-----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, M2cQaSDvfBtWBWe7sgg2seNrLh03CHkv5VRdEiV3rvrzot91E+oKzzvjpPon3/Y+ AHjVHYTPbPQNxy5A4mFx1w== 0000950134-01-001400.txt : 20010223 0000950134-01-001400.hdr.sgml : 20010223 ACCESSION NUMBER: 0000950134-01-001400 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 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: 1544330 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 d84148e10-q.txt FORM 10-Q FOR QUARTER ENDED DECEMBER 31, 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 December 31, 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 X No --- --- The number of shares outstanding of each of the issuer's classes of common stock, as of December 31, 2000:
Class of Securities Outstanding Securities ------------------- ---------------------- $0.01 par value 7,079,973 shares Common shares
2 VARI-L COMPANY, INC. December 31, 2000 Index Part I. Financial Information Item 1. Financial Statements: Balance Sheets, December 31, 2000 and June 30, 2000 (unaudited) 2 Statements of Operations, three months ended December 31, 2000 and 1999 and six months ended December 31, 2000 and 1999 (unaudited) 3-4 Statements of Stockholders' Equity, six months ended December 31, 2000 and six months ended June 30, 2000 (unaudited) 5 Statements of Cash Flows, six months ended December 31, 2000 and 1999 (unaudited) 6 Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk 20 The unaudited interim financial statements for the three and six months ended December 31, 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 21 Item 2 Changes in Securities 22 Item 3 Defaults upon Senior Securities 22 Item 4 Submission of Matters to a Vote of Security Holders 22 Item 5 Other Information 22 Item 6 Exhibits and Reports on Form 8-K 23
1 3 PART I FINANCIAL INFORMATION VARI-L COMPANY, INC. Balance Sheets (unaudited)
DECEMBER 31, JUNE 30, ASSETS 2000 2000 ------------ ------------ Current assets: Cash and cash equivalents $ 7,466,320 11,030,293 Trade accounts receivable, less allowance for doubtful 6,354,391 5,881,280 accounts of $140,469 and $174,634, respectively Inventories (note 3) 6,141,567 7,434,660 Prepaid expenses and other current assets 584,562 189,485 ------------ ------------ Total current assets 20,546,840 24,535,718 ------------ ------------ Property and equipment: Machinery and equipment 10,477,994 9,845,402 Furniture and fixtures 763,983 720,971 Leasehold improvements 1,565,241 1,538,575 ------------ ------------ 12,807,218 12,104,948 Less accumulated depreciation and amortization 5,586,453 4,767,159 ------------ ------------ Net property and equipment 7,220,765 7,337,789 Intangible and other assets 708,509 697,185 ------------ ------------ Total assets $ 28,476,114 32,570,692 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft $ -- 320,798 Trade accounts payable 2,423,459 4,182,270 Accrued compensation 1,930,888 1,499,890 Other accrued expenses 238,478 225,105 Notes payable and current installments of long-term obligations (note 3) 8,878,127 11,566,386 ------------ ------------ Total current liabilities 13,470,952 17,794,449 Long-term obligations (note 4) 77,596 91,666 ------------ ------------ Total liabilities 13,548,548 17,886,115 ------------ ------------ Stockholders' equity Common stock, $.01 par value, 50,000,000 shares authorized; 7,071,123 and 7,070,423 shares issued and outstanding, respectively 70,711 70,704 Additional paid-in capital 36,796,243 40,524,974 Unamortized stock compensation cost (135,574) (4,318,371) Accumulated deficit (21,803,814) (21,592,730) ------------ ------------ Total stockholders' equity 14,927,566 14,684,577 ------------ ------------ Commitments and contingencies (note 7) Total liabilities and stockholders' equity $ 28,476,114 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 DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ (restated - note 2) Net sales $ 10,893,607 6,913,517 Cost of goods sold 5,704,863 3,777,470 ------------ ------------ Gross profit 5,188,744 3,136,047 ------------ ------------ Operating expenses: Selling 1,295,543 881,579 General and administrative 2,104,490 1,144,470 Research and development 949,272 1,422,832 Expenses relating to accounting restatements and the related shareholder litigation (note 6) 619,894 -- ------------ ------------ Total operating expenses 4,969,199 3,448,881 ------------ ------------ Operating profit (loss) 219,545 (312,834) Other income (expense): Interest income 104,461 87,861 Interest expense (316,016) (208,505) Other, net (17,869) (8,163) ------------ ------------ Total other income (expense) (229,424) (128,807) ------------ ------------ Net loss $ (9,879) (441,641) ============ ============ Loss per share $ * (0.07) ============ ============ Weighted average shares outstanding 7,079,692 6,048,354 ============ ============
* Loss per share is less than $.01 See accompanying notes to financial statements. 3 5 VARI-L COMPANY, INC. Statements of Operations (unaudited)
SIX MONTHS SIX MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ (restated - note 2) Net sales $ 22,388,736 13,439,072 Cost of goods sold 11,842,657 7,229,607 ------------ ------------ Gross profit 10,546,079 6,209,465 ------------ ------------ Operating expenses: Selling 2,362,924 1,687,440 General and administrative 3,682,437 1,995,827 Research and development 2,462,919 2,643,503 Expenses relating to accounting restatements and the related shareholder litigation (note 6) 1,867,960 -- ------------ ------------ Total operating expenses 10,376,240 6,326,770 ------------ ------------ Operating profit (loss) 169,839 (117,305) Other income (expense): Interest income 262,167 144,752 Interest expense (645,150) (418,829) Other, net 2,060 (7,781) ------------ ------------ Total other income (expense) (380,923) (281,858) ------------ ------------ Net loss $ (211,084) (399,163) ============ ============ Loss per share $ (0.03) (0.07) ============ ============ Weighted average shares outstanding 7,070,861 5,857,938 ============ ============
See accompanying notes to financial statements. 4 6 VARI-L COMPANY, INC. Statements of Stockholders' Equity Six months ended June 30, 2000 and six months ended December 31, 2000 (unaudited)
UNAMORTIZED COMMON STOCK ADDITIONAL STOCK ---------------------------- PAID-IN COMPENSATION SHARES AMOUNT CAPITAL COST ----------- ----------- ----------- ----------- Balance, December 31, 1999 6,945,483 $ 69,455 40,449,692 (5,732,611) Stock options exercised 116,569 1,165 930,335 -- Common stock issued under employee stock purchase plan 7,471 75 50,130 -- Common stock issued under stock award plan 900 9 16,448 -- Stock options forfeited -- -- (921,631) 921,631 Amortization of stock compensation cost -- -- -- 492,609 Net loss -- -- -- -- ----------- ----------- ----------- ----------- Balance, June 30, 2000 7,070,423 70,704 40,524,974 (4,318,371) =========== =========== =========== =========== Common stock issued under stock award plan 700 7 8,953 -- Stock options forfeited -- -- (204,577) 204,577 Reversal of unamortized stock compensation upon repricing of options -- -- (3,533,107) 3,533,107 Amortization of stock compensation cost -- -- -- 445,113 Net loss -- -- -- -- ----------- ----------- ----------- ----------- Balance, December 31, 2000 7,071,123 $ 70,711 36,796,243 (136,574) =========== =========== =========== =========== TOTAL ACCUMULATED STOCKHOLDERS' DEFICIT EQUITY ----------- ------------- Balance, December 31, 1999 (20,413,478) 14,373,058 Stock options exercised -- 931,500 Common stock issued under employee stock purchase plan -- 50,205 Common stock issued under stock award plan -- 16,457 Stock options forfeited -- -- Amortization of stock compensation cost -- 492,609 Net loss (1,179,252) (1,179,252) ----------- ----------- Balance, June 30, 2000 (21,592,730) 14,684,577 =========== =========== Common stock issued under stock award plan -- 8,960 Stock options forfeited -- -- Reversal of unamortized stock compensation upon repricing of options -- -- Amortization of stock compensation cost -- 445,113 Net loss (211,084) (211,084) ----------- ----------- Balance, December 31, 2000 (21,803,814) 14,927,566 =========== ===========
See accompanying notes to financial statements. 5 7 VARI-L COMPANY, INC. Statements of Cash Flows Six months ended December 31, 2000 and 1999 (unaudited)
SIX MONTHS SIX MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ (restated - note 2) Net loss $ (211,084) (399,163) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation of property and equipment 819,294 673,742 Amortization of intangible assets 13,353 8,506 Common stock issued under profit sharing and stock award plans 8,960 10,696 Amortization of stock compensation 445,113 57,514 Changes in operating assets and liabilities: Trade accounts receivable, net (473,111) (780,181) Inventories, net 1,293,093 (395,853) Prepaid expenses and other current assets (395,077) 48,573 Trade accounts payable (1,758,811) 500,625 Accrued compensation 430,998 911,676 Other accrued expenses 13,373 (24,938) ------------ ------------ Total adjustments 397,185 1,010,360 ------------ ------------ Cash provided by operating activities 186,101 611,197 Cash flows from investing activities: Purchases of property and equipment (667,970) (661,485) Increase in other assets (24,677) (22,634) ------------ ------------ Cash used in investing activities (692,647) (684,119) ------------ ------------ Cash flows from financing activities: Decrease in bank overdraft (320,798) (778,488) Proceeds from notes payable -- 877,469 Payments of notes payable (2,700,000) (904,707) Proceeds from long-term obligations -- 40,894 Payments of long-term obligations (36,629) (24,615) Proceeds from warrants exercised -- 6,317,521 Proceeds from stock options exercised -- 5,215,604 Common stock repurchases -- (66,626) ------------ ------------ Cash provided by (used in) financing activities (3,057,427) 10,677,052 ------------ ------------ Increase (decrease) in cash and cash equivalents (3,563,973) 10,604,130 Cash and cash equivalents at beginning of period 11,030,293 4,116,918 ------------ ------------ Cash and cash equivalents at end of period $ 7,466,320 14,721,048 ============ ============ Supplemental disclosure of cash flow information: Cash paid for interest $ 738,642 439,725 ============ ============ Cash paid for income taxes $ -- -- ============ ============
