-----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, REO/Bz80uF6RvKHpkTMGWYu/kntIrfUuWZirK+43H9TxNxM6fwLxtcfNS62mrJ8Z PGHMZ90Mm+CVUb8xvwspng== 0000895755-99-000059.txt : 19990817 0000895755-99-000059.hdr.sgml : 19990817 ACCESSION NUMBER: 0000895755-99-000059 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARI L CO INC CENTRAL INDEX KEY: 0000917173 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 060678347 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-23866 FILM NUMBER: 99693797 BUSINESS ADDRESS: STREET 1: 4895 PEORIA STREET CITY: DENVER STATE: CO ZIP: 80239 BUSINESS PHONE: 303/371-1560 MAIL ADDRESS: STREET 1: 11101 EAST 51ST AVENUE CITY: DENVER STATE: CO ZIP: 80239 10QSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File No. 0-23866 June 30, 1999 VARI-L COMPANY, INC. (Exact name of Registrant as specified in its charter.) Colorado 06-0679347 ----------------------- ----------------------------------- (State of Incorporation) (I.R.S. Employer identification No.) 4895 Peoria Street Denver, Colorado 80239 ----------------------- (Address of principal executive offices) (303) 371-1560 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes -----X----- No---------- The number of shares outstanding of each of the issuer's classes of common stock, as of June 30, 1999: Class of Securities Outstanding Securities ------------------- ---------------------- $0.01 par value 5,517,308 shares Common shares PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ----------------------------- VARI-L COMPANY, INC. BALANCE SHEETS JUNE 30, 1999 AND DECEMBER 31, 1998 (000's Omitted)
6/30/99 12/31/98 Assets (Unaudited) (Audited) - ------ ---------- --------- Current Assets: Cash and cash equivalents $ 4,118 $ 6,515 Trade receivables, less $23 allowance for doubtful accounts 4,236 4,417 Inventories 8,780 7,901 Prepaid expenses and other 2,096 1,235 -------- -------- Total Current Assets 19,230 20,068 -------- -------- Property and Equipment: Machinery and equipment 25,259 22,299 Furniture and fixtures 1,656 1,499 Leasehold improvements 8,248 7,797 -------- -------- 35,163 31,595 Less accumulated depreciation and amortization (5,241) (4,444) -------- -------- Net Property and Equipment 29,922 27,151 -------- -------- Other Assets: Long-term inventories 475 475 Covenant not to compete 17 33 Patents, net of accumulated amortization of $192 and $141 1,811 1,173 ISO registration costs and other, net of accumulated amortization of $85 and $57 1,608 1,771 -------- -------- Total Other Assets 3,911 3,452 -------- -------- TOTAL ASSETS $ 53,063 $ 50,671 ======== ========
(Continued) See Accompanying Notes to Financial Statements. VARI-L COMPANY, INC. BALANCE SHEETS, CONTINUED JUNE 30, 1999 AND DECEMBER 31, 1998 (000's Omitted)
6/30/99 12/31/98 Liabilities and Stockholders' Equity (Unaudited) (Audited) - ------------------------------------ ---------- --------- Current Liabilities: Current installments of long-term debt $ 993 $ 832 Financed insurance premiums 32 22 Trade accounts payable 2,290 2,147 Accrued expenses 452 684 Income taxes payable 925 0 -------- -------- Total Current Liabilities 4,692 3,685 Bank line of credit 3,861 4,756 Long-term debt 6,327 5,901 Deferred income taxes 3,904 3,904 -------- -------- Total Liabilities 18,784 18,246 -------- -------- Stockholders' Equity: Common stock, $.01 par value, 50,000 shares authorized; 5,517 and 5,464 shares outstanding, respectively 55 54 Paid-in capital 22,455 22,103 Retained earnings 11,787 10,286 Less loans for purchase of stock (18) (18) -------- -------- Total Stockholders' Equity 34,279 32,425 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 53,063 $ 50,671 ======== ========
See Accompanying Notes to Financial Statements. VARI-L COMPANY, INC. STATEMENTS OF INCOME FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1999 AND JUNE 30, 1998 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND JUNE 30, 1998 (000's omitted, except for per share amounts)
Three Months Three Months Six Months Six Months Ended Ended Ended Ended 6/30/99 6/30/98 6/30/99 6/30/98 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------ ------------ ----------- ----------- Net sales $ 5,460 $ 4,331 $ 10,773 $ 8,376 Cost of products sold 2,448 1,934 4,814 3,778 -------- -------- -------- -------- Gross profit 3,012 2,397 5,959 4,598 -------- -------- -------- -------- Other costs and expenses: General and administrative 585 498 1,062 969 Engineering 384 282 718 547 Selling 655 464 1,273 940 Interest expense 221 131 464 206 Interest income (49) (82) (117) (159) Profit sharing plan contribution 1 0 109 0 Other 8 17 24 43 -------- -------- -------- -------- 1,805 1,310 3,533 2,546 -------- -------- -------- -------- Income before taxes 1,207 1,087 2,426 2,052 Income taxes 460 435 925 821 -------- -------- -------- -------- NET INCOME $ 747 $ 652 $ 1,501 $ 1,231 - ---------- ======== ======== ======== ======== Basic earnings per share $ 0.14 $ 0.12 $ 0.27 $ 0.23 ======== ======== ======== ======== Basic weighted average shares outstanding 5,510 5,409 5,499 5,343 ======== ======== ======== ======== Diluted earnings per share $ 0.13 $ 0.11 $ 0.27 $ 0.21 ======== ======== ======== ======== Diluted weighted average shares outstanding 5,660 6,166 5,618 5,846 ======== ======== ======== ========
