-----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, Gmb8hENdvcnp9I93Cz0jpOQxAQpyX0emb0u5QC/tx2GTeqwnfkOXizEORQcZdBK6 T3ncisfgOwBnpWg/s2zuOA== 0000950134-01-001327.txt : 20010223 0000950134-01-001327.hdr.sgml : 20010223 ACCESSION NUMBER: 0000950134-01-001327 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20010214 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: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23866 FILM NUMBER: 1542332 BUSINESS ADDRESS: STREET 1: 4895 PEORIA STREET CITY: DENVER STATE: CO ZIP: 80239 BUSINESS PHONE: 3033711560 MAIL ADDRESS: STREET 1: 11101 EAST 51ST AVENUE CITY: DENVER STATE: CO ZIP: 80239 10-Q 1 d84145e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2000 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File No. 0-23866 September 30, 2000 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 No X ------- ------- The number of shares outstanding of each of the issuer's classes of common stock, as of September 30, 2000: Class of Securities Outstanding Securities ------------------- ---------------------- $0.01 par value 7,070,823 shares Common shares 2 VARI-L COMPANY, INC. September 30, 2000 Index Part I. Financial Information Item 1. Financial Statements: Balance Sheets, September 30, 2000 and June 30, 2000 (unaudited) 2 Statements of Operations, three months ended September 30, 2000 and 1999 (unaudited) 3 Statements of Stockholders' Equity, three months ended September 30, 2000 and year ended June 30, 2000 (unaudited) 4 Statements of Cash Flows, three months ended September 30, 2000 and 1999 (unaudited) 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
The unaudited interim financial statements for the three months ended September 30, 1999 included herein have not been reviewed by the Company's independent accountants. The Company has been informed by its independent accountants that they are not able to complete the review procedures required under Statement of Auditing Standards No. 71 for periods prior to June 30, 2000 based on their determination that the internal controls over inventory accounting and management systems prior to June 30, 2000 was not sufficiently reliable to enable them to perform review procedures on the Company's inventory. Part II. Other Information Item 1 Legal Proceedings 18 Item 2 Changes in Securities 19 Item 3 Defaults Upon Senior Securities 19 Item 4 Submission of Matters to a Vote of Security Holders 19 Item 5 Other Information 19 Item 6 Exhibits and Reports on Form 8-K 20
1 3 PART I FINANCIAL INFORMATION VARI-L COMPANY, INC. Balance Sheets (unaudited)
SEPTEMBER 30, JUNE 30, 2000 2000 ------------- ----------- ASSETS Current assets: Cash and cash equivalents $ 7,063,579 11,030,293 Trade accounts receivable, less allowance for doubtful accounts of $204,650 and $174,634, respectively 7,716,580 5,881,280 Inventories (note 3) 7,268,252 7,434,660 Prepaid expenses and other 612,574 189,485 ------------ ----------- Total current assets 22,660,985 24,535,718 ------------ ----------- Property and equipment: Machinery and equipment 10,093,884 9,845,402 Furniture and fixtures 763,983 720,971 Leasehold improvements 1,562,282 1,538,575 ------------ ----------- 12,420,149 12,104,948 Less accumulated depreciation and amortization 5,173,612 4,767,159 ------------ ----------- Net property and equipment 7,246,537 7,337,789 Intangible and other assets 698,912 697,185 ------------ ----------- Total assets $ 30,606,434 32,570,692 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft $ 806,752 320,798 Trade accounts payable 2,892,994 4,182,270 Accrued compensation 1,843,963 1,499,890 Other accrued expenses 284,393 225,105 Notes payable and current installments of long-term obligations (note 4) 9,978,077 11,566,386 ------------ ----------- Total current liabilities 15,806,179 17,794,449 Long-term obligations (note 4) 98,407 91,666 ------------ ----------- Total liabilities 15,904,586 17,886,115 ------------ ----------- Stockholders' equity Common stock, $.01 par value, 50,000,000 shares authorized; 7,070,823 and 7,070,423 shares issued and outstanding, respectively 70,708 70,704 Additional paid-in capital 40,341,985 40,524,974 Unamortized stock compensation cost (3,916,912) (4,318,371) Accumulated deficit (21,793,933) (21,592,730) ------------ ----------- Total stockholders' equity 14,701,848 14,684,577 ------------ ----------- Commitments and contingencies (note 7) Total liabilities and stockholders' equity $ 30,606,434 32,570,692 ============ ===========
See accompanying notes to financial statements. 2 4 VARI-L COMPANY, INC. Statements of Operations (unaudited)
THREE MONTHS THREE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 ------------- ------------------- (restated - note 2) Net sales $ 11,495,129 6,525,555 Cost of goods sold 6,137,794 3,452,136 ------------ ------------ Gross profit 5,357,335 3,073,419 ------------ ------------ Operating expenses: Selling 1,067,381 805,861 General and administrative 1,577,947 851,357 Research and development 1,513,647 1,220,671 Expenses relating to accounting restatements and the related shareholder litigation (note 6) 1,248,066 -- ------------ ------------ Total operating expenses 5,407,041 2,877,889 ------------ ------------ Operating profit (loss) (49,706) 195,530 Other income (expense): Interest income 157,706 56,891 Interest expense (329,134) (210,324) Other, net 19,931 382 ------------ ------------ Total other income (expense) (151,497) (153,051) ------------ ------------ Net income (loss) $ (201,203) 42,479 ============ ============ Basic earnings (loss) per share $ (0.03) 0.01 ============ ============ Basic weighted average shares outstanding 7,070,702 5,667,523 ============ ============ Diluted earnings (loss) per share $ (0.03) 0.01 ============ ============ Diluted weighted average shares outstanding 7,070,702 6,150,984 ============ ============
See accompanying notes to financial statements. 3 5 VARI-L COMPANY, INC. Statements of Stockholders' Equity Six months ended June 30, 2000 and three months ended September 30, 2000 (unaudited)