See accompanying notes to financial statements. 6 8 VARI-L COMPANY, INC. Notes to Financial Statements Six months ended December 31, 2000 (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 and six months ended December 31, 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 audit 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 and six months ended December 31, 1999 by $1,378,641 and $2,301,163, respectively. (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. 7 (Continued) 9 VARI-L COMPANY, INC. Notes to Financial Statements Six months ended December 31, 2000 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. 8 (Continued) 10 VARI-L COMPANY, INC. Notes to Financial Statements Six months ended December 31, 2000 (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 and six months ended December 31, 1999 as previously reported and as restated are as follows:
THREE MONTHS SIX MONTHS ENDED THREE MONTHS ENDED SIX MONTHS DECEMBER 31, ENDED DECEMBER 31, ENDED 1999 DECEMBER 31, 1999 DECEMBER 31, (AS PREVIOUSLY 1999 (AS PREVIOUSLY 1999 REPORTED) (AS RESTATED) REPORTED) (AS RESTATED) -------------- ------------- ------------- -------------- Net sales $ 6,914,000 6,913,517 13,508,000 13,439,072 Cost of goods sold 3,069,000 3,777,470 6,193,000 7,229,607 ----------- ----------- ----------- ----------- Gross profit 3,845,000 3,136,047 7,315,000 6,209,465 ----------- ----------- ----------- ----------- Operating expenses: Selling 800,000 881,579 1,477,000 1,687,440 General and administrative 7,000 1,144,470 613,000 1,995,827 Research and development 1,322,000 1,422,832 1,773,000 2,643,503 Expenses relating to accounting restatements and the related shareholder litigation -- -- -- -- ----------- ----------- ----------- ----------- Total operating expenses 2,129,000 3,448,881 3,863,000 6,326,770 ----------- ----------- ----------- ----------- Operating income (loss) 1,716,000 (312,834) 3,452,000 (117,305) Total other income (expense), net (201,000) (128,807) (377,000) (281,858) ----------- ----------- ----------- ----------- Income (loss) before income taxes 1,515,000 (441,641) 3,075,000 (399,163) Income tax expense (578,000) -- (1,173,000) -- ----------- ----------- ----------- ----------- Net income (loss) $ 937,000 (441,641) 1,902,000 (399,163) =========== =========== =========== =========== Basic earnings (loss) per share $ .15 (0.07) .32 (0.07) =========== =========== =========== =========== Diluted earnings (loss) per share $ .14 (0.07) .30 (0.07) =========== =========== =========== ===========
9 (Continued) 11 VARI-L COMPANY, INC. Notes to Financial Statements Six months ended December 31, 2000 (3) INVENTORIES Inventories, net of allowances for excess and obsolete items, consist of the following:
DECEMBER 31, JUNE 30, 2000 2000 ------------ ---------- Finished goods $ 461,492 363,549 Work-in-process 877,986 1,226,984, Raw materials 4,802,089 5,844,127 ---------- ---------- $6,141,567 7,434,660 ========== ==========
(4) NOTES PAYABLE AND LONG-TERM OBLIGATIONS Notes payable and long-term obligations consist of the following:
DECEMBER 31, JUNE 30, 2000 2000 ----------- ----------- Notes payable under Revolving Credit Facility $ 8,800,000 11,500,000 Promissory notes 51,722 66,756 Capital leases 104,001 91,296 ----------- ----------- 8,955,723 11,658,052 Less current installments 8,878,127 11,566,386 ----------- ----------- Long-term obligations $ 77,596 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. 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 receivables, 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 December 31, 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 December 31, 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. 10 (Continued) 12 VARI-L COMPANY, INC. Notes to Financial Statements Six months ended December 31, 2000 The second forbearance agreement also increased the interest rate to the prime rate plus 2% through March 31, 2001 (11% at December 31, 2000). 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 and six months ended December 31, 2000 and 1999, 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. (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 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 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. 11 (Continued) 13 VARI-L COMPANY, INC. Notes to Financial Statements Six months ended December 31, 2000 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. 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 12 (Continued) 14 VARI-L COMPANY, INC. Notes to Financial Statements Six months ended December 31, 2000 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 affect on its financial condition, results of operations or liquidity. 13 15 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 December 31, 2000 Compared To the Three Months Ended December 31, 1999 Net Sales Net sales for the three months ended December 31, 2000 increased 57.6% to $10,893,607 compared with $6,913,517 for the three months ended December 31, 1999. This improvement primarily reflects increased demand for commercial signal source products. Revenue from commercial signal source products was $9,047,909 for the three months ended December 31, 2000, a 72.9% increase from $5,232,595 for the three months ended December 31, 1999. The three months ended December 31, 2000 also included fees earned from a contract modification of approximately $295,000. Revenue from all other products was $1,550,698 for the three months ended December 31, 2000, a 7.7% decrease from $1,680,922 for the three months ended December 31, 1999. Gross Profit Gross profit for the three months ended December 31, 2000 increased 65.5% to $5,188,744, or 47.6% of net sales, compared with $3,136,047, or 45.4% of net sales, for the three months ended December 31, 1999. Included in cost of goods sold for the three months ended December 31, 2000 is a charge of $339,949 for obsolete and excess inventory, compared to $58,547 for the three months ended December 31, 1999. The higher gross profit margin in the 2000 period principally reflected the benefit from the contract modification, partially offset by 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. 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 $234,574 total amount of stock compensation recorded for the three months ended December 31, 2000, $217,542 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: 14 16
THREE MONTHS ENDED ---------------------------- DECEMBER 31, DECEMBER 31, 2000 1999 ---------- ---------- Selling: Non-cash stock compensation $ 37,533 4,796 Other selling expenses 1,258,010 876,783 ---------- ---------- Total selling expenses $1,295,543 881,579 ========== ========== General and administrative: Non-cash stock compensation $ 87,352 11,162 Other general and administrative expenses 2,017,138 1,133,308 ---------- ---------- Total general and administrative expenses $2,104,490 1,144,470 ========== ========== Research and development: Non-cash stock compensation $ 109,689 14,016 Other research and development expenses 839,583 1,408,816 ---------- ---------- Total research and development expenses $ 949,272 1,422,832 ========== ==========
Selling Expenses Selling expenses for the three months ended December 31, 2000 increased 47.0% to $1,295,543, or 11.9% of net sales, compared with $881,579, or 12.8% of net sales, for the three months ended December 31, 1999. Excluding non-cash stock compensation, selling expenses for the three months ended December 31, 2000 increased 43.5% to $1,258,010, or 11.5% of net sales, compared with $876,783, or 12.7% of net sales, for the three months ended December 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 December 31, 2000 increased 83.9% to $2,104,490, or 19.3% of net sales, compared with $1,144,470, or 16.6% of net sales, for the three months ended December 31, 1999. Excluding non-cash stock compensation, general and administrative expenses for the three months ended December 31, 2000 increased 78.0% to $2,017,138, or 18.5% of net sales, compared with $1,133,308, or 16.4% of net sales, for the three months ended December 31, 1999. The increase was primarily attributable to higher amounts paid to independent contractors for interim management and accounting services, stay bonuses paid to employees, higher insurance premiums, as well as an increase in stock compensation expense. Research and Development Expenses Research and development expenses for the three months ended December 31, 2000 decreased 33.3% to $949,272, or 8.7% of net sales, compared with $1,422,832 or 20.6% of net sales, for the three months ended December 31, 1999. Excluding non-cash compensation, research and development expenses for the three months ended December 31, 2000 decreased 40.4% to $839,583, or 7.7% of net sales, compared with $1,408,816, or 20.4% of net sales, for the three months ended December 31, 1999. The decrease was primarily attributable to lower salaries and benefits from the temporary transfer of personnel to assist in production efforts and fewer employees engaged in research and development efforts, partially offset by an increase in stock compensation expense. 15 17 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 December 31, 2000, were $619,894. 