUDITED) The Company has given serious attention to the potential problems that could arise from the rollover of computer clocks with two-digit fields when the year 2000 arrives. The Company is assessing the effects on both its IT (information technology) and non-IT systems. This assessment was substantially complete as of December 31, 1998, except for its survey of suppliers, for which the Company has had a 52 percent response rate. The Company expects to have all assessment, remediation, and testing completed by the end of August 1999. During recent years, the Company has automated much of its manufacturing processes with investments in new machinery and equipment. Accordingly, computers and software purchased for this purpose incorporated Year 2000 compliant technology. As a result, specific costs incurred through December 31, 1998 regarding Year 2000 issues have not been material. The Company anticipates the future, separately identifiable costs will be less than $50,000. The Company has also initiated a licensing audit project to ensure that all software utilized by the Company is properly licensed by the software provider to be Year 2000 compliant. Also, the Company has prohibited the purchase of any new hardware without empirical proof that such hardware is Year 2000 compliant. The Company believes that it has multiple sources for the vast majority of the raw materials and services that it presently procures from vendors or third-party contractors. As described above, the Company is in the process of surveying those vendors and contractors regarding their compliance with Year 2000 issues. With respect to the Company's customer base, most are large, multi- national customers who are expected to be in timely compliance with Year 2000 issues. The Company will have manual backup systems in place to minimize the impact of any unanticipated Year 2000 problems. In addition, data being currently generated and collected in those systems is being continuously archived as a part of the Company's existing business practices. 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 1999 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 1999 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 1999 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 1999 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 effective June 1, 1997, filed as Exhibit 10.1 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference 10.2 Executive Employment Agreement with David G. Sherman, dated effective June 1, 1997, filed as Exhibit 10.2 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference 10.3 Executive Employment Agreement with Alwin E. Branson, dated November 12, 1992, filed as Exhibit 10.3 to the Registrant's Form SB-2 Registration Statement (No. 33-74704- D) and incorporated herein by reference 10.4 Tandem Stock Option and Stock Appreciation Rights Plan, effective as of June 19, 1998 filed as Exhibit 10.7 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.5 Equipment Lease Agreement dated May 26, 1993 between the Company and Rossi Hardesty Financial Inc., filed as Exhibit 10.14 to the Registrant's Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference 10.6 Lease Agreement dated January 1, 1987, between the Company and J.C. Enterprises for the facility located at 5165 Peoria Street, Denver, Colorado, as amended on December 6, 1990 and March 23, 1993, filed as Exhibit 10.15 to the Registrant's Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference 10.7 Amended Lease Agreement dated July 1, 1992 between the Company and Bello-1 Partnership for the facility located at 11101 East 51st Avenue, Denver Colorado, filed as Exhibit 10.16 to the Registrant's Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference 10.8 Consulting Agreement between Carolyn Y. Kiser and the Company, dated January 31, 1992, as amended March 23, 1993, filed as Exhibit 10.17 to the Registrant's Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference 10.9 Settlement Agreement between the Company, Joseph H. Kiser, David G. Sherman, Alwin E. Branson and Carolyn Y. Kiser dated January 31, 1992, as amended March 23, 1993, filed as Exhibit 10.18 to the Registrant's Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference 10.10 Warrant Agreement with American Securities Transfer, Inc., filed as Exhibit 10.19 to the Registrant's Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference 10.11 Consulting Agreement between the Company and Neidiger/Tucker/Bruner, Inc. dated April 26, 1994, filed as Exhibit 10.23 to the Registrant's Form SB-2 Registration Statement (No. 33-74704-D and incorporated herein by reference 10.12 Profit Sharing Plan and Trust Agreement, as amended and restated effective April 19, 1994 filed as Exhibit 10.16 to the Registrant's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference 10.13 Assignment of Amended Lease Agreement dated July 1, 1992 between the Company and Bello-1 Partnership from Bello-1 Partnership to Kenneth L. Bettenhausen and Jean M. Bettenhausen dated May 26, 1994 for the facility located at 11101 East 51st Avenue, Denver, Colorado filed as Exhibit 10.18 to the Registrant's Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference 10.14 Stock Grant Plan effective as of June 19, 1998 filed as Exhibit 10.8 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference 10.15 Lease Agreement dated July 14, 1995 between the Company and Joseph H. and Nora L. Kiser, as amended September 1, 1995, for the facility located at 15556 East 17th Avenue, Denver, Colorado filed as Exhibit 10.21 to the Registrant's Form 10-KSB for the year ended December 31, 1995 and incorporated herein by reference. 