Unamortized Common stock Additional Stock Total ------------------------- paid-in compensation Accumulated Stockholders' Shares Amount capital cost deficit equity ----------- ----------- ----------- ------------ ----------- ------------- Balance, December 31, 1999 6,945,483 $ 69,455 40,449,692 (5,732,611) (20,413,478) 14,373,058 Stock options exercised 116,569 1,165 930,335 -- -- 931,500 Common stock issued under employee stock purchase plan 7,471 75 50,130 -- -- 50,205 Common stock issued under stock award plan 900 9 16,448 -- -- 16,457 Stock options forfeited -- -- (921,631) 921,631 -- -- Amortization of stock compensation cost -- -- -- 492,609 -- 492,609 Net loss -- -- -- -- (1,179,252) (1,179,252) ----------- ----------- ----------- ------------ ----------- ------------- Balance, June 30, 2000 7,070,423 $ 70,704 40,524,974 (4,318,371) (21,592,730) 14,684,577 =========== =========== =========== ============ =========== ============= Common stock issued under stock award plan 400 4 7,931 -- -- 7,935 Stock options forfeited -- -- (190,920) 190,920 -- -- Amortization of stock compensation cost -- -- -- 210,539 -- 210,539 Net loss -- -- -- -- (201,203) (201,203) ----------- ----------- ----------- ------------ ----------- ------------- Balance, September 30, 2000 7,070,823 $ 70,708 40,341,985 (3,916,912) (21,793,933) 14,701,848 =========== =========== =========== ============ =========== =============
See accompanying notes to financial statements. 4 6 VARI-L COMPANY, INC. Statements of Cash Flows Three months ended September 30, 2000 and 1999 (unaudited)
THREE MONTHS THREE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 ------------- ------------------ (restated - note 2) Net income (loss) $ (201,203) 42,479 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation of property and equipment 406,453 331,627 Amortization of intangible assets 6,649 4,253 Common stock issued under profit sharing and stock award plans 7,935 4,276 Amortization of stock compensation 210,539 27,540 Changes in operating assets and liabilities: Trade accounts receivable, net (1,835,300) (691,786) Inventories, net 166,408 505,846 Prepaid expenses and other current assets (423,089) (22,653) Trade accounts payable (1,289,276) (174,521) Accrued compensation 344,073 539,789 Other accrued expenses 59,288 54,167 ------------- ------------------ Total adjustments (2,346,320) 578,538 ------------- ------------------ Cash provided by (used in) operating activities (2,547,523) 621,017 Cash flows from investing activities: Purchases of property and equipment (280,901) (260,656) Increase in other assets (8,376) (9,716) ------------- ------------------ Cash used in investing activities (289,277) (270,372) ------------- ------------------ Cash flows from financing activities: Increase (decrease) in bank overdraft 485,954 (643,462) Proceeds from notes payable -- 677,466 Payments of notes payable (1,600,000) (584,375) Proceeds from long-term obligations -- 26,970 Payments of long-term obligations (15,868) (7,486) Proceeds from warrants exercised -- 76,000 Proceeds from stock options exercised -- 1,640,698 ------------- ------------------ Cash provided by (used in) financing activities (1,129,914) 1,185,811 ------------- ------------------ Increase (decrease) in cash and cash equivalents (3,966,714) 1,536,456 Cash and cash equivalents at beginning of period 11,030,293 4,116,918 ------------- ------------------ Cash and cash equivalents at end of period $ 7,063,579 5,653,374 ============= ================== Supplemental disclosures of cash flow information: Cash paid for interest $ 477,145 154,136 ============= ================== Cash paid for income taxes $ -- -- ============= ==================
See accompanying notes to financial statements. 5 7 VARI-L COMPANY, INC. Notes to Financial Statements Three months ended September 30, 2000 and 1999 (1) BASIS OF PRESENTATION The accompanying financial statements of the Company have been prepared without audit. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Transition Report on Form 10-K/T for the period ended June 30, 2000. In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations for the periods presented. Interim results of operations for the three months ended September 30, 2000 are not necessarily indicative of operating results that can be expected for the full year. The Company's Board of Directors approved a change in the Company's year end to June 30, effective in 2000. (2) RESTATEMENT OF FINANCIAL STATEMENTS In late 1999, the Securities and Exchange Commission commenced an investigation into the Company's accounting and reporting practices in recent years. Subsequently, the Company announced that its previously issued financial statements should not be relied upon and that it would be amending its 1997 and subsequent financial statements. It also announced that the Audit Committee of the Board of Directors was conducting an investigation into the Company's accounting policies and practices which may result in further adjustments to the Company's financial statements. The preliminary results of the Company's investigation were reported to the Audit Committee in September 2000, and on September 12, 2000, the Company announced that it would restate its previously issued financial statements, reducing stockholders' equity by $30 to $35 million. That estimate included write-downs of assets and changes in liabilities identified in a preliminary report from an independent accounting firm engaged by the Audit Committee. Thereafter, the Company began a process of restating its previously issued financial statements. The adjustments to restate the Company's previously issued financial statements are numerous, however, the principal reasons for the restatement adjustments are summarized below. The restatement adjustments reduced previously reported net income for the three months ended September 30, 1999 by $922,521. (a) ACCOUNTS RECEIVABLE An adjustment was recorded to increase the allowance for doubtful accounts and to write-off uncollectible accounts receivable. (b) INVENTORIES Inventories were adjusted to record work-in-process and finished goods inventory based on the actual cost of raw materials used in the manufacturing process and the labor and associated overhead required to complete the manufacturing processes. (Continued) 6 8 VARI-L COMPANY, INC. Notes to Financial Statements Three months ended September 30, 2000 and 1999 Inventories were also adjusted