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 18.9% to $104,461 for the three months ended December 31, 2000 compared with $87,861 for the three months ended December 31, 1999. The increase was attributable to higher interest earnings on average cash balances available in the quarter for investing. Interest expense and other, net, increased 54.1% to $333,885 for the three months ended December 31, 2000 compared with $216,668 for the three months ended December 31, 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 Loss and Loss Per Share The net loss for the three months ended December 31, 2000 was $9,879, or less than $0.01 per share, compared with a net loss of $441,641, or $0.07 per share, for the three months ended December 31, 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 for the three months ended December 31, 2000 would have been $844,589, or $0.12 per share, compared with a net loss of $411,667, or $0.07 per share, for the three months ended December 31, 1999. Results of Operations for the Six Months Ended December 31, 2000 Compared To the Six Months Ended December 31, 1999 Net Sales Net sales for the six months ended December 31, 2000 increased 66.6% to $22,388,736 compared with $13,439,072 for the six months ended December 31, 1999. This improvement primarily reflects increased demand for commercial signal source products. Revenue from commercial signal source products was $18,394,238 for the six months ended December 31, 2000, an 83.2% increase from $10,042,874 for the six months ended December 31, 1999. The six months ended December 31, 2000 included a significant end-of-life production run generating net sales of $809,285 and fees earned from a contract modification of approximately $295,000. Revenue from all other products was $3,699,498 for the six months ended December 31, 2000, an 8.9% increase from $3,396,198 for the six months ended December 31, 1999. Gross Profit Gross profit for the six months ended December 31, 2000 increased 69.8% to $10,546,079, or 47.1% of net sales, compared with $6,209,465, or 46.2% of net sales, for the six months ended December 31, 1999. Included in cost of goods sold for the six months ended December 31, 2000 is a charge of $885,532 for obsolete and excess inventory, compared to $72,874 for the six months ended December 31, 1999. The higher gross profit margin in the 2000 period principally reflected the benefit from the end-of-life production run and contract modification, partially offset by 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. 16 18 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 $445,113 total amount of stock compensation recorded in the six months ended December 31, 2000, $408,559 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:
SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ Selling: Non-cash stock compensation $ 71,220 9,203 Other selling expenses 2,291,704 1,678,237 ---------- ---------- Total selling expenses $2,362,924 1,687,440 ========== ========== General and administrative: Non-cash stock compensation $ 165,753 21,417 Other general and administrative expenses 3,516,684 1,974,410 ---------- ---------- Total general and administrative expenses $3,682,437 1,995,827 ========== ========== Research and development: Non-cash stock compensation $ 208,140 26,894 Other research and development expenses 2,254,779 2,616,609 ---------- ---------- Total research and development expenses $2,462,919 2,643,503 ========== ==========
Selling Expenses Selling expenses for the six months ended December 31, 2000 increased 40.0% to $2,362,924, or 10.6% of net sales, compared with $1,687,440, or 12.6% of net sales, for the six months ended December 31, 1999. Excluding non-cash stock compensation, selling expenses for the six months ended December 31, 2000 increased 36.6% to $2,291,704, or 10.2% of net sales, compared with $1,678,237, or 12.5% of net sales, for the six months ended December 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 six months ended December 31, 2000 increased 84.5% to $3,682,437, or 16.4% of net sales, compared with $1,995,827, or 14.9% of net sales, for the six months ended December 31, 1999. Excluding non-cash stock compensation, general and administrative expenses for the six months ended December 31, 2000 increased 78.1% to $3,516,684, or 15.7% of net sales, compared with $1,974,410, or 14.7% of net sales, for the six months ended December 31, 1999. The 17 19 increase was primarily attributable to higher amounts paid to independent contractors for interim management and accounting services, stay bonuses paid to employees, higher insurance premiums, as well as an increase in stock compensation expense. Research and Development Expenses Research and development expenses for the six months ended December 31, 2000 decreased 6.8% to $2,462,919, or 11.0% of net sales, compared with $2,643,503, or 19.7% of net sales for the six months ended December 31, 1999. Excluding non-cash compensation, research and development expenses for the six months ended December 31, 2000 decreased 13.8% to $2,254,779, or 10.1% of net sales, compared with $2,616,609, or 19.5% of net sales, for the six months ended December 31, 1999. The decrease was primarily attributable to lower salaries and benefits from the temporary transfer of personnel to assist in production efforts and fewer employees engaged in research and development efforts, partially offset by an increase in stock compensation expense. Expenses Relating to Accounting Restatements and the Related Shareholder Litigation Expenses relating to the accounting restatements and the related shareholder litigation for the six months ended December 31, 2000, were $1,867,960. 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 the cost of counsel for current and former employees of the Company. Other Income (Expense) Interest income increased 81.1% to $262,167 for the six months ended December 31, 2000 compared with $144,752 for the six months ended December 31, 1999. The increase was attributable to higher interest earnings on larger average cash balances available in the period for investing. Interest expense and other, net, increased 50.7% to $643,090 for the six months ended December 31, 2000 compared with $426,610 for the six months ended December 31, 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 Loss and Loss Per Share The net loss for the six months ended December 31, 2000 was $211,084, or $0.03 per share, compared with a net loss of $399,163, or $0.07 per share, for the six months ended December 31, 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 six months ended December 31, 2000 would have been $2,101,989, or $0.30 per share, compared with a net loss of $341,649, or $0.06 per share, for the six months ended December 31, 1999. Liquidity and Capital Resources The Company's working capital at December 31, 2000 was $15,875,888, excluding notes payable under the Company's credit facility with its current bank of $8,800,000. Including the notes payable, working capital at December 31, 2000 was $7,075,888. Working capital at December 31, 2000 includes cash and cash equivalents of $7,466,320. 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. 18 20 Cash provided by operating activities was $186,101 for the six months ended December 31, 2000. Cash provided by net loss, adjusted for non-cash charges, was $1,075,636. This cash provided was partially offset by cash used to reduce accounts payable, increased accounts receivable as a result of higher net sales and increases in prepaid expenses and other current assets. Partially offsetting this use of cash were reduced inventory levels and an increase in accrued compensation. Cash provided by operating activities was $611,197 for the six months ended December 31, 1999. Cash provided by net loss, adjusted for non-cash charges, was $351,295. Cash was also provided by increases in accrued compensation and accounts payable, which was partially offset by increased accounts receivable and inventories as a result of higher net sales volume. Cash used in investing activities was $692,647 for the six months ended December 31, 2000 and was used principally for capital expenditures. The capital expenditures for the six months ended December 31, 2000 related to additional production and test equipment to increase manufacturing capacity. Cash used in investing activities for the six months ended December 31, 1999 was $684,119 and were for capital expenditures. The capital expenditures for the six months ended December 31, 1999 primarily related to additional production and test equipment to increase manufacturing capacity. Cash flows used in financing activities were $3,057,427 for the six months ended December 31, 2000. Repayments on notes payable to the Company's primary lender along with repayments to other lenders accounted for the use of cash. Cash flows provided by financing activities for the six months ended December 31, 1999 were $10,604,130, including the proceeds from stock options and warrants exercised of $11,533,125. These proceeds were offset by net repayments of $10,959 to the Company's lenders. 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 payable on the line of credit was 11% at December 31, 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 receivables, 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 December 31, 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 December 31, 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. As of December 31, 2000 the Company's calculated borrowing base was $8,819,068. 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 19 21 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 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, 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 December 31, 2000, the Company had notes payable outstanding under a bank credit facility of $8,800,000 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. 20 22 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. 21 23 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 December 31, 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 December 31, 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. 22 24 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10.1 Amended and Restated Tandem Stock Option and Appreciation Rights Plan, effective as of December 1, 2000. Exhibit 10.2 Executive Employment Agreement with Derek Bailey dated October 1, 2000. (b) Reports on Form 8-K A report on Form 8-K dated December 15, 2000 under Item 5 was filed with the Commission on December 21, 2000. A report on Form 8-K dated December 27, 2000 under Item 8 was filed with the Commission on January 2, 2001. No financial statements were filed with any of the foregoing reports. 23 25 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 26 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- Exhibit 10.1 Amended and Restated Tandem Stock Option and Appreciation Rights Plan, effective as of December 1, 2000. Exhibit 10.2 Executive Employment Agreement with Derek Bailey dated October 1, 2000.