See Accompanying Notes to Financial Statements. VARI-L COMPANY, INC. STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND JUNE 30, 1998 (000's Omitted)
Six Months Six Months Ended Ended 6/30/99 6/30/98 (Unaudited) (Unaudited) ----------- ----------- Net cash provided by operating activities (Note 8) $ 1,292 $ 1,532 -------- -------- Cash flows from investing activities: Purchases of property and equipment (3,568) (4,445) - -------- -------- Net cash used in investing activities (3,568) (4,445) -------- -------- Cash flows from financing activities: Increases in long-term debt 1,064 935 Repayments of long-term debt (477) (330) Borrowings under bank line of credit 1,100 2,886 Repayments under bank line of credit (1,995) (1,350) Net proceeds under insurance financing 10 132 Net proceeds from warrant conversions 0 807 Treasury stock purchase (22) 0 Net proceeds from stock issuances 199 438 -------- -------- Net cash (used in) provided by financing activities (121) 3,518 -------- -------- Net (decrease) increase in cash (2,397) 605 Beginning cash 6,515 5,971 -------- -------- Ending Cash $ 4,118 $ 6,576 - ----------- ======== ======== Supplemental disclosure of cash flows information: Cash paid for interest $ 497 $ 206 ======== ======== Cash paid for income taxes $ 0 $ 0 ======== ========
See Accompanying Notes to Financial Statements. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS Vari-L Company, Inc. (the Company) was founded in 1953 and is a manufacturer of electronic components. The Company's products are used in commercial and military communication systems where electrical processing of radio frequency signals is required. NOTE 1 - FINANCIAL PRESENTATION - ------------------------------- These financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 1998 and notes thereto. In the opinion of management, the accompanying interim, unaudited financial statements contain all the adjustments necessary to present fairly the financial position of the Company as of June 30, 1999, and the results of its operations, and its cash flows for the three-month and six- month periods ended June 30, 1999 and June 30, 1998. All adjustments made are of a normal recurring nature. NOTE 2 - INVENTORIES - -------------------- Inventories consist of the following:
(000's Omitted) ----------------------- 6/30/99 12/31/98 (Unaudited) (Audited) ----------- --------- Finished goods $ 3,406 $ 2,174 Work in process 2,979 3,365 Raw materials 2,244 2,211 Gold bullion 151 151 -------- -------- $ 8,780 $ 7,901 ======== ======== Long-term inventories $ 475 $ 475 ======== ========
NOTE 3 - INCOME TAXES - --------------------- Income tax expense reflects effective tax rates of 38.13% for 1999 and 40% for 1998. NOTE 4 - CREDIT FACILITY - ------------------------ The Company has two credit facilities. The first consists of a line of credit. The second consists of a term loan and a revolving equipment term loan. On May 18, 1999, the Company renegotiated its line of credit. The line now provides for borrowings of up to $6.0 million. Interest is payable monthly, calculated at prime. The line of credit matures April 30, 2001. At June 30, 1999, the outstanding balances due under the line of credit was approximately $3.9 million. 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 1.50% and 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 $65,000 are required. At June 30, 1999, the balance due under the term loan was approximately $3.8 million. The revolving equipment term loan provides for borrowings up to $4.0 million. Interest accrues on the outstanding principal balance of the revolving equipment term loan at prime plus .25% when advances are made under the revolver. These borrowings can be converted to term notes at rates which adjust to the 3-year treasury note rate plus 1.95%. When converted, the term debt requires monthly principal and interest payments calculated on a seven-year amortization basis with a 42-month maturity. The revolving loan matures on August 13, 1999. As of June 30, 1999, the balance of the advances under the revolving loan that had been converted to term notes totaled approximately $3.4 million. Interest accrues on the outstanding principal balances of these term notes at rates ranging from 6.108% to 7.72% and monthly principal and interest payments totaling $52,890 are required. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 5 - SECURITIES PURCHASE AGREEMENT - -------------------------------------- On March 4, 1997, the Company entered into an agreement to sell up to 75 units of debentures and warrants. The units consisted of an aggregate of $7,500,000 in 4-year, 7%, subordinated, convertible debentures and 750,000 non-redeemable warrants to purchase common stock at a price of $9.50 per share, exercisable for a period of three years. All of the debentures plus accrued interest were converted into common stock during 1997. As of June 30, 1999, 85,000 of the warrants had been exercised and 665,000 warrants were still outstanding. NOTE 6 - STOCK COMPENSATION PLANS - --------------------------------- The Company has three stock-based compensations plans: a stock option plan, an employee stock purchase plan, and a stock grant plan. Stock Option Plan - ----------------- The Company has reserved 3,270,000 shares of its common stock for issuance upon exercise of rights and options under the stock option plan. Typically, rights and options have been granted subject to a vesting schedule, vesting at the rate of 20 percent per year, becoming fully vested upon the change of control of the Company, and expiring 10 years from the date of issuance. Certain options granted to senior management are fully vested upon issuance. In the quarter ended June 30, 1999, the Company granted 1,500 options pursuant to the plan. 18,000 options were exercised and 5,372 options were cancelled in the quarter. Employee Stock Purchase Plan - ---------------------------- Under the Company's employee stock purchase plan, eligible employees may contribute up to 10 percent of their earnings, through payroll deductions, to purchase shares of the Company's common stock. The purchase price is equal to 85 percent of the fair value of the stock on specified dates. A total of 800,000 shares were reserved under the plan, of which 43,136 have been issued during prior years. The remaining maximum number of shares to be issued is 189,216 per year. For the plan year 1998, a total of 12,851 shares were issued in January 1999 at $6.43 per share. Stock Grant Plan - ---------------- During 1996, the Company adopted a stock grant plan under which stock grants can be made to the Company's officers, directors, employees, consultants, and advisors. The Company reserved 100,000 shares of its common stock for issuance under the stock grant plan. The plan provides for automatic grants of 50 shares per month to non-management members of the Company's Board of Directors. During the second quarter of 1999, those members received grants for 450 shares. Compensation cost charged to operations was measured by the fair market value of the stock on the date of the grants. In connection with certain executive employment agreements, 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. Shares are granted only as earned pursuant to the vesting schedule in the employment agreements. 6,250 shares vested in March 1999 and the remaining shares are scheduled to vest in 2000. Additionally, the Company is liable for income and payroll taxes attributable to the stock bonuses. The grants are subject to forfeiture provisions related to fulfillment of various terms of the employment agreements. Accordingly, the Company is amortizing the cost of the stock bonuses over the term of the employment agreements. As of June 30, 1999, the value of the vested stock bonuses, and the related income and payroll taxes, totaled approximately $698,000 and the unamortized, prepaid portion of this cost was approximately $538,000. 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:
(000's Omitted) ------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- For the quarter ended June 30, 1998 Basic earnings per share $ 652 5,409 $0.12 Effect of dilutive stock options and warrants 0 757 ------- ----- Diluted earnings per share $ 652 6,166 $0.11 ======= ===== For the quarter ended June 30, 1999 Basic earnings per share $ 747 5,510 $0.14 Effect of dilutive stock options and warrants 0 150 ------- ----- Diluted earnings per share $ 747 5,660 $0.13 ======= ===== For the six months ended June 30, 1998 Basic earnings per share $ 1,231 5,343 $0.23 Effect of dilutive stock options and warrants 0 503 ------- ----- Diluted earnings per share $ 1,231 5,846 $0.21 ======= ===== For the six months ended June 30, 1999 Basic earnings per share $ 1,501 5,499 $0.27 Effect of dilutive stock options and warrants 0 119 ------- ----- Diluted earnings per share $ 1,501 5,618 $0.27 ======= =====
At June 30, 1999, the Company had 5,517,308 common shares outstanding. During the six months ended June 30, 1999, the Company issued 57,024 shares and repurchased 3,850. For purposes of computing earnings per share, the shares issued and repurchased during the period were weighted for the period of time they were outstanding. VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 8 - 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 six-month periods ended June 30, 1999 and June 30, 1998 is as follows:
Six Months Six Months Ended Ended 6/30/99 6/30/98 (Unaudited) (Unaudited) ----------- ----------- Net Income $ 1,501 $ 1,231 ------- ------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 877 517 Amortization of covenant not to compete 16 16 Stock contribution to profit sharing plan 101 0 Changes in assets and liabilities: Decrease in accounts receivable 181 298 Increase in inventories (879) (653) Increase in prepaid expenses and other current assets (786) (267) Increase in patents and other assets (555) (32) Increase (decrease) in accounts payable 143 (293) Decrease in accrued expenses (232) (106) Increase in income taxes payable 925 821 ------- ------- Total adjustments (209) 301 ------- ------- Net cash provided by operating activities $ 1,292 $ 1,532 - ----------------------------------------- ======= =======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. - ------------------------------------------------------------------------- OVERVIEW - -------- The Company achieved record financial results in the three- and six-month periods ended June 30, 1999. In the quarter, net sales were up 26%, to $5.5 million, over the same quarter last year. Net income was up 14%, to $747,000, over the same quarter last year. Basic and diluted earnings per share were 14 cents and 13 cents per share, respectively, versus 12 cents and 11 cents per share, respectively, for the same quarter last year. For the six month period, net sales were up 29%, to $10.8 million and net income was up 22%, to $1.5 million, over the same period last year. Both basic and diluted earnings per share were 27 cents per share for the first six months of 1999, versus 23 cents and 21 cents per share, respectively, for the same period last year The Company also achieved a record level of new firm customer orders for the three- and six-month periods ended June 30, 1999. In the quarter, bookings of new orders were up 75%, to $3.9 million, compared to $2.2 million for the same quarter in 1998. In the six-month period, bookings were up 29%, to $7.9 million, compared to $6.1 million for the same period in 1998. RESULTS OF OPERATIONS - --------------------- Three months ended - ------------------ June 30, 1999 and June 30, 1998 - ------------------------------- and the Six months ended - ------------------------ June 30, 1999 and June 30, 1998 - ------------------------------- Total Revenues - -------------- Sales revenue increased approximately $1,129,000 (26%) in the three months ended June 30, 1999 as compared with the three months ended June 30, 1998, from $4,331,000 to $5,460,000. Sales revenue increased approximately $2,397,000 (29%) in the six months ended June 30, 1999 as compared with the six months ended June 30, 1998, from $8,376,000 to $10,773,000. The growth in sales revenue continues to reflect the Company's ongoing success in selling to the commercial infrastructure marketplace, and entry into the subscriber handset marketplace, with its narrow-band VCOs and PLLs, while maintaining its existing markets in military products. The Company produces seven major product lines: 1. Signal Processing components for industrial, military and aerospace (Military/Aerospace Signal Processing, or MSP). 2. Signal Source components, primarily wide-band VCOs, for industrial, military and aerospace (Military/Aerospace Signal Source, or MSS). 3. Special Assemblies that combine MSP and MSS components (Military/Aerospace Special Assemblies, or MSA). 4. Commercial Signal Source components including PLLs and narrow- band VCOs (Commercial Signal Source, or CSS). 5. Commercial Signal Processing components, including optoelectronic components and subassemblies used in magnetic and fiberoptic products for CATV applications (Commercial Signal Processing, or CSP). 6. Subscriber product components used in hand-held telephone sets, pagers and other consumer-oriented products (Subscriber Signal Source, or SSS). 7. Commercial Special Assemblies (CSA). In the first six months of 1999, the composition of sales revenue was 6% MSP, 9% MSS, less than 1% MSA, 70% CSS, 7% CSP, 6% SSS and less than 1% CSA. In the first six months of 1998, the composition of sales revenue was 11% MSP, 25% MSS, 1% MSA, 59% CSS, 4 % CSP, 0% SSS and 0% CSA. Cost of Goods Sold ------------------ Cost of goods sold, as a percent of sales revenues, was 45% in the three months and six months ended June 30, 1999 and 1998. Margins are anticipated to decrease as the subscriber products sales increase, because of the lower, competitive pricing of these high volume products, while earnings are expected to be stable or improve from these types of sales. Selling and Engineering Expense ------------------------------- Selling expenses increased approximately $191,000, or 41%, for the three months ended June 30, 1999 as compared to the three months ended June 30, 1998. Selling expenses increased approximately $333,000, or 35%, for the six months ended June 30, 1999 as compared to the six months ended June 30, 1998. Sales commissions, a significant component of selling expenses, increase ratably with the increase of sales revenues, which increased 26% and 29% in the periods, respectively. Additional increases in the periods reflect increased travel, personnel expenses and other selling expenses. Engineering expenses increased approximately $102,000, or 36%, for the three months ended June 30, 1999 as compared to the three months ended June 30, 1998. Engineering expenses increased approximately $171,000, or 31%, for the six months ended June 30, 1999 as compared to the six months ended June 30, 1998. These increases reflect ongoing improvements to the engineering department, including costs to hire and retain