10.16 Term Loan and Credit Agreement between the Company and Norwest Bank Colorado, National Association, dated May 17, 1996 filed as Exhibit 10.1 to the Registrant's Form 10-QSB for the quarter ended June 30, 1996 and incorporated herein by reference. 10.17 Lease Agreement dated March 12, 1997 between the Company and Five K Investments for the facility located at 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. 10.18 Business Loan Agreement between the Company and Bank One, Colorado, N.A., dated August 13, 1997 with a maturity date of August 13, 1998 filed as Exhibit 10.18 to the Registrant's Form 10-KSB for the year ended December 31, 1997 and incorporated herein by reference. 10.19 Business Loan Agreement between the Company and Bank One, Colorado, N.A., dated August 13, 1997 with a maturity date of February 13, 2001 filed as Exhibit 10.19 to the Registrant's Form 10-KSB for the year ended December 31, 1997 and incorporated herein by reference. 10.20 Letter Agreement between the Company and Norwest Bank, Colorado N.A., dated April 30, 1998 and filed as Exhibit 10 to the Registrant's Form 10-QSB for the quarter ended June 30, 1998 and incorporated herein by reference. 10.21 Amendment to Business Loan Agreement between the Company and Bank One, Colorado N.A., dated effective August 21, 1998 and filed as Exhibit 10.3 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.22 Amendment to Business Loan Agreement between the Company and Bank One, Colorado N.A., dated effective August 13, 1998 and filed as Exhibit 10.4 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.23 Second Amendment to Lease Agreement dated July 14, 1995 between the Company and Joseph H. Kiser and Nora L. Kiser for the facility located at 15556 East 17th Avenue, Denver, Colorado, as amended September 31, 1995 and July 31, 1998 and filed as Exhibit 10.5 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.24 Third Amendment to Lease Agreement dated January 1, 1987 between the Company and J.C. Enterprises for the facility located at 5165 Peoria Street, Denver, Colorado, as amended December 6, 1990, March 23, 1993, and October 30, 1998 and filed as Exhibit 10.6 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.25 Employment Agreement with Daniel J. Wilmot dated January 1, 1998 and filed as Exhibit 10.9 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.26 Employment Agreement with Derek L. Bailey dated January 1, 1998 and filed as Exhibit 10.10 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.27 Employment Agreement with Jon L. Clark dated January 1, 1998 and filed as Exhibit 10.11 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.28 Employee Stock Purchase Plan effective as of December 31, 1998 filed 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, 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 15, 1999 Joseph H. Kiser, Chairman of the Board, Chief Scientific Officer and Director /s/David G. Sherman Date: March 15, 1999 David G. Sherman, President, Chief Executive Officer, Principal Executive Officer, and Director /s/Jon L. Clark Date: March 15, 1999 Jon L. Clark, Vice President of Finance, Chief Financial Officer and Principal Accounting and Financial Officer /s/Sarah L. Booher Date: March 15, 1999 Sarah L. Booher, Director /s/David A. Lisowski Date: March 15, 1999 David A. Lisowski, Director /s/Anthony B. Petrelli Date: March 15, 1999 Anthony B. Petrelli, Director EXHIBIT INDEX No. Description Method of Filing - --- ----------- ---------------- 10 Employee Stock Purchase Plan effective as of December 31, 1998 Filed herewith electronically 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) Filed herewith electronically 27 Financial Data Schedule Filed herewith electronically EX-10 2 VARI-L COMPANY, INC. EMPLOYEE STOCK PURCHASE PLAN AS OF DECEMBER 31, 1998 ARTICLE I. - PURPOSE 1.01. PURPOSE. The Vari-L Company, Inc. Employee Stock Purchase Plan is intended to provide a method whereby employees of Vari-L Company, Inc. (hereinafter referred to, unless the context otherwise requires, as the "Company") will have an opportunity to acquire a proprietary interest in the Company through the purchase of shares of the Common Stock of the Company. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. ARTICLE II. - DEFINITIONS 2.01. BASE PAY. "Base Pay" shall mean regular straight-time earnings including payments for overtime, shift premium, bonuses and other special payments, commissions and other marketing incentive payments. 2.02. COMMITTEE. "Committee" shall mean the individuals described in Article XI. 2.03. EMPLOYEE. "Employee" means any person who is customarily employed on a full- time or part-time basis by the Company and is regularly scheduled to work more than 20 hours per week. ARTICLE III. - ELIGIBILITY AND PARTICIPATION 3.01. INITIAL ELIGIBILITY. Any employee who shall have completed one hundred eighty (180) days' employment and shall be employed by the Company on the date his participation in the Plan is to become effective shall be eligible to participate in offerings under the Plan which commence on or after such 180-day period has concluded. 3.02. LEAVE OF ABSENCE. For purposes of participation in the Plan, a person on leave of absence shall be deemed to be an employee for the first 180 days of such leave of absence and such employee's employment shall be deemed to have terminated at the close of business on the 180th day of such leave of absence unless such employee shall have returned to regular full-time or part-time employment (as the case may be) prior to the close of business on such 180th day. Termination by the Company of any employee's leave of absence, other than termination of such leave of absence on return to full- time or part-time employment, shall terminate an employee's employment for all purposes of the Plan and shall terminate such employee's participation in the Plan and right to exercise any option. 3.03. RESTRICTIONS ON PARTICIPATION. Notwithstanding any provisions of the Plan to the contrary, no employee shall be granted an option to participate in the Plan: (a) if, immediately after the grant, such employee would own stock, and/or hold outstanding options to purchase stock, possessing 5% or more of the total combined voting power or value of all classes of stock of the Company (for purposes of this paragraph, the rules of Section 424(d) of the Code shall apply in determining stock ownership of any employee); or (b) which permits his rights to purchase stock under all employee stock purchase plans of the Company to accrue at a rate which exceeds $25,000 in fair market value of the stock (determined at the time such option is granted) for each calendar year in which such option is outstanding. 3.04. COMMENCEMENT OF PARTICIPATION. An eligible employee may become a participant by completing an authorization for a payroll deduction on the form provided by the Company and filing it with the President of the Company on or before the date set therefor by the Committee, which date shall be prior to the end of the third pay period after the Offering Commencement Date for the Offering (as such terms are defined below). Payroll deductions for a participant shall commence on the applicable Offering Commencement Date when his authorization for a payroll deduction becomes effective and shall end on the Offering Termination Date of the Offering to which such authorization is applicable unless sooner terminated by the participant as provided in Article VIII. ARTICLE IV. - OFFERINGS 4.01. ANNUAL OFFERINGS. The Plan was originally implemented by four annual offerings of the Company's Common Stock beginning on the 10th day of March, 1995 and the 1st day of January in each of the years 1996, 1997, and 1998, each offering terminating on December 31 of the same year (the "Pre-1999 Offerings"). The Company will make four additional annual offerings of the Company's Common Stock (the "Offerings") beginning on January 1, 1999 and on the first day of January in each of the years 2000, 2001 and 2002; provided, however, that each annual Offering may, in the discretion of the Committee exercised prior to the commencement thereof, be divided into two six-month Offerings commencing, respectively, on January 1 and July 1 of such year and terminating on June 30 of such year and December 31 of such year, respectively. The maximum number of shares issued in the respective years shall be: - From January 1, 1999 to December 31, 1999: 189,216 shares. - From January 1, 2000 to December 31, 2000: 189,216 shares plus unissued shares from the prior Offerings, whether offered or not. - From January 1, 2001 to December 31, 2001: 189,216 shares plus unissued shares from the prior Offerings, whether offered or not. - From January 1, 2002 to December 31, 2002: 189,216 shares plus unissued shares from the prior Offerings, whether offered or not. If a six-month Offering is made, the maximum number of shares to be issued shall be one-half (1/2) of the number of shares set forth for the annual period in which the six-month Offering falls, plus, if the Offering is a July 1 to December 31 Offering, unissued shares, whether offered or not, from the immediately preceding six-month Offering. As used in the Plan, "Offering