EX-10.1 2 d84148ex10-1.txt AMENDED/RESTATED TANDEM STOCK OPTION PLAN 1 EXHIBIT 10.1 VARI-L COMPANY, INC. TANDEM STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN TABLE OF CONTENTS 1. Purpose......................................................1 2. General Provisions...........................................1 3. Eligibility..................................................2 4. Number of Shares Subject to Plan.............................2 5. Stock Option.................................................3 6. Stock Appreciation Rights....................................6 7. Capital Adjustments..........................................7 8. Nontransferability...........................................8 9. Amendment, Suspension, or Termination of Plan................8 10. Effective Date...............................................8 11. Termination Date.............................................9 12. Resale of Shares Purchased...................................9 13. Acceleration of Options......................................9 14. Written Notice Required; Tax Withholding.....................10 15. Compliance with Securities Laws..............................10 16. Waiver of Vesting Restrictions by Committee..................10 17. Reports to Participants......................................10 18. No Employee Contract.........................................11
2 TANDEM STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN AS OF JUNE 18, 1999 1. PURPOSE. Vari-L Company, Inc. (the "Company") hereby establishes the Tandem Stock Option and Stock Appreciation Rights Plan (the "Plan"). The purpose of the Plan is to advance the interests of the Company and its stockholders by providing a means by which the Company shall be able to attract and retain competent officers, directors, key employees, advisors and consultants by providing them with an opportunity to participate in the increased value of the Company which their effort, initiative, and skill have helped produce. 2. GENERAL PROVISIONS. (a) The Plan will be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee"). The Committee shall be comprised of two or more directors designated by the Board of Directors. If and to the extent that Securities Exchange Act Rule 16b-3 or Internal Revenue Code Section 162 are applicable to the Plan, Committee members shall qualify as "Non-Employee Directors" within the meaning of Securities Exchange Act Rule 16b-3 and as "outside directors" within the meaning of Treasury Regulation Section 1.162-27(e)(3). (In the event Rule 16b-3 or Treasury Regulation 1.162.27(3)(3) is amended, modified or repealed, the requirements for being a member of the Committee shall reflect the then current requirements of the successor rule or regulation, if any.) Options granted under the Plan are intended to qualify for the "qualified performance based compensation" exception to Internal Revenue Code Section 162(m). The Committee shall have full power to construe and interpret the Plan and to establish and amend rules and regulations for its administration. Notwithstanding the foregoing, if it would be consistent with all applicable law including without limitation Rule 16b-3 and Treasury Regulation 1.162-27(e)(3), then the Plan may be administered by the Board of Directors, and if so administered all subsequent references to the Committee shall be read as referring to the Board of Directors. Any action of the Committee with respect to the Plan shall be taken by majority vote or by the unanimous written consent of the Committee members. (b) The Committee shall determine, in its sole discretion, which participants under the Plan shall be granted stock options or stock appreciation rights, the time or times at which options and rights are granted, as well as the number of shares and the duration of the options or rights which are granted to participants, provided, however, that no participant may be granted more than 300,000 options during any three year period under the Plan. (c) The Committee shall also determine any other terms and conditions relating to options and rights granted under the Plan as the Committee may prescribe, in its sole discretion. (d) The Committee may, in its discretion, delegate its administrative duties with respect to the Plan to an officer or employees, or to a committee composed of officers or employees, of the Company. (e) The Committee shall make all other determinations and take all other actions which it deems necessary or advisable for the administration of the Plan. 3 (f) All decisions, determinations and interpretations made by the Committee shall be binding and conclusive on all participants in the Plan and on their legal representatives, heirs and beneficiaries. (g) Notwithstanding anything to the contrary herein, the Committee shall have no authority to determine the amount, price or timing of grants hereunder to members of the Committee, unless, and only to the extent that, its exercise of such authority is consistent with all applicable laws, including, without limitation, Rule 16b-3. 3. ELIGIBILITY. Officers, directors and employees of the Company and advisors and consultants to the Company shall be eligible to participate in the Plan and to receive options and rights hereunder, provided, however, that: (i) Incentive Stock Options may only be granted to employees (including officers and directors who are employees) of the Company or its subsidiaries; and (ii) advisors and consultants shall be eligible for grants only if they provide bona fide services that are not rendered in connection with the offer or sale of securities or in a capital- raising transaction. 4. NUMBER OF SHARES SUBJECT TO PLAN. The aggregate number of shares of the Company's $.01 par value Common Stock which may be granted to participants shall be 3,624,000 shares, subject to adjustment only as provided in Sections 5(h) and 7 hereof. These shares may consist of shares of the Company's authorized but unissued Common Stock or shares of the Company's authorized and issued Common Stock reacquired by the Company and held in its treasury or any combination thereof. If an option or right granted under this Plan is surrendered, or for any other reason ceases to be exercisable in whole or in part, the shares as to which the option or right ceases to be exercisable shall be available for options or rights to be granted to the same or other participants under the Plan, except to the extent that an option or right is deemed surrendered by the exercise of a tandem stock appreciation right and that right is paid by the Company in stock, in which event the shares issued in satisfaction of the right shall not be available for new options or rights under the Plan. 5. STOCK OPTION. (a) TYPE OF OPTIONS. Options granted on or after January 28, 1994 may be either Nonqualified Stock Options or Incentive Stock Options as determined by the Committee in its sole discretion and as reflected in the Notice of Grant issued by the Committee. All Options granted under the Plan prior to January 28, 1994 were nonqualified stock options. "Incentive Stock Option" means an option intended to qualify as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). "Nonqualified Stock Option" means an option not intended to qualify as an Incentive Stock Option or an Incentive Stock Option which is converted to a Nonqualified Stock Option under Section 5(f) hereof. 4 (b) OPTION PRICE. The price at which options may be granted under the Plan shall be determined as follows: (i) For Incentive Stock Options the option price shall be equal to 100% of the Fair Market Value of the stock on the date the option is granted provided, however, that Incentive Stock Options granted to any person who, at the time such option is granted owns (as defined in Section 422 of the Code) shares possessing more than 10% of the total combined voting power of all classes of shares of the Company or its parent or subsidiary corporation, the Option Price shall be 110% of the Fair Market Value. (ii) For Nonqualified Stock Options the option price may be less than the Fair Market Value of the stock on the date of grant, but in no event shall the option price be less than fifty percent 50% of the Fair Market Value of the stock on the date the option is granted, provided, however that any grant of a Nonqualified Stock Option at a price less than Fair Market Value shall not qualify for the "qualified performance based compensation" exception to Internal Revenue Code Section 162(m). (iii) For purposes of this Plan, and except as otherwise set forth herein, "Fair Market Value" shall mean (a) if there is an established market for the Company's Common Stock on a stock exchange, in an over-the-counter market or otherwise, the closing price on the date of grant, or (b) as otherwise specified by the Committee. In the case of automatic grants to Committee members, the Fair Market Value shall be the closing price on the date of grant. (c) EXERCISE OF OPTION. The right to purchase shares covered by any option or options under this Plan shall be exercisable only in accordance with the terms and conditions of the grant to the participant. Such terms and conditions may include a time period or schedule whereby some of the options granted may become exercisable, or "vested", over time and certain conditions, such as continuous service or specified performance criteria or goals, must be satisfied for such vesting. The determination as to whether to impose any such vesting schedule or requirements, and the terms of such schedule or requirements, shall be within the sole discretion of the Committee. These terms and conditions may be different for different participants so long as all options satisfy the requirements of the Plan. Options shall be paid for in cash or in shares of the Company's Common Stock, which shares shall be valued at the Fair Market Value of the shares on the date of exercise, or any combination thereof. The Committee may, in its discretion and subject to ratification by the entire Board of Directors, loan one or more participants all or a portion of the exercise price, together with the amount of any tax liability incurred by the participant as a result of the exercise of the option, for up to three (3) years with interest payable at the prime rate quoted in the Wall Street Journal on the date of exercise. Members of the Committee may receive such loans for the exercise of their options without Committee approval or Board ratification. 