exceptional personnel, and related equipment costs and expenses, to support new product development and expansion of existing product lines. General and Administrative and Other Expenses --------------------------------------------- General and administrative expenses increased approximately $87,000, or 17%, for the three months ended June 30, 1999 as compared to the three months ended June 30, 1998. General and administrative expenses increased approximately $93,000, or 10%, in the six months ended June 30, 1999 as compared with the six months ended June 30, 1998. Increases to G&A primarily reflect higher management compensation, increased shareholder relations expense and other similar expenses. Other expenses were approximately $8,000 in the three months ended June 30, 1999 and $17,000 and the three months ended June 30, 1998. Other expenses decreased approximately $19,000 (44%) in the six months ended June 30, 1999 as compared with the six months ended June 30, 1998. Interest Income and Expense --------------------------- The Company manages its credit facilities and money fund in tandem. Interest income is earned on the Company's short-term investments in a U.S. government securities money fund purchased with proceeds from its March 1997 convertible debenture and warrant offering. Interest income decreased approximately $33,000, to approximately $49,000, in the three months ended June 30, 1999 compared to the three months ended June 30, 1998. Interest income decreased approximately $42,000, to approximately $117,000, in the six months ended June 30, 1999 compared to the six months ended June 30, 1998. These decreases reflect the Company's use of a portion of its cash during these periods for expansion of its production facilities. Interest expense increased approximately $90,000 (69%) for the three months ended June 30, 1999 as compared with the three months ended June 30, 1998. Interest expense increased approximately $258,000 (125%) for the six months ended June 30, 1999 as compared with the six months ended June 30, 1998. The increases are attributable to interest on increased borrowings during the year to support facilities improvements and equipment for expanded and improved production facilities. In addition, the first quarter of 1998 included an interest accrual adjustment, which was not applicable to 1999. Depreciation and Amortization ----------------------------- Depreciation and amortization increased approximately $360,000 (70%) for the six months ended June 30, 1999 as compared with the six months ended June 30, 1998. The increase reflects depreciation and amortization on increased investments in property, equipment, leasehold improvements, patents and ISO registrations. Depreciation and amortization expense is expected to continue to increase as a result of these and future capital investments. FINANCIAL CONDITION - ------------------- Liquidity ---------- At June 30, 1999, the Company's working capital was $14.5 million compared to $16.4 million at December 31, 1998. The Company's current ratio was 4.1 to 1 as of June 30, 1999 and 5.4 to 1 at December 31, 1998. The reduction in the Company's current ratio from December 31, 1998 to June 30, 1999 is primarily attributable to the consumption of cash for the expansion of the Company's production facilities and the current provision in the period for corporate income taxes, partially offset by increases in inventory and prepaid expenses. Capital Resources ----------------- The Company has two credit facilities. The first consists of a line of credit. The second consists of a term loan and a revolving equipment term loan. On May 18, 1999, the Company renegotiated its line of credit. The line now provides for borrowings of up to $6.0 million. Interest is payable monthly, calculated at prime. The line of credit matures April 30, 2001. At June 30, 1999, the outstanding balances due under the line of credit was approximately $3.9 million. 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 1.50% and 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 $65,000 are required. At June 30, 1999, the balance due under the term loan was approximately $3.8 million. The revolving equipment term loan provides for borrowings up to $4.0 million. Interest accrues on the outstanding principal balance of the revolving equipment term loan at prime plus .25% when advances are made under the revolver. These borrowings can be converted to term notes at rates which adjust to the 3-year treasury note rate plus 1.95%. When converted, the term debt requires monthly principal and interest payments calculated on a seven-year amortization basis with a 42-month maturity. The revolving loan matures on August 13, 1999. As of June 30, 1999, the balance of the advances under the revolving loan that had been converted to term notes totaled approximately $3.4 million. Interest accrues on the outstanding principal balances of these term notes at rates ranging from 6.108% to 7.72% and monthly principal and interest payments totaling $52,890 are required. The Company finances certain of its annual insurance premiums through a financing company. The amounts due under these loans totaled approximately $32,000 as of June 30, 1999 and are paid in monthly installments of $11,581 with interest at 6.21%. On March 4, 1997, the Company entered into an agreement to sell up to 75 units of debentures and warrants. The units consisted of an aggregate of $7.5 million in four year, 7% convertible debentures and 750,000 non- redeemable common stock purchase warrants exercisable at $9.50 per share for a period of three years. All of the debentures plus accrued interest were converted into common stock during 1997. During April 1998, 85,000 warrants were exercised. 