Commencement Date" means the January 1 or July 1, as the case may be, on which the particular Offering begins and "Offering Termination Date" means the June 30 or December 31, as the case may be, on which the particular Offering terminates. ARTICLE V. - PAYROLL DEDUCTIONS 5.01. AMOUNT OF DEDUCTION. At the time a participant files his authorization for payroll deduction, he shall elect to have deductions made from his pay on each payday during the time he is a participant in an Offering at the rate of 1, 2, 3, 4, 5, 6, 7, 8, 9 or 10% of his base pay in effect at the Offering Commencement Date of such Offering. In the case of a part-time, hourly employee, such employee's base pay during an Offering shall be determined by multiplying such employee's hourly rate of pay in effect on the Offering Commencement Date by the number of regularly scheduled hours of work for such employee during such Offering. 5.02. PARTICIPANT'S ACCOUNT. All payroll deductions made for a participant shall be credited to his account under the Plan. A participant may not make any separate cash payment into such account except when on leave of absence and then only as provided in Section 5.04. 5.03. CHANGES IN PAYROLL DEDUCTIONS. A participant may discontinue his participation in the Plan as provided in Article VIII, but no other change can be made during an Offering and, specifically, a participant may not alter the amount of his payroll deductions for that Offering. 5.04. LEAVE OF ABSENCE. If a participant goes on a leave of absence, such participant shall have the right to elect: to withdraw the balance in his or her account pursuant to Section 7.02, to discontinue contributions to the Plan but remain a participant in the Plan, or remain a participant in the Plan during such leave of absence, authorizing deductions to be made from payments by the Company to the participant during such leave of absence and undertaking to make cash payments to the Plan at the end of each payroll period to the extent that amounts payable by the Company to such participant are insufficient to meet such participant's authorized Plan deductions. ARTICLE VI. - GRANTING OF OPTION 6.01. NUMBER OF OPTION SHARES. On the Commencement Date of each Offering, a participating employee shall be deemed to have been granted an option to purchase a maximum number of shares of the stock of the Company equal to an amount determined as follows: an amount equal to (i) that percentage of the employee's base pay which he has elected to have withheld (but not in any case in excess of 10%) multiplied by (ii) the employee's base pay during the period of the offering (iii) divided by 85% of the market value of the stock of the Company on the applicable Offering Commencement Date. The market value of the Company's stock shall be determined as provided in paragraphs (a) and (b) of Section 6.02 below. An employee's base pay during the period of an offering shall be determined by multiplying, in the case of a one-year offering, his normal weekly rate of pay (as in effect on the last day prior to the Commencement Date of the particular offering) by 52 or the hourly rate by 2,080 or, in the case of a six-month offering, by 26 or 1,040, as the case may be, provided that, in the case of a part-time, hourly employee, the employee's base pay during the period of an offering shall be determined by multiplying such employee's hourly rate by the number of regularly scheduled hours of work for such employee during such Offering. 6.02. OPTION PRICE. The option price of stock purchased with payroll deductions made during such annual offering for a participant therein shall be the lower of: (a) 85% of the closing price of the stock on the nearest business day prior to the Offering Commencement Date on which trading occurred on the NASDAQ Small Cap Market (based on the average of the closing bid and closing ask prices) or the NASDAQ National Market System; or (b) 85% of the closing price of the stock on the Offering Termination Date or the nearest prior business day on which trading occurred on the NASDAQ Small Cap Market (based on the average of the closing bid and closing ask prices) or the NASDAQ National Market System. If the Common Stock of the Company is not admitted to trading on any of the aforesaid dates for which closing prices of the stock are to be determined, then reference shall be made to the fair market value of the stock on that date, as determined on such basis as shall be established or specified for the purpose by the Committee. ARTICLE VII. - EXERCISE OF OPTION 7.01. AUTOMATIC EXERCISE. Unless a participant gives written notice to the Company as hereinafter provided, his option for the purchase of stock with payroll deductions made during any offering will be deemed to have been exercised automatically on the Offering Termination Date applicable to such offering, for the purchase of the number of full shares of stock which the accumulated payroll deductions in his account at