5 The Committee may also permit a participant to effect a net exercise of an option without tendering any shares of the Company's stock as payment for the option. In such an event, the participant will be deemed to have paid for the exercise of the option with shares of the Company's stock and shall receive from the Company a number of shares equal to the difference between the shares that would have been tendered and the number of options exercised. The Committee may also cause the Company to enter into arrangements with one or more licensed stock brokerage firms whereby participants may exercise options without payment therefor but with irrevocable orders to such brokerage firm to immediately sell the number of shares necessary to pay the exercise price for the option and the withholding taxes, if any, and then to transmit the proceeds from such sales directly to the Company in satisfaction of such obligations. (d) DURATION OF OPTIONS. Unless otherwise prescribed by the Committee or this Plan, options granted hereunder shall expire ten (10) years from the date of grant, subject to early termination as provided in Section 5(f) hereof. (e) INCENTIVE STOCK OPTIONS LIMITATIONS. In no event shall an Incentive Stock Option be granted to any person who, at the time such option is granted, owns (as defined in Section 422 of the Code) shares possessing more than 10% of the total combined voting power of all classes of shares of the Company or of its parent or subsidiary corporation, unless the option price is at least 110% of the Fair Market Value of the stock subject to the Option, and such Option is by its terms not exercisable after the expiration of five (5) years from the date such Option is granted. Moreover, the aggregate Fair Market Value (determined as of the time that option is granted) of the shares with respect to which Incentive Stock Options are exercisable for the first time by any individual employee during any single calendar year under the Plan shall not exceed $100,000. In addition, in order to receive the full tax benefits of an Incentive Stock Option, the employee must not resell or otherwise dispose of the stock acquired upon exercise of the Incentive Stock Option until two (2) years after the date the option was granted and one (1) year after it was exercised. (f) EARLY TERMINATION OF OPTIONS. In the event a participant's employment with or service to the Company shall terminate as the result of total disability or the result of retirement at 65 years of age or later, then any options granted to such participant shall terminate and may no longer be exercised three (3) months after the time such participant is no longer an employee, officer or director of, or advisor or consultant to, the Company. If the participant dies while employed or engaged by the Company, to the extent that the option was exercisable at the time of the participant's death, such option may, within one year after the participant's death, be exercised by the person or persons to whom the participant's rights under the option shall pass by will or by the applicable laws of descent and distribution; provided, however, that an option may not be exercised to any extent after the expiration of the option as originally granted. In the event a participant's employment or engagement by the Company shall terminate as the result of any circumstances other than those referred to above, 6 whether terminated by the participant or the Company, with or without cause, then all options granted to such participant under this Plan shall terminate and no longer be exercisable as of the date of such termination, provided, however, that if an employee with an Incentive Stock Option terminates employment prior to its exercise, but after such termination becomes or remains a non-employee officer, director, advisor or consultant eligible for Nonqualified Stock Options hereunder, then the Incentive Stock Option shall be converted to a Nonqualified Stock Option on the date the Incentive Stock Option would otherwise have terminated. An employee who is absent from work with the Company because of total disability, as defined below, shall not by virtue of such absence alone be deemed to have terminated such participant's employment with the Company. All rights which such participant would have had to exercise options granted hereunder will be suspended during the period of such absence and may be exercised cumulatively by such participant upon his return to the Company so long as such rights are exercised prior to the expiration of the option as originally granted. For purposes of this Plan, "total disability" shall mean disability, as a result of sickness or injury, to the extent that the participant is prevented from engaging in any substantial gainful activity and is eligible for and receives a disability benefit under Title II of the Federal Social Security Act. (g) AUTOMATIC GRANTS TO COMMITTEE MEMBERS. Except as provided in Section 2(g) hereof, no action may be taken by the Committee to grant any options to members of the Committee. Notwithstanding the foregoing and irrespective of any action by the Committee, on the date of each meeting of the Board of Directors or a committee thereof, each member of the Committee and of the Audit Committee (other than members who are officers or employees of the Company) of such committee that attends such meeting in person shall receive a grant of ten year fully vested Nonqualified Stock Options to purchase 500 shares of the Company's Common Stock at an exercise price equal to the Fair Market Value calculated in accordance with Section 5(b). (h) RELOAD BY PAYMENT IN SHARES. To the extent that a participant pays for the exercise of an option with shares of the Company's stock rather than cash, the tendered shares shall be deemed to be added back to the Plan, increasing the total number of shares subject to and reserved for the Plan by that amount. 6. STOCK APPRECIATION RIGHTS. (a) GRANT. Stock appreciation rights may be granted by the Committee under this Plan upon such terms and conditions as it may prescribe. A stock appreciation right may be granted only in connection with an option previously granted to or to be granted under this Plan. Each stock appreciation right shall become nonexercisable and be forfeited if the related option is exercised. "Stock appreciation right" as used in this Plan means a right to receive the excess of Fair Market Value, on the date of exercise, of a share of the Company's Common Stock on which an appreciation right is exercised over the option price provided for in the related option and is issued in consideration of services performed for the Company or for its benefit by the participant. Such excess is hereafter called "the differential." 7 (b) EXERCISE OF STOCK APPRECIATION RIGHTS. Stock appreciation rights shall be exercisable and be payable in the following manner: (i) A stock appreciation right shall be exercisable by the participant at the same time or times that the option to which it relates could be exercised. A participant wishing to exercise a stock appreciation right shall give written notice of such exercise to the Company. Upon receipt of such notice, the Company shall determine, in its sole discretion, whether the participant's stock appreciation rights shall be paid in cash or in shares of the Company's Common Stock or any combination of cash and shares and thereupon shall, without deducting any transfer or issue tax, deliver to the person exercising such right an amount of cash or shares of the Company's Common Stock or a combination thereof with a value equal to the differential minus withholding taxes, if any. The date the Company receives the written notice of exercise hereunder is the exercise date. The shares issued upon the exercise of a stock appreciation right may consist of shares of the Company's authorized but unissued Common Stock or of its authorized and issued Common Stock reacquired by the Company and held in its treasury or any combination thereof. No fractional share of Common Stock shall be issued; rather, the Committee shall determine whether cash shall be given in lieu of such fractional share or whether such fractional share shall be eliminated. (ii) The exercise of a stock appreciation right shall automatically result in the surrender of the related stock option by the participant on a share for share basis. Likewise, the exercise of a stock option shall automatically result in the surrender of the related stock appreciation right. Shares covered by surrendered options shall be available for granting further options under this Plan except to the extent and in the amount that such rights are paid by the Company with shares of stock, as more fully discussed in Section 4 hereof. (iii) The Committee may impose any other terms and conditions it prescribes upon the exercise of a stock appreciation right, which conditions may include a condition that the stock appreciation right may only be exercised in accordance with rules and regulations adopted by the Committee from time to time. (c) LIMITATION ON PAYMENTS. Notwithstanding any other provision of this Plan, the Committee may from time to time determine, including at the time of exercise, the maximum amount of cash or stock which may be given upon exercise of any stock appreciation right in any year, provided, however, that all such amounts shall be paid in full no later than the end of the year immediately following the year in which the participant exercised such stock appreciation rights. Any determination under this paragraph may be changed by the Committee from time to time provided that no such change shall require the participant to return to the Company any amount theretofore received or to extend the period within which the Company is required to make full payment of the amount due as the result of the exercise of the participant's stock appreciation rights. 8 (d) EXPIRATION OR TERMINATION OF STOCK APPRECIATION RIGHTS. (i) Each stock appreciation right and all rights and obligations thereunder shall expire on the date on which the related option expires or terminates. (ii) A stock appreciation right shall terminate and may no longer be exercised upon the expiration or termination of the related option. 7. CAPITAL ADJUSTMENTS. The aggregate number of shares of the Company's Common Stock subject to this Plan, the maximum number of shares as to which options may be granted to any one participant hereunder, and the number of shares and the price per share subject to outstanding options, shall be appropriately adjusted by the Committee for any increase or decrease in the number of shares of Common Stock which the Company has issued resulting from any stock split, reverse stock split, stock dividend, combination of shares or any other change, or any exchange for other securities or any reclassification, merger, reorganization, consolidation, redesignation, recapitalization, or otherwise. Similar adjustments shall be made to the terms of stock appreciation rights. 