665,000 warrants remained outstanding as of June 30, 1999. The Company believes that it has sufficient financial resources available to meet its short-term working capital needs through cash flows generated by operating activities and through the management of its sources of financing. The Company also believes that, as the result of the sales of the convertible debentures, it has adequate capital resources to continue its growth plans. Backlog ------- Total backlog of unfilled firm customer orders ("backlog") at June 30, 1999 was $15.2 million compared with $14.4 million at June 30, 1998. Backlog at December 31, 1998 was $18.1 million. 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, including our suppliers, for which we have had an 85% response rate to date with no significant deficiencies noted. The Company currently expects to have all assessment, remediation and testing completed by the end of August 1999. 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. 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 and the MIS staff was increased to perform and manage compliance. 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 is continuing 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, including any events that result from the year 2000 computer clock rollover. VARI-L COMPANY, INC. PART II--OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS None ITEM 2 CHANGES IN SECURITIES None ITEM 3 DEFAULTS UPON SENIOR SECURITIES None ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting of shareholders was held on June 18, 1999. At the meeting Joseph H. Kiser, David G. Sherman, Sarah L. Booher, David A. Lisowski, Anthony B. Petrelli, Jae H. Shim and Derek L. Bailey were elected as directors. The shareholders also ratified the appointment of Haugen, Springer & Co. as the Company's independent public accountants for the year ending December 31, 1999 and approved of an amendment to the Company's Tandem Stock Option and Stock Appreciation Rights Plan to increase the number of shares reserved under the Plan by 270,000 shares. The number of votes cast for, withheld or broker nonvotes for each director nominee was as follows:
Broker Nominee For Withheld Nonvotes ------------------- --------- -------- -------- Joseph H. Kiser 4,697,660 420,735 0 David G. Sherman 4,700,340 418,055 0 Sarah L. Booher 4,683,938 434,457 0 David A. Lisowski 4,691,908 426,487 0 Anthony B. Petrelli 4,700,140 418,255 0 Jae H. Shim 4,692,650 425,745 0 Derek L. Bailey 4,696,915 421,480 0
The number of votes cast for, against, abstentions and broker nonvotes for ratification of auditors was as follows: Broker For Against Abstain Nonvotes --------- -------- ------- -------- 5,006,593 92,726 19,076 0 The number of votes cast for, against, abstentions and broker nonvotes for approval of the amendment to the Company's Tandem Plan was as follows: Broker For Against Abstain Nonvotes --------- -------- ------- -------- 4,331,691 751,409 55,295 0 Because the election of directors, ratification of auditors and approval of the increase in the number of shares reserved under the Tandem Plan were considered routine under applicable stock exchange rules, all proxy shares held in the names of brokers as nominees which were not voted at the meeting by the shareholders were voted by the brokers at their discretion. ITEM 5 OTHER INFORMATION None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10 Letter Agreement between the Company and Norwest Bank, Colorado, N.A., dated May 18, 1999 Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VARI-L COMPANY, INC. Date: August 16, 1999 By: /s/ Jon L. Clark -------------------------- ---------------------------- Jon L. Clark, V.P. Finance and Principal Financial Officer EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VARI-L'S AUDITED FINANCIAL STATEMENTS PREPARED AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIOD THEN ENDED, INCLUDED WITH ITS 2ND QUARTER 1999 10-QSB FILING WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT. 1,000 6-MOS DEC-31-1999 JUN-30-1999 4,118 0 4,259 23 8,780 19,230 35,163 5,241 53,063 4,692 0 0 0 55 34,224 53,063 10,773 10,890 4,814 4,814 3,186 0 464 2,426 925 1,501 0 0 0 1,501 .27 .27