to increase the allowance for excess and obsolete raw materials and finished goods inventories. Inventories were further adjusted to eliminate amounts recorded for products that had failed to meet the customer specifications which had been returned to the Company. (c) PREPAID EXPENSES Prepaid expenses were adjusted to record certain amounts as period expenses. (d) PROPERTY AND EQUIPMENT Property and equipment balances were adjusted to charge to expense amounts capitalized relating to finished unit prototypes, and to reverse the related depreciation expense. Property and equipment was also adjusted to eliminate amounts identified as labor and related overhead incurred to install machinery. The amounts capitalized were not supported by time records of the individuals involved in the installations and the overhead burden rate applied to payroll costs was not supported by any analysis of the underlying costs. Depreciation expense was adjusted for the revised carrying values. Adjustments were also made to eliminate certain amounts that should be recorded as period costs. Depreciation expense was adjusted for the revised carrying values. Finally, adjustments were made to increase depreciation to reflect a decrease in the estimated useful lives and salvage values of property and equipment. (e) INTANGIBLE AND OTHER ASSETS Adjustments were recorded to charge to expense labor and overhead costs incurred to develop new products and apply for patents which had previously been capitalized. Other assets were also reduced for labor and overhead and third party costs incurred in connection with the Company's ISO registration which should have been expensed as incurred. Additionally, adjustments were recorded to eliminate certain costs recorded as other assets which should have been expensed as period costs. (f) ACCRUED EXPENSES Accrued expenses were adjusted to record salaries, wages, bonuses and related payroll expenses in the proper period. Certain expenses were previously not accrued in the period to which they relate. (Continued) 7 9 VARI-L COMPANY, INC. Notes to Financial Statements Three months ended September 30, 2000 and 1999 (g) DEFERRED INCOME TAXES The tax effect of the above adjustments was recorded, which reduced the net deferred tax liability to zero. A net deferred tax asset was not recorded, as management believes that it is not more likely than not that the deferred tax assets will be realized. (h) STOCK COMPENSATION EXPENSE Stock compensation expense was recorded for options granted to employees during 1999, with exercise prices below the market price on the respective grant dates, for which compensation expense was not previously recognized. The income statements for the three months ended September 30, 1999 as previously reported and as restated are as follows:
THREE MONTHS ENDED SEPTEMBER 30, 1999 THREE MONTHS ENDED (AS PREVIOUSLY SEPTEMBER 30, 1999 REPORTED) (AS RESTATED) ------------------ ------------------ Net sales $ 6,594,000 6,525,555 Cost of goods sold 3,124,000 3,452,136 ------------------ ------------------ Gross profit 3,470,000 3,073,419 ------------------ ------------------ Operating expenses: Selling 677,000 805,861 General and administrative 606,000 851,357 Research and development 451,000 1,220,671 Expenses relating to accounting restatements and the related shareholder litigation -- -- ------------------ ------------------ Total operating expenses 1,734,000 2,877,889 ------------------ ------------------ Operating income 1,736,000 195,530 Other income (expense) (176,000) (153,051) ------------------ ------------------ Income (loss) before income taxes 1,560,000 42,479 Income tax expense (595,000) -- ------------------ ------------------ Net income (loss) $ 965,000 42,479 ================== ================== Income per share - basic $ 0.17 0.01 ================== ================== Income per share - diluted $ 0.16 0.01 ================== ==================
(Continued) 8 10 VARI-L COMPANY, INC. Notes to Financial Statements Three months ended September 30, 2000 and 1999 (3) INVENTORIES Inventories, net of allowances for excess and obsolete items, consist of the following:
SEPTEMBER 30, JUNE 30, 2000 2000 ------------- ---------- Finished goods $ 351,496 363,549 Work-in-process 1,433,225 1,226,984 Raw materials 5,483,531 5,844,127 ------------- ---------- $ 7,268,252 7,434,660 ============= ==========
(4) NOTES PAYABLE Notes payable and long-term obligations consist of the following:
SEPTEMBER 30, JUNE 30, 2000 2000 ------------- ----------- Notes payable under Revolving Credit Facility $ 9,900,000 11,500,000 Promissory notes 60,484 66,756 Capital leases 116,000 91,296 ------------- ----------- 10,076,484 11,658,052 Less current installments 9,978,077 11,566,386 ------------- ----------- Long-term obligations $ 98,407 91,666 ============= ===========
On March 24, 2000, the Company entered into a $20,000,000 Revolving Credit Facility (the "Loan Agreement"). The Loan Agreement provided for interest based on the prime rate or LIBOR plus a margin, and was originally due September 30, 2002. Interest was payable on the line of credit at an annual rate of 11% at September 30, 2000. The Company pays an annual commitment fee of .15% of the average unused portion of the line, payable quarterly. The loan is secured by substantially all of the Company's accounts receivable, inventories and equipment. Subsequent to March 24, 2000, it was determined that the Company was in default of certain covenants under the Loan Agreement from loan inception. As of September 30, 2000, the Company continued to be in default of certain covenants under the Loan Agreement. Upon default by the Company the lender may call the loan at any time. On September 28, 2000, the Company entered into a forbearance agreement with the bank which, among other matters delayed the bank's right to accelerate payment of the facility to December 15, 2000. On December 15, 2000, the Company entered into a second forbearance agreement which delayed the bank's right to accelerate payment of the facility to March 31, 2001. Accordingly, the amounts outstanding as of September 30, 2000 have (Continued) 9 11 VARI-L COMPANY, INC. Notes to Financial Statements Three months ended September 30, 2000 and 1999 