that time will purchase at the applicable option price (but not in excess of the number of shares for which options have been granted to the employee pursuant to Section 6.01), and any excess in his account at that time will be returned to him. 7.02. WITHDRAWAL OF ACCOUNT. By written notice to the Treasurer of the Company, at any time prior to the Offering Termination Date applicable to any Offering, a participant may elect to withdraw all the accumulated payroll deductions in his account at such time. 7.03. FRACTIONAL SHARES. Fractional shares will not be issued under the Plan and any accumulated payroll deductions which would have been used to purchase fractional shares will be returned to any employee promptly following the termination of an Offering, without interest. 7.04. TRANSFERABILITY OF OPTION. During a participant's lifetime, options held by such participant shall be exercisable only by that participant. 7.05. DELIVERY OF STOCK. As promptly as practicable after the Offering Termination Date of each Offering, the Company will deliver to each participant, as appropriate, the stock purchased upon exercise of his option. ARTICLE VIII. - WITHDRAWAL 8.01. IN GENERAL. As indicated in Section 7.02, a participant may withdraw payroll deductions credited to his account under the Plan at any time by giving written notice to the Treasurer of the Company. All of the participant's payroll deductions credited to his account will be paid to him promptly after receipt of his notice of withdrawal, and no further payroll deductions will be made from his pay during such Offering. The Company may, at its option, treat any attempt to borrow by an employee on the security of his accumulated payroll deductions as an election, under Section 7.02, to withdraw such deductions. 8.02. EFFECT ON SUBSEQUENT PARTICIPATION. A participant's withdrawal from any Offering will not have any effect upon his eligibility to participate in any succeeding Offering or in any similar plan which may hereafter be adopted by the Company; except that persons subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934, as amended, may not elect to participate in a succeeding Offering commencing within six months of a withdrawal by such individual. 8.03. TERMINATION OF EMPLOYMENT. Upon termination of the participant's employment for any reason, including retirement (but excluding death while in the employ of the Company or continuation of a leave of absence for a period beyond 180 days), the payroll deductions credited to his account will be returned to him, or, in the case of his death subsequent to the termination of his employment, to the person or persons entitled thereto under Section 12.01. 8.04. TERMINATION OF EMPLOYMENT DUE TO DEATH. Upon termination of the participant's employment because of his death, his beneficiary (as defined in Section 12.01) shall have the right to elect, by written notice given to the Treasurer of the Company prior to the earlier of the Offering Termination Date or the expiration of a period of sixty (60) days commencing with the date of the death of the participant, either: (a) to withdraw all of the payroll deductions credited to the participant's account under the Plan, or (b) to exercise the participant's option for the purchase of stock on the Offering Termination Date next following the date of the participant's death for the purchase of the number of full shares of stock which the accumulated payroll deductions in the participant's account at the date of the participant's death will purchase at the applicable option price, and any excess in such account will be returned to said beneficiary, without interest. In the event that no such written notice of election shall be duly received by the President of the Company, the beneficiary shall automatically be deemed to have elected, pursuant to paragraph (b), to exercise the participant's option. 8.05. LEAVE OF ABSENCE. A participant on leave of absence shall, subject to the election made by such participant pursuant to Section 5.04, continue to be a participant in the Plan so long as such participant is on continuous leave of absence. A participant who has been on leave of absence for more than 180 days and who therefore is not an employee for the purpose of the Plan shall not be entitled to participate in any offering commencing after the 180th day of such leave of absence. Notwithstanding any other provisions of the Plan, unless a participant on leave of absence returns to regular full-time or part-time employment with the Company at the earlier of: the termination of such leave of absence or three months from the 180th day of such leave of absence, such participant's participation in the Plan shall terminate on whichever of such dates first occurs. ARTICLE IX. - INTEREST 9.01. PAYMENT OF INTEREST. No interest will be paid or allowed on any money paid into the Plan or credited to the account of any participant employee. ARTICLE X. - STOCK 10.01. MAXIMUM