EX-10 3 NORWEST BANK Norwest Bank Colorado, N.A. Denver 1740 Broadway Denver, Colorado 80274 303/861-8811 May 18, 1999 Mr. David Sherman President and Chief Executive Officer Vari-L Company, Inc. 4895 Peoria Denver, Colorado 80239 Dear David: We are pleased to inform you that Norwest Bank Colorado, National Association (the "Bank") has approved a revolving line of credit (the "Line") in the amount not to exceed six million dollars ($6,000,000) for Vari-L Company Inc. a Colorado corporation, (the "Borrower"). The Line is subject to the terms and conditions in this letter agreement (the "Agreement"), as defined below, as well as to those in the promissory note executed by the Borrower evidencing indebtedness arising under this Agreement, security agreements and any other documents signed by the Borrower in connection with the Line (collectively, the "Loan Documents"). This Agreement replaces the Agreement dated April 30, 1998, as amended. This Agreement shall be retroactive to April 30, 1999. Until the maturity date (April 30, 2001), and so long as no default exists, the Borrower may borrow, repay and borrow again under the Line, provided the outstanding balance at no time exceeds the lesser of a) the $6,000,000 face amount or b) the following Borrowing Base limitation: The Borrowing Base shall mean the sum of 80% of Borrower's eligible accounts receivable and 60% of Borrower's eligible inventory, provided that eligible inventory may not exceed 50% of the Line commitment, as set forth and calculated in a monthly Borrowing Base Certificate delivered to Bank in connection herewith. The form of such Certificate is attached as Exhibit A. Ineligible account receivable include those over 60 days past due, disputed accounts, federal government accounts, foreign accounts unless insured by an export credit insurance policy acceptable to Bank or secured by a letter of credit benefiting Borrower, affiliate accounts, accounts covering booked but unfilled orders, contra accounts, doubtful accounts, and accounts in which Bank does not have a perfected first priority security interest. Ineligible inventory includes inventory which is work in process, obsolete, damaged, defective, classified by Borrower as long term inventory, or in which Bank does not have a perfected first priority security interest. Should the total amount to be drawn on the Line exceed the amount allowed for in the most recent Borrowing Base Certificate, a new Borrowing Base Certificate must accompany the draw request to substantiate borrowing base adequacy. If any Borrowing Base calculation yields a deficiency of Borrowing Base to loan outstandings, a principal payment in amount sufficient to cover the deficiency shall accompany the Borrowing Base Certificate. In addition to the terms and conditions included in the Loan Documents, the making of any advance under the Line, shall depend upon compliance with the following: 1) The Line shall be secured by a first security interest in Borrower's accounts, inventory, and general intangibles and proceeds thereof, whether now owned or hereafter acquired. 2) Prior to the making of the first advance under the Line, Borrower shall sign and return to Bank this Agreement and the Loan Documents. 3) Borrower shall pay to Bank a commitment fee in the amount of $12,000. 4) Borrower shall furnish to Bank: a) Monthly, within 45 days of each month end (except November), Borrowing Base Certificate (Exhibit A) and accounts receivable aging summary page beginning April 30, 1999; b) Quarterly, within 45 days of each quarter end, Borrower's company prepared financial statements or a complete Form 10-QSB Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 and Compliance certificate (Exhibit B) or in a form acceptable to Bank beginning June 30, 1999; c) Annually, within 90 days of Borrower's fiscal year-end, Borrower's year end accounts receivable aging and accounts payable aging beginning December 31, 1999; d) Annually, within 90 days of Borrower's fiscal year-end, Borrower's audited financial statements by a certified public accountant acceptable to Bank or a complete Form 10-KSB Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 beginning December 31, 1999; e) Annually, within 120 days of Borrower's fiscal year end, Borrower's forecasted balance sheet and income statement for the subsequent fiscal year end; f) Such other financial statements or information as may be requested for credit underwriting and monitoring purposes. FINANCIAL COVENANTS: So long as any indebtedness remains outstanding under the Line, the Borrower will not, without the Bank's prior written consent: 1) Permit Borrower's Tangible Net Worth to be less than $29,000,000 measured quarterly beginning June 30, 1999; 2) Permit Borrower's Debt to Tangible Net Worth to exceed 1.0 to 1.0 measured quarterly beginning June 30, 1999; 3) Permit Borrower's Current Ratio to be less than 2.0 to 1.0 measured quarterly beginning June 30, 1999; 4) Permit Borrower's Debt Service Coverage to exceed 1.0 to 1.0 measured at Borrower's fiscal year end. DEFINITIONS: Generally accepted accounting principles shall determine the manner of computation unless noted below. TANGIBLE NET WORTH: Stockholders' equity minus intangible assets. CURRENT RATIO: Current assets minus current prepaid expenses divided by current liabilities. DEBT SERVICE COVERAGE: Earnings before interest, taxes, depreciation, and amortization ("EBITDA") at Borrower's fiscal year end divided by the sum of current maturities of long-term debt at year end plus interest expense at year end plus 20% of property and equipment purchased during the calendar year. NEGATIVE COVENANTS: So long as any indebtedness remains outstanding under the Line, the Borrower will not, without the Bank's prior written consent: 1) Pay dividends or distributions; 2) Liquidate, merge or consolidate; 3) Make loans or advances to officers, directors, or shareholders, employees; 4) Guarantee or make a pledge of credit on undertakings of another entity or person; 5) Incur any debt except debt to Bank, trade debt, equipment debt to Bank One under existing or future credit commitments, debt subordinated to bank, and debt under existing capital leases; 6) Create or permit any lien or encumbrance against Borrower's property except those created under the Loan Documents, equipment liens created under equipment debt to Bank One, and liens for existing capital leases. OTHER COVENANTS: 1) Borrower shall maintain all significant depository accounts at Norwest. 2) Borrower shall maintain a minimum of one million dollars each of life insurance on Joseph H. Kiser and David G. Sherman with the Borrower named as the beneficiary. 3) Bank retains the right to conduct annual collateral audits paid by Borrower. Bank has agreed to pay 100% of the cost for a collateral audit to be conducted by no later than October 31, 1999. CONDITIONS OF DEFAULT: Upon the occurrence of any of the following events of default: 1) Default in any payment of interest or principal on the Line when due and continuance thereof for 15 days; or 2) Default in the observance or performance of any agreement of the Borrower herein set forth or in an other agreement between the Bank and the Borrower and continuance thereof for 20 days after written notice by Bank to Borrower; or 3) Default by the Borrower in the payment of any other indebtedness for borrowed money or in the observance or performance of any term, covenant, agreement of the Borrower in any agreement relating to any indebtedness of the Borrower; the effect of which default is to permit the holder of such indebtedness to declare the same due prior to the date fixed for its payment under the terms thereof and failure to cure such default within 30 days; or 4) Any representation or warranty made by the Borrower herein or in any statement or certificate furnished by Borrower is untrue in any material respect; 5) The occurrence of any litigation or governmental proceeding which is pending or threatened against the Borrower, which could have a material adverse effect on the Borrower's financial condition or business and which is not remedied within a reasonable period of time after notice thereof to the Borrower; or 6) The occurrence of any extraordinary situation which gives the Bank reasonable grounds to believe that Borrower may not be able to perform under the Note, the Agreement, or any other documents executed in connection with the Credit. then, or at any time thereafter, unless such an event of default is remedied, the Bank may terminate its commitment to make advances on the Credit and may, by notice in writing to the Borrower, declare the Note to be due and payable, whereupon the Note shall immediately become due and payable. Upon the occurrence of the following events of default: The Borrower becomes insolvent or bankrupt, or makes an appointment for the benefit of creditors or consents to or is subject to the appointment of a custodian, trustee, or receiver for itself, or bankruptcy, reorganization, or liquidation proceedings are instituted by or against the Borrower and, if instituted against it, are consented to by it or remain undismissed for 60 days; then the Bank's commitment to make advances on the Credit shall be automatically terminated and the Note shall automatically become due and payable. Borrower represents that the person signing below is authorized to accept this Agreement and execute the Loan Documents, which will constitute obligations valid and enforceable against the Borrower. Borrower further represents and warrants that all balance sheets, profit and loss statements, and other information furnished to the Bank are true and correct and fairly reflect the financial condition of the Borrower on their effective dates, including contingent liabilities of every type and that Borrower's financial condition has not changed materially and adversely since those dates. We sincerely thank you for your business and look forward to serving your financial needs now and in the future. Sincerely, Norwest Bank Colorado, National Association /s/Derek R. Hewitt Derek R. Hewett Margaret J. Brown Business Banking Representative Vice President Accepted and agreed as of the date first stated above. Vari-L Company, Inc. By:/s/David G. Sherman David G. Sherman President and Chief Executive Officer By:/s/Joseph H. Kiser Joseph H. Kiser Chairman of the Board and Chief Scientific Officer -----END PRIVACY-ENHANCED MESSAGE-----