been classified as current. The second forbearance agreement requires the Company to maintain a borrowing base of at least $8,800,000, calculated based on a formula relating to inventories, accounts receivable aged less than 90 days, and equipment. The Company was also required to reduce the amount outstanding under the facility to $8,800,000 on December 15, 2000. The second forbearance agreement also increased the interest rate to the prime rate plus 2% through March 31, 2001. The Company is seeking a new lender to provide a long-term credit facility with more favorable terms and more capacity than is available under the forbearance agreement with its current lender. There can be no assurance, however, that the Company will be successful in obtaining a new lender or, if it is not successful, in negotiating additional forbearance agreements with its current lender. (5) INCOME TAXES For the three months ended September 30, 2000, the Company recorded no provision for federal or state income taxes since a valuation allowance was provided for the income tax benefit of the net operating losses incurred during those periods. For the three months ended September 30, 1999, the provision for income taxes was offset by a reduction in the valuation allowance for net deferred tax assets. (6) EXPENSES OF ACCOUNTING RESTATEMENTS AND RELATED MATTERS As discussed in note 2, early in 2000, management of the Company commenced efforts to restate its previously issued financial statements after being notified by the Securities and Exchange Commission (the "Commission") that the Commission was investigating its accounting and reporting practices. Certain costs incurred in conjunction with these efforts have been separately classified on the Company's statements of operations as "expenses relating to accounting restatements and the related shareholder litigation." Expenses included in this classification include the cost of external counsel for services provided in connection with shareholder lawsuits and the Commission's investigation of the Company, the cost of certain consultants and temporary labor hired to assist in the accounting restatements, and the reimbursements to current and former employees of the Company for their legal fees and expenses. (7) LITIGATION, COMMITMENTS AND CONTINGENCIES LITIGATION The Commission is currently investigating the Company to determine whether there were violations of the federal securities laws by the Company or any of its officers, directors or employees. The Company believes that the Commission's investigation is focused on the Company's prior financial reporting and its accounting practices and procedures. The Company has been providing documents and other information requested by the Commission staff in the course of its investigation. The Commission has not brought an action against the Company, but it may do so in the future. In such an event, the Commission may seek injunctive or other relief from the Company. A number of private shareholder class actions alleging violations of federal securities laws were filed against the Company in the U.S. District Court for the District of Colorado beginning in (Continued) 10 12 VARI-L COMPANY, INC. Notes to Financial Statements Three months ended September 30, 2000 and 1999 June 2000. On August 3, 2000, all of these class actions were consolidated into a single action. Lead counsel for the representatives of the putative plaintiff class have been appointed but, pursuant to the court's order the Company's obligation to respond to the complaints has been deferred until such time as the lead plaintiff files an amended complaint. As of the date hereof, an amended complaint has not yet been filed and a class has not been certified. The consolidated class action complaints were filed on behalf of persons who purchased shares of the Company's stock between 1997 and sometime in 2000 (the "Class Period"). All of the complaints name the Company; David G. Sherman, the Company's former President and Chief Executive Officer; Joseph H. Kiser, the Company's Chief Scientific Officer and Jon L. Clark, the Company's former Chief Financial Officer, as defendants. Some of the complaints also name Derek L. Bailey, the Company's Executive Vice President of Sales and Marketing, as an additional defendant. The various complaints allege that the Company's financial statements for the years 1997, 1998 and 1999 did not conform to generally accepted accounting principles and were materially false and misleading. The complaints allege violations of Section 10(b) of the Securities Exchange Act of 1934 and seek to impose "control person" liability on the individual defendants pursuant to Section 20(a) of the Exchange Act. The complaints generally seek compensatory damages in an unspecified amount, attorneys' fees and costs of suit, equitable and injunctive relief as permitted by law, including the imposition of a constructive trust on the assets of the individual defendants, and any other relief the court deems just and proper. Some of the complaints allege that the individual defendants sold stock throughout the Class Period as part of an alleged scheme to defraud the public. Some complaints specifically allege that the Company instituted a policy of "bill and hold," in which the Company would book and report revenue for the sale of its products even though the Company retained physical possession of the product. Some complaints also cite a May 18, 2000 Denver newspaper article in which Mr. Sherman stated that he believed that the restatements would have little effect on the Company's 1998 and 1999 earnings. The parties have had preliminary discussions regarding the possibility of settlement. There can be no assurance, however, that a settlement acceptable to the Company can be reached or that any settlement reached will not have a material adverse effect on the Company. In addition, the individual defendants in the class action may have claims against the Company for indemnification of their cost of defense, which claims may be material. On August 4, 2000, a shareholder derivative action was filed purportedly on behalf of the Company in Colorado state court in Denver. The Company is named in that action as a nominal defendant. A shareholder