8. NONTRANSFERABILITY. During a participant's lifetime, an option may be exercisable only by the participant and options granted under the Plan and the rights and privileges conferred thereby shall not be subject to execution, attachment or similar process and may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will or by the applicable laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by applicable law and Rule 16b-3, the Committee may (i) permit a recipient of a Nonqualified Stock Option to designate in writing during the participant's lifetime a beneficiary to receive and exercise the participant's Nonqualified Stock Options in the event of such participant's death (as provided in Section 5(f)), (ii) grant Nonqualified Stock Options that are transferable to the immediate family or a family trust of the recipient, and (iii) modify existing Nonqualified Stock Options to be transferable to the immediate family or a family trust of the recipient. Any other attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any option under the Plan or of any right or privilege conferred thereby, contrary to the provisions of the Plan shall be null and void. 9. AMENDMENT, SUSPENSION, OR TERMINATION OF PLAN. The Board of Directors or the Committee may at any time suspend or terminate the Plan and may amend it from time to time in such respects as the Board of Directors or the Committee may deem advisable in order that options and rights granted hereunder shall conform to any change in the law, or in any other respect which the Board of Directors or the Committee may deem to be in the best interests of the Company; provided, however, that no such amendment shall, without the participant's consent, alter or impair any of the rights or obligations under any option or stock appreciation rights theretofore granted to him under the plan; and provided further 9 that no such amendment shall, without shareholder approval: increase the total number of shares available for grants of options or rights under the Plan (except as provided by Section 7 hereof); or effect any change to the Plan which is required to be approved by shareholder by law, including, without limitation, the regulations promulgated under Section 422 and Section 162(m) of the Code. In addition, the provisions of Section 5(g) relating to the amount, price and timing of grants to members of the Committee shall not be amended more than once every six (6) months other than to comport with applicable changes to the Code, the Employee Retirement Income Security Act or rules thereunder. 10. EFFECTIVE DATE. The effective date of the Plan shall be December 31, 1987, provided, however, that the effective date of the Plan as it relates to Incentive Stock Options shall be January 28, 1994 and no Incentive Stock Option may be granted hereunder before January 28, 1994. If the January 28, 1994 amendment to and restatement of the Plan is not approved by the affirmative vote of a majority of the Company's shareholders on or before January 28, 1995, then the Plan shall remain in effect as it was last amended on June 14, 1990. The failure of the shareholders to approve such amendment and restatement of the Plan shall not, however, affect the validity, duration or any other terms and conditions of options or rights granted prior to January 28, 1994, and shall affect the terms and conditions of options or rights granted after that date only to the extent required by law. 11. TERMINATION DATE. Unless this Plan shall have been previously terminated by the Committee, this Plan shall terminate on January 28, 2004, except as to options and rights theretofore granted and outstanding under the Plan at that date, and no stock option or stock appreciation rights shall be granted after that date. 12. RESALE OF SHARES PURCHASED. All shares of stock purchased under this Plan may be freely resold, subject to applicable state and federal securities laws restricting their transfer. As a condition to exercise of an option, the Company may impose various conditions, including a requirement that the person exercising such option represent and warrant that, at the time of such exercise, the shares of Common Stock being purchased are being purchased for investment and not with a view to resale or distribution thereof. The resale of shares purchased upon the exercise of Incentive Stock Options may, however, cause the employee to lose certain tax benefits if the employee fails to comply with the holding period requirements described in Section 5(e) hereof. 13. ACCELERATION OF OPTIONS. If the Company or its shareholders enter into an agreement to dispose of all or substantially all of the assets or stock of the Company by means of a sale, merger or other reorganization, liquidation, or otherwise, any option granted pursuant to the Plan shall become immediately exercisable with respect to the full number of shares subject to that option during the period commencing as of the date of the agreement to dispose of all or substantially all of the assets or stock of the Company and ending when the disposition of assets or stock contemplated by that agreement is consummated or the option is otherwise terminated in accordance with its provisions or the provisions of the Plan, whichever occurs first; provided that 10 no option shall be immediately exercisable under this Section on account of any agreement of merger or other reorganization where the shareholders of the Company immediately before the consummation of the transaction will own 50% or more of the total combined voting power of all classes of stock entitled to vote of the surviving entity (whether the Company or some other entity) immediately after the consummation of the transaction. In the event the transaction contemplated by the agreement referred to in this section is not consummated, but rather is terminated, canceled or expires, the options granted pursuant to the Plan shall thereafter be treated as if that agreement had never been entered into. 14. WRITTEN NOTICE REQUIRED; TAX WITHHOLDING. Any option or right granted pursuant to the Plan shall be exercised when written notice of that exercise by the participant has been received by the Company at its principal office and, with respect to options, when such notice is received and full payment for the shares with respect to which the option is exercised has been received by the Company. Participant agrees that, to the extent required by law, the Company shall withhold or require the payment by participant of any state, federal or local taxes resulting from the exercise of an option or right, provided however that to the extent permitted by law, the Committee may in its discretion, permit some or all of such withholding obligation to be satisfied by the delivery by the participant of, or the retention by the Company of, shares of its Common Stock. 15. COMPLIANCE WITH SECURITIES LAWS. Shares shall not be issued with respect to any option or right granted under the Plan unless the exercise of that option and the issuance and delivery of the shares pursuant thereto shall comply with all relevant provisions of state and federal law, including without limitation the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder and the requirements of any stock exchange or automated quotation system upon which the shares may then be listed or traded, and shall be further subject to the approval of counsel for the Company with respect to such compliance. Further, each participant must consent to the imposition of a legend on the certificate representing the shares of Common Stock issued upon the exercise of the option or right restricting their transferability as may be required by law, the option, or the Plan. 16. WAIVER OF VESTING RESTRICTIONS BY COMMITTEE. Notwithstanding any provision of the Plan, in the event a participant dies, becomes disabled, retires as an employee, officer or director of, or as an advisor or consultant to, the Company, the Committee shall have the discretion to waive any vesting restrictions on the retiree's options, or the early termination of any Nonqualified Stock Options held by the retiree. 17. REPORTS TO PARTICIPANTS. The Company shall furnish to each participant a copy of the annual report sent to the Company's shareholders. Upon written request, the Company shall furnish to each participant a copy of its most recent annual report and each quarterly report to shareholders issued since the end of the Company's most recent fiscal year. 11 18. NO EMPLOYEE CONTRACT. The grant of an option or right under the Plan shall not confer upon any participant any right with respect to continuation of employment by, or the rendition of advisory or consulting services to, the Company, nor shall it interfere in any way with the Company's right to terminate the participant's employment or services at any time. DAVID G. SHERMAN, JOSEPH H. KISER, President Chairman of the Board and Secretary EX-10.2 3 d84148ex10-2.txt EXECUTIVE EMPLOYMENT AGREEMENT - DEREK BAILEY 1 EXHIBIT 10.2 VARI-L COMPANY, INC. EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT, effective October 1, 2000, is made and entered into by and between VARI-L COMPANY, INC. (the "Company") and DEREK L. BAILEY ("Employee"). WHEREAS, Employee's diligent efforts on behalf of the Company have greatly contributed to the tremendous growth of the Company, in terms of revenues, profitability, technological developments, customer base and shareholder value; and WHEREAS, the Compensation Committee of the Board of Directors, comprised solely of disinterested directors, has determined to provide Employee with this employment agreement, including the severance package and other benefits provided hereby, for the purpose of rewarding Employee for the success of the Company resulting from his efforts and as a method of encouraging Employee to remain with the Company and to continue to provide such diligent and efficacious services to the Company during that employment. NOW, THEREFORE, for good and valuable consideration, the parties hereto agree as follows: I. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby accepts employment, upon the terms and conditions hereinafter set forth. II. TERM. Subject to the provisions for termination as hereinafter provided, the term of this Agreement is for a period commencing October 1, 2000, and expiring October 1, 2001 (the "Initial Term"). On October 1 of each year, beginning in 2001, the term of this Agreement shall be automatically extended for an additional year without any further action on the part of the Company or Employee unless terminated under the provisions of Section VIII of this Agreement. III. DUTIES. Employee is engaged as Executive Vice President of the Company, to have complete responsibility for and authority over the management and direction of all sales and marketing activities of the Company, including the commercial, military, aerospace and other markets served by the Company, subject only to the direction of the Company's Chief Executive Officer or President and the Board of Directors, for administering those operations of the Company in all respects. IV. Employee shall faithfully, industriously, and to the best of his ability, experience, and talents, perform all of the duties that may be required of and from him pursuant to this Agreement. Nothing herein shall be construed as preventing Employee from (a) investing his assets in such form or manner as will not require any services on the part of Employee in the operations or the affairs of the companies in which such investments are made or (b) serving as a director, advisor, or consultant; PROVIDED, HOWEVER, that such investments or services may not be in connection with a business which is in competition with the Company (excluding (i) indirect investments through mutual funds or other broad based investment vehicles, (ii) investments in debt instruments, and (iii) investments in less than 2 5% of the stock of any publicly held business). For purposes hereof, "in competition with the Company" shall be construed consistently with Section VII hereof. V. COMPENSATION AND EMPLOYEE BENEFITS. A. For all services rendered by Employee under this Agreement, the Company shall pay Employee an annual base salary of at least $130,000, payable in equal bi-weekly installments. The amount of such base salary shall be determined at the beginning of each fiscal year by the Compensation Committee of the Company's Board of Directors in its sole discretion on the basis of merit and the Company's financial success and progress but in no event shall such base salary