SHARES. The maximum number of shares which shall be issued under the Plan, subject to adjustment upon changes in capitalization of the Company as provided in Section 12.04 shall not exceed 800,000 shares for all Offerings, including the shares issued in the Pre-1999 Offerings, consisting of 43,136 shares issued in Pre-1999 Offerings, 189,216 shares in each annual Offering (94,608 shares in each six-month Offering) plus in each Offering all unissued shares from prior Offerings, whether offered or not. If the total number of shares for which options are exercised on any Offering Termination Date in accordance with Article VI exceeds the maximum number of shares for the applicable Offering, the Company shall make a pro rata allocation of the shares available for delivery and distribution in a nearly uniform manner as it shall be practicable and as it shall determine to be equitable, and the balance of payroll deductions credited to the account of each participant under the Plan shall be returned to him as promptly as possible. 10.02. PARTICIPANT'S INTEREST IN OPTION STOCK. The participant will have no interest in stock covered by his option until such option has been exercised. 10.03. REGISTRATION OF STOCK. Stock to be delivered to a participant under the Plan will be registered in the name of the participant, or, if the participant so directs by written notice to the Treasurer of the Company prior to the Offering Termination Date applicable thereto, in the names of the participant and one such other person as may be designated by the participant, as joint tenants with rights of survivorship or as tenants by the entireties, to the extent permitted by applicable law. 10.04. RESTRICTIONS ON EXERCISE. The Board of Directors may, in its discretion, require as conditions to the exercise of any option that the shares of Common Stock reserved for issuance upon the exercise of the option shall have been duly qualified, upon official notice of issuance, upon NASDAQ, and that either: (a) a Registration Statement under the Securities Act of 1933, as amended, with respect to said shares shall be effective, or (b) the participant shall have represented at the time of purchase, in form and substance satisfactory to the Company, that it is his intention to purchase the shares for investment and not for resale or distribution. ARTICLE XI. - ADMINISTRATION 11.01. APPOINTMENT OF COMMITTEE. The Executive Committee of the Board of Directors (the "Committee") shall administer the Plan. 11.02. AUTHORITY OF COMMITTEE. Subject to the express provisions of the Plan, the Committee shall have plenary authority in its discretion to interpret and construe any and all provisions of the Plan, to adopt rules and regulations for administering the Plan, and to make all other determinations deemed necessary or advisable for administering the Plan. The Committee's determination on the foregoing matters shall be conclusive. 11.03. RULES GOVERNING THE ADMINISTRATION OF THE COMMITTEE. The Board of Directors may from time to time appoint members of the Committee in substitution for or in addition to members previously appointed and may fill vacancies, however caused, in the Committee. The Committee may select one of its members as its Chairman and shall hold its meetings at such times and places as it shall deem advisable and may hold telephonic meetings. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. The Committee may correct any defect or omission or reconcile any inconsistency in the Plan, in the manner and to the extent it shall deem desirable. Any decision or determination reduced to writing and signed by a majority of the members of the Committee shall be as fully effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary and shall make such rules and regulations for the conduct of its business as it shall deem advisable. ARTICLE XII. - MISCELLANEOUS 12.01. DESIGNATION OF BENEFICIARY. A participant may file a written designation of a beneficiary who is to receive any stock and/or cash. Such designation of beneficiary may be changed by the participant at any time by written notice to the Treasurer of the Company. Upon the death of a participant and upon receipt by the Company of proof of identity and existence at the participant's death of a beneficiary validly designated by him under the Plan, the Company shall deliver such stock and/or cash to such beneficiary. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such stock and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such stock and/or cash to the spouse or to any one or more dependents of the participant as the Company may designate. No beneficiary shall, prior to the death of the participant by whom he has been designated, acquire any interest in the stock or cash credited to the participant under the Plan. 12.02. TRANSFERABILITY. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive stock under the Plan may be assigned, transferred, pledged, or otherwise disposed of in any way by the participant other than by will or the laws of descent and distribution. Any such attempted assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 7.02. 12.03. USE OF FUNDS. All payroll deductions received or held by the Company under this Plan may be used by the Company for any corporate purpose and the Company shall not be obligated to segregate such payroll deductions. 12.04. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. (a) If, while any options are outstanding, the outstanding shares of Common Stock of the Company have increased, decreased, changed into, or been exchanged for a different number or kind of shares or securities of the Company through reorganization, merger, recapitalization, reclassification, stock split, reverse stock split or similar transaction, appropriate and proportionate adjustments may be made by the Committee in the number and/or kind of shares which are subject to purchase under outstanding options and on the option exercise price or prices applicable to such outstanding options. In addition, in any such event, the number and/or kind of shares which may be offered in the Offerings described in Article IV hereof shall also be proportionately adjusted. No adjustments shall be made for stock dividends. For the purposes of this paragraph, any distribution of shares to shareholders in an amount aggregating 20% or more of the outstanding shares shall be deemed a stock split and any distributions of shares aggregating less than 20% of the outstanding shares shall be deemed a stock dividend. (b) Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon a sale of substantially all of the property or stock of the Company to another corporation, the holder of each option then outstanding under the Plan will thereafter be entitled to receive at the next Offering Termination Date upon the exercise of such option for each share as to which such option shall be exercised, as nearly as reasonably may be determined, the cash, securities and/or property which a holder of one share of the Common stock was entitled to receive upon and at the time of such transaction. The Board of Directors shall take such steps in connection with such transactions as the Board shall deem necessary to assure that the provisions of this Section 12.04 shall thereafter be applicable, as nearly as reasonably may be determined, in relation to the said cash, securities and/or property as to which such holder of such option might thereafter be entitled to receive. 12.05. AMENDMENT AND TERMINATION. The Board of Directors shall have complete power and authority to terminate or amend the Plan; provided, however, that the Board of Directors shall not, without the approval of the stockholders of the Corporation (i) increase the maximum number of shares which may be issued under any Offering (except pursuant to Section 12.04); or (ii) amend the requirements as to the class of employees eligible to purchase stock under the Plan. No termination, modification, or amendment of the Plan may, without the consent of an employee then having an option under the Plan to purchase stock, adversely affect the rights of such employee under such option. 12.06. EFFECTIVE DATE. The Plan shall become effective as of March 10, 1995. 12.07. NO EMPLOYMENT RIGHTS. The Plan does not, directly or indirectly, create any right for the benefit of any employee or class of employees to purchase any shares under the Plan, or create in any employee or class of employees any right with respect to continuation of employment by the Company, and it shall not be deemed to interfere in any way with the Company's right to terminate, or otherwise modify, an employee's employment at any time. 12.08. EFFECT OF PLAN. The provisions of the Plan shall, in accordance with its terms, be binding upon, and inure to the benefit of, all successors of each employee participating in the Plan, including, without limitation, such employee's estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such employee. 12.09. GOVERNING LAW. The laws of the State of Colorado will govern all matters relating to this Plan except to the extent it is superseded by the laws of the United States. EX-23 3 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, 1998 and 1997 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., P.C. HAUGEN, SPRINGER & CO., P.C. March 12, 1999 EX-27 4
5 This schedule contains summary financial information extracted from Vari-L's audited financial statements prepared as of December 31, 1998 and for the twelve-month period then ended, included with its 10-KSB filing with the Securities and Exchange Commission for the year ended December 31, 1998, and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 6,515 0 4,440 23 7,901 20,068 31,595 4,444 50,671 3,685 0 0 0 55 32,370 50,671 18,063 18,391 8,100 8,100 5,270 0 663 4,358 1,662 2,696 0 0 0 2,696 0.50 0.48 40. EPS Basic Earnings Per Share.
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