derivative action is a state law action in which shareholders assert claims against third parties on behalf of the corporation. The derivative complaint alleges some of the same facts as were asserted in the class actions in federal court and claims that those facts demonstrate that the officers named in the class actions, as well as the Company's directors, breached their fiduciary duties to the Company and the shareholders in connection with the Company's erroneous reporting of its financial results. (Continued) 11 13 VARI-L COMPANY, INC. Notes to Financial Statements Three months ended September 30, 2000 and 1999 The Company and the other defendants have moved to dismiss the derivative action. In its motion, the Company argues that the plaintiffs have not substantiated the allegations for a court to allow the derivative plaintiffs to bypass the Board of Directors in pursuing claims for the benefit of the Company. The Company believes that the derivative plaintiffs should not be permitted to usurp the function of the Board of Directors under the present circumstances. These circumstances include the internal investigation of the prior accounting irregularities by the Audit Committee of the Board of Directors, the retention of an independent accounting firm to assist the Committee with that investigation, the termination of the employment of the Company's former President, Chief Financial Officer and Controller, the installation of a new management team, the retention of new independent accountants, and the reformation of the Company's Board of Directors to exclude all officers and employees from the Board. The court has not yet ruled on the motion to dismiss. The Company is unable to reasonably estimate the possible loss associated with these matters. OTHER The Company is a party to other legal proceedings and claims in the ordinary course of its business. The Company believes that the outcome of these other matters will not have a material adverse effect on its financial condition, results of operations or liquidity. 12 14 VARI-L COMPANY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations for the Three Months Ended September 30, 2000 Compared To Three Months Ended September 30, 1999 Net Sales Net sales for the three months ended September 30, 2000 increased 76.2% to $11,495,129 compared with $6,525,555 for the three months ended September 30, 1999. This improvement primarily reflects increased demand for commercial signal source products. Revenue from commercial signal source products was $9,342,909 for the three months ended September 30, 2000, a 94.2% increase from $4,810,279 for the three months ended September 30, 1999. The three months ended September 30, 2000 included a significant end-of-life production run generating net sales of approximately $809,285. Revenue from all other products was $1,342,935 for the three months ended September 30, 2000, a 21.7% decrease from $1,715,276 for the three months ended September 30, 1999. Gross Profit Gross profit for the three months ended September 30, 2000 increased 74.3% to $5,357,335, or 46.6% of net sales, compared with $3,073,419, or 47.1% of net sales, for the three months ended September 30, 1999. Included in cost of goods sold for the three months ended September 30, 2000 is a charge of $545,583 for obsolete and excess inventory, compared to $14,326 for the three months ended September 30, 1999. The lower gross profit margin in the 2000 period also reflects a decrease in average net selling prices of the Company's products, a higher ratio of material costs to net sales, due in part to the Company's decision to pay higher costs in return for expedited delivery of raw materials, as well as the above noted provision, offset by the higher than normal margin on the end-of-life production run. Operating Expenses Included in operating expenses are charges for non-cash stock compensation. The charges for stock compensation principally relate to amortization of deferred stock compensation attributable to stock options granted at less than the market price of the common stock on the date of the grant. Of the $210,539 total amount of stock compensation recorded for the three months ended September 30, 2000, $191,017 relates to options granted in December, 1999. In December, 2000, these options were re-priced at $34.50 per share, the market price of the common stock at the date of the original grant. As a result, the remaining unamortized stock compensation associated with these option grants was reversed in December 2000. The following table summarizes stock compensation expense included in each category of operating expenses: 13 15
THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 ------------- ------------- Selling: Non-cash stock compensation $ 33,687 4,407 Other selling expenses 1,033,694 801,454 ------------- ------------- Total selling expenses $ 1,067,381 805,861 ============= ============= General and administrative: Non-cash stock compensation $ 78,402 10,255 Other general and administrative expenses 1,499,545 841,102 ------------- ------------- Total general and administrative expenses $ 1,577,947 851,357 ============= ============= Research and development: Non-cash stock compensation $ 98,450 12,878 Other research and development expenses 1,415,197 1,207,793 ------------- ------------- Total research and development expenses $ 1,513,647 1,220,671 ============= =============
Selling Expenses Selling expenses for the three months ended September 30, 2000 increased 32.5% to $1,067,381, or 9.3% of net sales, compared with $805,861, or 12.3% of net sales, for the three months ended September 30, 1999. Excluding non-cash stock compensation, selling expenses for the three months ended September 30, 2000 increased 29.0% to $1,033,694, or 9.0% of net sales, compared with $801,454 or 12.3% of net sales for the three months ended March 31, 1999. The increase in selling expenses was primarily attributable to higher commissions paid to manufacturer's representatives, as well as an increase in stock compensation expense. General and Administrative Expenses General and administrative expenses for the three months ended September 30, 2000 increased 85.3% to $1,577,947, or 13.7% of net sales, compared with $851,357, or 13.0% of net sales, for the three months ended September 30, 1999. Excluding non-cash stock compensation, general and administrative expenses for the three months ended September 30, 2000 increased 78.3% to $1,499,545, or 13.0% of net sales, compared with $841,102, or 12.9% of net sales for the three months ended September 30, 1999. The increase was primarily attributable to higher amounts paid to independent contractors for interim management and accounting services, stay bonuses paid to employees, as well as an increase in stock compensation expense. Research and Development Expenses Research and development expenses for the three months ended September 30, 2000 increased 24.0% to $1,513,647, or 13.2% of net sales, compared with $1,220,671, or 18.7% of net sales, for the three months ended September 30, 1999. Excluding non-cash compensation, research and development expenses for the three months ended September 30, 2000 increased 17.2% to $1,415,197, or 12.3% of net sales, compared with $1,207,793, or 18.5% of net sales, for the three months ended September 30, 1999. The increase was primarily attributable to higher salaries and benefits for both current and new employees, as well as an increase in stock compensation expense. 14 16 Expenses Relating to Accounting Restatements and the Related Shareholder Litigation Expenses relating to the accounting restatements and the related shareholder litigation for the three months ended September 30, 2000, were $1,248,066. These expenses include the cost of external counsel for services provided in connection with shareholder lawsuits and the Securities and Exchange Commission investigation of the Company, certain consultants and temporary labor hired to assist in the accounting restatements, and reimbursements to current and former employees of the Company for their legal fees and expenses. Other Income (Expense) Interest income increased 177.2% to $157,706 for the three months ended September 30, 2000 compared with $56,891 for the three months ended September 30, 1999. The increase was attributable to higher interest earnings on substantially larger cash balances available for investing. Interest expense and other, net, increased 47.3% to $309,203 for the three months ended September 30, 2000 compared with $209,942 for the three months ended September 30, 1999. The increase was primarily attributable to interest and fees associated with the forbearance agreement, along with higher interest rates on the Company's credit facility. Net Income (Loss) and Income (Loss) Per Share The net loss for the three months ended September 30, 2000 was $201,203, or $0.03 per share, compared with net income of $42,479, or $0.01 per share, for the three months ended September 30, 1999. Excluding the impact of stock compensation, which is a non-cash charge, and expenses relating to accounting restatements (which management believes is nonrecurring), net income in the three months ended September 30, 2000 would have been $1,257,402, or $0.18 per share (basic and diluted), compared with net income of $70,019, or $0.01 per share, for the three months ended September 30, 1999. Certain common stock equivalents were dilutive for the purpose of calculating earnings per share for the three months ended September 30, 1999. Diluted earnings per share was $0.01 per share for the three months ended September 30, 1999. Liquidity and Capital Resources The Company's working capital at September 30, 2000 was $16,754,806, excluding notes payable under the Company's credit facility with its current bank of $9,900,000. Including the notes payable, working capital at September 30, 2000 was $6,854,806. Working capital at September 30, 2000 includes cash and cash equivalents of $7,063,579. Working capital at June 30, 2000, excluding notes payable under the Company's credit facility with its current bank of $11,500,000, was $18,241,269. Including the notes payable, working capital at June 30, 2000 was $6,741,269. Working capital at June 30, 2000 includes cash and cash equivalents of $11,030,293. Cash used in operating activities was $2,547,523 for the three months ended September 30, 2000. Cash provided by net loss, adjusted for non-cash charges, was $430,373. This cash provided was offset primarily by increased accounts receivable related to higher net sales volume, increased prepaid expenses and other current assets and a reduction in accounts payable, partially offset by lower accrued compensation and net inventory levels. Cash provided by operating activities was $621,017 for the three months ended September 30, 1999. Net income adjusted for non-cash charges was $410,175. Cash provided by a decrease in inventories and an increase in accrued compensation and other accrued expenses was partially offset by an increase in accounts receivable due to higher net sales volume and a decrease in accounts payable. Cash used in investing activities was $289,277 for the three months ended September 30, 2000 and was principally for capital expenditures. The capital expenditures for the three months ended September 30, 15 17 2000 related to additional production and test equipment to increase manufacturing capacity. Cash used in investing activities for the three months ended September 30, 1999 was $270,372 and was principally for capital expenditures. The capital expenditures for the three months ended September 30, 1999 primarily related to additional production and test equipment to increase manufacturing capacity and for leasehold improvements to expand the Company's manufacturing and engineering space. Cash used in financing activities was $1,129,914 for the three months ended September 30, 2000. Repayments on notes payable and payments on long-term obligations were partially offset by an increase in the bank overdraft. Cash provided by financing activities for the three months ended September 30, 1999 were $1,185,811, including proceeds from stock warrants and stock options exercised of $1,716,698 and net additional borrowings of $112,575, partially offset by a decrease in the bank overdraft of $643,462. Revolving Credit Facility On March 24, 2000, the Company entered into a $20,000,000 Revolving Credit Facility (the "Loan Agreement"). The Loan Agreement provided for interest based on the prime rate or LIBOR plus a margin, and was originally due September 30, 2002. Interest was payable on the line of credit at an annual rate of 11% at September 30, 2000. The Company pays an annual commitment fee of .15% of the average unused portion of the line, payable quarterly. The loan is secured by substantially all of the Company's accounts receivable, inventories and equipment. Proceeds from the Loan Agreement were used to repay the amount outstanding under the prior credit facilities, which included a line of credit, a term loan, and a revolving equipment term loan. Interest on the loans ranged from 6.10% to 7.75% at December 31, 1999. The loans were secured by receivables, inventory, and property and equipment. Subsequent to March 24, 2000, it was determined that the Company was in default of certain covenants under the Loan Agreement from loan inception. As of September 30, 2000, the Company continued to be in default of certain covenants under the Loan Agreement. Upon default by the Company the lender may call the loan at any time. On September 28, 2000, the Company entered into a forbearance agreement with the bank which, among other matters delayed the bank's right to accelerate payment of the facility to December 15, 2000. On December 15, 2000, the Company entered into a second forbearance agreement which delayed the bank's right to accelerate payment of the facility to March 31, 2001. Accordingly, the amounts outstanding as of September 30, 2000 have been classified as current. The second forbearance agreement requires the Company to maintain a borrowing base of at least $8,800,000, calculated based on a formula relating to inventories, accounts receivable aged less than 90 days, and equipment. The Company was also required to reduce the amount outstanding under the facility to $8,800,000 on December 15, 2000. The second forbearance agreement also increased the interest rate to the prime rate plus 2% through March 31, 2001. The Company is seeking a new lender to provide a long-term credit facility with more favorable terms and additional capacity than is available under the forbearance agreement. There can be no assurance, however, that the Company will be successful in obtaining a new lender or, if it is not successful, in negotiating additional forbearance agreements with its current lender. Even if the Company is successful in obtaining a new lender or negotiating an additional forbearance agreement with its current lender, there can be no assurance that the terms of such an agreement would provide adequate financing for additional equipment and working capital required to support the Company's current growth plans. Forward-Looking Statements Some of the statements contained in this report 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 overall market for wireless communications products, the success of the specific products into which the 16 18 Company's products are integrated, governmental action relating to wireless communications, licensing and regulation, the accuracy of the Company's 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, the outcome of pending and threatened litigation and regulatory actions, and the Company's ability to refinance its loan agreement or obtain additional forbearance agreements, as well as other factors. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk, including the effects of adverse changes in interest rates. The Company's exposure to changes in interest rates results from borrowings with floating interest rates. At the present time, the Company has no financial instruments in place to manage the impact of changes in interest rates. As of September 30, 2000, the Company had notes payable outstanding under a bank credit facility of $9,900,000 with an interest rate of 11%. The Company's second forbearance agreement with its lender increased the interest rate to the prime rate plus 2% through March 31, 2001. The notes are due March 31, 2001, under the current forbearance agreement with the bank. 17 19 VARI-L COMPANY, INC. PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The U.S. Securities and Exchange Commission (the "Commission") is currently investigating the Company to determine whether there were violations of the federal securities laws by the Company or any of its officers, directors, or employees (the "SEC Investigation"). The Company believes that the SEC Investigation is focused on the Company's prior financial reporting and its accounting practices and procedures. The Company has been providing documents and other information requested by the Commission staff in the course of its investigation. The Commission has not brought an action against the Company, but it may do so in the future. In such an event, the Commission may seek injunctive or other relief from the Company. A number of private shareholder class actions alleging violations of federal securities laws were filed against the Company in the U.S. District Court for the District of Colorado beginning in June 2000. On August 3, 2000, all of these class actions were consolidated into a single action, Rasner v. Vari-L Company, Inc., et al., Civ. No. 00-S-1181, U.S.D.C., D. Colo. Lead counsel for the representatives of the putative plaintiff class have been appointed but, pursuant to the court's order the Company's obligation to respond to the complaints has been deferred until such time as the lead plaintiff files an amended complaint. As of the date hereof, an amended complaint has not yet been filed and a class has not been certified. The consolidated class action complaints were filed on behalf of persons who purchased shares of the Company's stock between 1997 and sometime in 2000 (the "Class Period"). All of the complaints name the Company, David G. Sherman, the Company's former President and Chief Executive Officer, Joseph H. Kiser, the Company's Chief Scientific Officer and Jon L. Clark, the Company's former Chief Financial Officer, as defendants. Some of the complaints also name Derek L. Bailey, the Company's Executive Vice President of Sales and Marketing, as an additional defendant. The various complaints allege that the Company's financial statements for the years 1997, 1998 and 1999 did not conform to generally accepted accounting principles and were materially false and misleading. The complaints allege violations of Section 10(b) of the Securities Exchange Act of 1934 and seek to impose "control person" liability on the individual defendants pursuant to Section 20(a) of the Exchange Act. The complaints generally seek compensatory damages in an unspecified amount, attorneys' fees and costs of suit, equitable and injunctive relief as permitted by law, including the imposition of a constructive trust on the assets of the individual defendants, and any other relief the court deems just and proper. Some of the complaints allege that the individual defendants sold stock throughout the Class Period as part of an alleged scheme to defraud the public. Some complaints specifically allege that the Company instituted a policy of "bill and hold," in which the Company would book and report revenue for the sale of its products even though the Company retained physical possession of the product. Some complaints also cite a May 18, 2000 Denver newspaper article in which Mr. Sherman stated that he believed that the restatements would have little effect on the Company's 1998 and 1999 earnings. The parties have had preliminary discussions regarding the possibility of settlement. There can be no assurance, however, that a settlement acceptable to the Company can be reached or that any settlement reached will not have a material adverse effect on the Company. In addition, the individual defendants in the class action may have claims against the Company for indemnification of their cost of defense, which claims may be material. 18 20 On August 4, 2000, a shareholder derivative action was filed purportedly on behalf of the Company in Colorado state court in Denver, captioned Ritter v. Kiser, et al., No. 00-CV-6001, Colo. Dist. Ct., Denver. The Company is named in that action as a nominal defendant. A shareholder derivative action is a state law action in which shareholders assert claims against third parties on behalf of the corporation. The derivative complaint alleges some of the same facts as were asserted in the class actions in federal court and claims that those facts demonstrate that the officers named in the class actions, as well as the Company's directors, breached their fiduciary duties to the Company and the shareholders in connection with the Company's erroneous reporting of its financial results. The Company and the other defendants have moved to dismiss the derivative action. In its motion, the Company argues that the plaintiffs have not substantiated the allegations for a court to allow the derivative plaintiffs to bypass the Board of Directors in pursuing claims for the benefit of the Company. The Company believes that the derivative plaintiffs should not be permitted to usurp the function of the Board of Directors under the present circumstances. These circumstances include the internal investigation of the prior accounting irregularities by the Audit Committee of the Board of Directors, the retention of KPMG LLP to assist the Committee with that investigation, the termination of the employment of the Company's former President, Chief Financial Officer and Controller, the installation of a new management team, the retention of KPMG LLP as the Company's new independent accountants, and the reformation of the Company's Board of Directors to exclude all officers and employees from the Board. The court has not yet ruled on the motion to dismiss. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES On March 24, 2000, the Company entered into a $20,000,000 Revolving Credit Facility (the "Loan Agreement"). Subsequent to that date, it was determined that the Company was in default of certain covenants under the Loan Agreement from inception of the loan. As of September 30, 2000, the Company continued to be in default of certain covenants under the Loan Agreement. Upon default by the Company, the lender may call the loan at any time. On September 28, 2000, the Company entered into a forbearance agreement with the lender that, among other matters, delayed the lender's right to accelerate payment of the loan to December 15, 2000. On December 15, 2000, the Company entered into a second forbearance agreement that delayed the lender's right to accelerate payment of the loan to March 31, 2001. Accordingly, the amounts outstanding as of September 30, 2000 have been classified as current. The second forbearance agreement requires the Company to maintain a borrowing base of at least $8,800,000, calculated using a formula based on inventories, accounts receivable aged less than 90 days, and equipment. The Company was required to reduce the amount outstanding under the loan to $8,800,000 on December 15, 2000. The second forbearance agreement also increased the interest rate to the prime rate plus 2% through March 31, 2001. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. 19 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K A report on Form 8-K dated July 5, 2000 under Item 4 was filed with the Commission on July 12, 2000. An amendment to the Form 8-K dated July 5, 2000 on Form 8-K/A was filed with the Commission on July 20, 2000. A report on Form 8-K dated August 1, 2000 under Item 5 was filed with the Commission on August 11, 2000. A report on Form 8-K dated August 2, 2000 under Item 5 was filed with the Commission on September 1, 2000. A report on Form 8-K dated September 12, 2000 under Item 4 was filed with the Commission on September 15, 2000. A report on Form 8-K dated September 29, 2000 under Item 5 was filed with the Commission on October 2, 2000. No financial statements were filed with any of the foregoing reports. 20 22 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: February 14, 2001 By: /s/ Richard P. Dutkiewicz ------------------------- ---------------------------------- Richard P. Dutkiewicz, Vice President of Finance and Chief Financial Officer 21 23 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 Financial Data Schedule
EX-27 2 d84145ex27.txt FINANCIAL DATA SCHEDULE
CT 3-MOS JUN-30-2001 JUL-01-2000 SEP-30-2000 30,606,434 0 0 70,708 14,631,140 30,606,434 11,495,129 0 (201,203) 0 0 0 (201,203) (0.03) (0.03)
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