be less than the annual base salary indicated in this paragraph. B. Bonus Compensation. The Employee and the Company have entered into a separate Stay Bonus Agreement dated September 20, 2000, a copy of which is attached hereto and incorporated by reference herein. In addition to the bonuses payable to Employee pursuant to said Stay Bonus Agreement and the Severance Amount provided for in Section VIII hereof, the Employee may receive such additional bonuses, payable in cash or shares of the Company's stock, as determined at the beginning of each fiscal year of the Company by the Board of Directors or the Compensation Committee of the Board of Directors, in its sole discretion, on the basis of merit and the Company's financial success and progress in the prior fiscal year. C. Employee shall be entitled to accrue four (4) weeks of paid vacation for each year of service provided. Employee's vacation balance as of September 20, 2000 was 313.32 hours and will accrue at a rate of 3.077 hours for each week of service provided thereafter. Any vacation time taken will be deducted from Employee's vacation balance. Employee shall be entitled to utilize all accrued and unused vacation time. Any accrued but unused vacation time shall be paid to Employee at or before the termination of his employment, in accordance with Company policy, in addition to any amounts due and payable to Employee under the Stay Bonus Agreement or under Section VIII hereof. D. Employee shall be entitled to receive all of the rights, benefits, and privileges of an employee and an executive officer under any retirement, pension, profit-sharing, insurance, health and hospital, and other employee benefit plans which may be now in effect or hereafter adopted by the Company. E. Employee shall be furnished with a private office, business tools, and such other facilities and services suitable to Employee's position and adequate for the performance of the duties required by this Agreement. F. Subject to limits which may be imposed by the Chief Executive Officer, President or the Board of Directors, Employee is authorized to incur reasonable expenses in connection with his responsibilities in conducting the business of the Company, including expenses for entertainment, travel, and similar items. The Company will reimburse Employee for all such expenses upon the presentation by Employee, from time to time, of an itemized account of such expenditures, 2 3 including receipts or other adequate documentation, or Employee may pay such expenses with a Company credit card, if a Company credit card is issued to Employee, and Employee may appropriately document the business purpose of such expenditures. G. Employer shall provide Employee with an automobile, and shall directly provide or reimburse Employee for insurance, maintenance, fuel and repairs associated with such automobile. The Company will reimburse Employee for all such expenses upon the presentation by Employee, from time to time, of an itemized account of such expenditures or Employee may pay such expenses with a Company credit card, if a Company credit card is issued to Employee. Employee shall be given an opportunity to provide documentation to the Company indicating the extent to which the automobile was used for business purposes. If and to the extent that the automobile is not considered by the Company to have been used for business purposes based upon such documentation, the Company will include the value of the non-business use of the automobile and other reimbursements made in connection therewith Employee's Form W-2 or 1099 as income for each year such personal benefit is received. Upon termination of this Agreement, at the Company's discretion, Employee may purchase such automobile from the Company at its then current fair market value based upon the average of the stated retail prices and wholesale prices derived from at least two industry sources such as NADA, Kelly Bluebook, etc. VI. PROPRIETARY INTERESTS OF COMPANY. Employee and the Company recognize that the Company is in a highly competitive business in a highly technical industry. The parties acknowledge that the success or failure of the Company depends largely on the development and use of certain proprietary and confidential information and trade secrets, including without limitation, information concerning any of the Company's patented components, research and development projects and in patent process components, and personal relationships with present and potential customers, suppliers, contractors, and governmental agencies as well as technology, procedures, systems, and techniques relating to the products developed or distributed by the Company (hereinafter collectively referred to as "Confidential Information"). Confidential Information is a substantial asset of the Company. Confidential Information will be disclosed to Employee in the normal course of operation. Employee acknowledges that Confidential Information is extremely valuable to the Company and must be protected from unauthorized use by the Company's competitors or other persons. Therefore, Employee agrees not to disclose or use, whether for the benefit of Employee or any other person or entity, at any time during or after his employment, any Confidential Information to any person or entity other than the Company or persons authorized by the Company to receive such Confidential Information. Employee recognizes that, during the term of his employment with the Company, he may develop new products, technology, processes, devices, inventions, or methods of production, including but not limited to computer hardware, software or "firmware," and may enhance, improve or perfect existing products, technology, processes, devices, inventions or methods of production (hereinafter collectively referred to as "Inventions"). As partial consideration for the salary and other benefits provided by the Company to the Employee, Employee hereby agrees that his 3 4 entire work product while in the employ of the Company, including any Inventions, is the exclusive property of the Company. Employee also agrees to cooperate fully with the Company and to do whatever acts are reasonably necessary in order to obtain United States or foreign letters patent or copyrights, or both, and to vest the entire right and title thereto in the Company. Employee further agrees that the Company shall have the royalty-free right to use in its business, and to make, use, and sell such Inventions whether or not patentable, regardless of whether they are conceived or made by the Employee during the hours which he is employed by the Company or with the use of or assistance of the Company's facilities, materials or personnel. Except as required in his duties to the Company, Employee will not, directly or indirectly, use, disseminate, disclose, lecture upon, or publish articles concerning any Confidential Information without the prior written consent of the Company. Upon termination of his employment with the Company, all documents, records, notebooks, and similar repositories of or containing Confidential Information, including copies thereof, then in Employee's possession, whether prepared by Employee or others, will be left with the Company, and no copies thereof will be retained by the Employee. It is agreed that any breach of this section of the Agreement will cause immediate irreparable harm to the Company and monetary damages would be difficult if not impossible to ascertain. Therefore, the parties agree that, upon any breach of any covenant in this Section VI, that the Company may obtain from the district court for the City and County of Denver, Colorado, or any other court of competent jurisdiction, an appropriate restraining order, preliminary injunction or other form of equitable relief with respect thereto. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other available remedies for such breach, including the recovery of damages, costs, and attorney fees. VII. NONCOMPETE AND NONSOLICITATION. During the term of this Agreement and for a period of the greater of (a) one year after termination or expiration of this Agreement or (b) the period during which a Severance Amount or consulting arrangement is being paid to Employee by the Company (the "Noncompete Period"), the Employee will not, directly or indirectly, own, manage, operate, control, provide services to, be employed by, participate in, or be connected in any manner with the ownership, management, operation, or control of any business which develops, manufactures, distributes or sells the same type of products as the Company, or products which are the functional equivalent of the Company's products or currently planned products, within and to the same market as the Company's market at the time of Employee's activity or, after the termination of this Agreement, at the time of such termination. Employee certifies that his employment with the Company will not breach a previous employment agreement. Employee agrees not to engage in the unauthorized use of the proprietary assets of others during the term of his employment by the Company. Employee agrees not to enter into any other employment agreement, oral or written, which will run concurrently, in whole or in part, with Employee's employment by the Company. It is agreed that any breach of this section of the Agreement will cause immediate irreparable harm to the Company and that monetary damages for 4 5 such breach would be difficult if not impossible to ascertain. Therefore, the parties agree that upon any breach of the covenants of this section the Company may obtain from the district court for the City and County of Denver, Colorado, or any other court of competent jurisdiction, an appropriate restraining order, preliminary injunction or other form of equitable relief with respect thereto. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other available remedies for such breach, including the recovery of damages, costs, and attorney fees. The foregoing agreement not to compete shall not be held invalid because of the scope of the territory or the actions restricted thereby, or the period of time within which such agreement is operative; but any judgment by a court of competent jurisdiction may define the maximum territory and actions subject to, and restricted by, this paragraph and the period of time during which such agreement is enforceable. Notwithstanding the foregoing, in the event of a Change of Control, as hereinafter defined, not recommended by a majority of the Board of Directors of the Company as constituted prior to the date of such Change of Control, this non-compete agreement shall terminate upon the date of such Change of Control. VIII. TERMINATION OF EMPLOYMENT. A. TERMINATION BY MUTUAL AGREEMENT. The Company and Employee may agree to terminate this Agreement on terms and conditions mutually acceptable to them as of the date of termination. B. DEATH. In the event of Employee's death during the term of this Agreement, including the Consulting Period, if any, or so long as any Severance Amount is being paid to Employee, the Company shall pay to any beneficiary designated by Employee or, if no such beneficiary has been designated, to his estate, an amount equal to the then annual base salary for one (1) year, together with any bonuses which the Company's Board of Directors may determine, in its sole discretion, to be due and payable to Employee. If Employee's beneficiary or estate receives any proceeds from any life insurance policies paid for by the Company, the payments of annual base salary and bonuses shall be reduced by the amount of such proceeds from such life insurance policies. C. DISABILITY. If Employee becomes Disabled during the term of employment or during the Consulting Period, the Company, at its option, may thereafter, upon written notice to Employee or Employee's personal representative, terminate the employment or Consulting Agreement. Employee shall thereafter be eligible to receive disability benefits under the Company's standard employee disability insurance policy like any other employee. D. VOLUNTARY OR INVOLUNTARY TERMINATION. Upon a Voluntary or Involuntary Termination as defined herein, Employee shall continue to render his services to the Company, if and to the extent required by the Company, up to the date of such Voluntary or Involuntary Termination as referenced in the written notice of termination submitted to Employee by the Company, or vice versa, and shall be paid (i) the unpaid amount of the 5 6 then applicable annual base salary up to the date of such Voluntary or Involuntary Termination, (ii) any bonuses which the Company's Board of Directors may determine, in its sole discretion, to be due and payable to Employee, (iii) any unpaid Stay Bonuses which are due and payable under the terms of the Stay Bonus Agreement, and (iv) the Severance Amount as defined herein. In the event of a Voluntary Termination, as a condition to Employee's receipt of the foregoing payments to Employee, during the time between the submission of a notice of termination by Employee and the effective date of termination set forth in such notice, Employee shall continue to diligently provide the Company with such services as the Company may request. In the event of an Involuntary Termination, all unvested stock options and stock appreciation rights that have previously been granted to Employee will fully vest and remain exercisable for a period of time equal to the later of one (1) year after such termination or the end of the Consulting Period. E. DEFINITIONS. All the terms defined in this Section shall have the meanings given below throughout this Agreement. 1. "CHANGE IN DUTIES, COMPENSATION, OR BENEFITS" shall mean any one or more of the following: a. a significant and detrimental change in the nature or scope of Employee's authority, responsibilities or duties from those currently applicable to him; b. a reduction in Employee's annual base salary from that currently provided to him; c. a diminution in Employee's eligibility to participate in bonus, stock option, incentive award or any other compensation plan which provides opportunities to receive compensation from those currently applicable to him, except for: (i) changes in the eligibility requirements for plans that are applicable to employees generally; (ii) changes in plans that are applicable to all executives and result in a diminution of Employee's benefits under such plan that is fair and proportional as compared to the diminution of benefits for all executives; and (iii) changes that are required by applicable law; d. a material diminution in employee benefits (including but not limited to medical, dental or life insurance and long-term disability plans) and perquisites currently applicable to Employee, except for: (i) changes in the eligibility requirements for benefits that are applicable to employees generally; (ii) changes in benefits and perquisites that are applicable to all executives and result in a diminution of Employee's benefits that is fair and proportional as compared to the diminution for all executives; and (iii) changes that are required by applicable law; e. a change in the location of Employee's principal place of employment by the Company (including its subsidiaries) by more than twenty-five (25) miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or 6 7 f. a reasonable determination by a majority of those persons comprising the Board of Directors of the Company prior to a Change of Control (even if such determination is made after such Change of Control) that, as a result of a Change of Control and a change in circumstances thereafter significantly affecting his position, Employee is unable to exercise the functions or duties attached to his position immediately prior to the date on which a Change of Control occurs. 2. "CHANGE OF CONTROL" shall be deemed to have occurred if: a. any "person," including a "group" as determined in accordance with Section 13(d)(3) of the Securities Exchange Act of 1934 (the "Exchange Act"), is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; b. as a result of, or in connection with, any tender offer or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions (a "Transaction"), the persons who were directors of the Company before the Transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company; c. the Company is merged or consolidated with another corporation or entity and, as a result of the merger or consolidation, less than 80% of the outstanding voting securities of the surviving corporation or entity is then owned in the aggregate by the former stockholders of the Company; d. a tender offer or exchange offer is made and consummated for the ownership of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding voting securities; or e. the Company transfers all or substantially all of its assets to another corporation which is not a wholly-owned subsidiary of the Company. 3. "DISABLED" OR "DISABILITY" shall mean mental or physical illness or condition rendering Employee incapable of performing any portion of Employee's normal duties with the Company even after the Company's reasonable accommodation of any such disability in accordance with the Americans with Disabilities Act and the Colorado Nondiscrimination statute. 4. "INVOLUNTARY TERMINATION" shall mean any termination except: a. VOLUNTARY TERMINATION; b. termination by mutual agreement; c. termination as a result of death; or d. Employee's voluntary retirement from employment or mandatory retirement from employment pursuant to a retirement plan to which Employee was subject prior to any Change of Control. ("Retirement"). 7 8 5. "SEVERANCE AMOUNT" is equal to: a. in the case of an Involuntary or Voluntary Termination or Retirement after March 31, 2001, one-half of Employee's annual base salary, notwithstanding that the Employee may provide post-termination consulting services to the Company pursuant to Section XI hereof; provided, however, the Employee (i) has given proper notice as defined herein. In the case of a Involuntary or Voluntary Termination prior to March 31, 2001, other than an Involuntary Termination following a Change of Control, the Severance Amount is payable only upon providing such notice in accordance with the following vesting schedule:
Termination Date Severance Amount ---------------- ---------------- October 31, 2000 One-eighth of Employee's annual base salary (45.5 calendar days) November 30, 2000 One-sixth of Employee's annual base salary (60.6 calendar days) December 31, 2000 One-fourth of Employee's annual base salary (91 calendar days) January 31, 2001 One-third of Employee's annual base salary (121.3 calendar days) February 28, 2001 Five-twelfths of Employee's annual base salary (151.6 calendar days) March 31, 2001 One-half of Employee's annual base salary (182 calendar days)
b. In the case of a Voluntary Termination or an Involuntary Termination resulting from a Change in Duties, Compensation or Benefits, Employee must give the Company proper notice of such Termination in order to receive the Severance Amount. For purposes hereof, proper notice is defined as written notice received by the Company not less than thirty (30) days prior to the date of termination of employment. c. In the case of an Involuntary Termination by the Company, the Company must give Employee not less than sixty (60) days prior written notice of such termination. d. In the case of an Involuntary or Voluntary Termination or Retirement, the Severance Amount as set forth in subparagraph (a) is payable on regular bi-weekly payroll dates commencing immediately after Employee's last regular pay period, at the bi-weekly rate and amount in which Employee was paid on his last day of regular employment until fully paid. e. notwithstanding the above, in the event an Involuntary Termination follows a Change of Control, the Severance Amount shall be doubled and shall be fully vested and payable in a lump sum no later than ten (10) days following the date of termination. 8 9 f. Notwithstanding any other provision of this Agreement, in the event that the Employee is found to have violated the non-compete provisions of Section VII of this Agreement by a court of competent jurisdiction ("Breach"), all Severance Amounts due and owing under this Agreement shall be terminated upon the effective date of the Breach and the Employee shall reimburse the Company any portion of the Severance Amount previously paid to Employee. 6. "VOLUNTARY TERMINATION" shall mean any termination which results from a resignation by the Employee other than a resignation following a Change in Duties, Compensation, or Benefits as defined herein. 7. "VOTING SECURITIES" shall mean any securities which ordinarily possess the power to vote in the election of directors without the occurrence of any pre-condition or contingency other than the passage of time. 8. "BENEFICIALLY OWNED" shall mean beneficial ownership by the Employee, the Employee's spouse, or a trust or similar arrangement established by or for the benefit of the Employee, the Employee's spouse, or the Employee's minor children as well as the meaning of such term under Section 13 or Section 16 of the Securities Exchange Act. 9. "FAIR MARKET VALUE" shall mean (a) if there is an established market for the Company's common stock, the average of the mean of the highest and lowest quoted selling prices on each trading day for the ninety (90) day period preceding the day of the event triggering an obligation for the Company to purchase the shares of stock Beneficially Owned by the Employee; or (b) if there is no established market for the Company's stock during such ninety (90) day period, then the average over that ninety (90) day period of the value determined in accordance with Treasury Reg. Section 10.2031-2 or successor regulations. F. SECTION 280G PAYMENT. In the event that the Severance Amount payments under this Agreement are determined by an independent accounting firm retained by Employee (but paid for by the Company) to constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended, (the "Code") and any regulations thereunder, the Company agrees to increase the Severance Amount by the amount necessary to put the Employee in the position he would be in if Code Sections 280G and 4999 or any successor provisions to the Code which are designed to limit or restrict such "excess parachute payments" did not exist. G. MEDICAL AND DENTAL BENEFITS. If Employee's employment by the Company or any subsidiary or successor of the Company is terminated because of Disability, Retirement, Voluntary Termination, or Involuntary Termination, then to the extent that Employee or any of Employee's dependents may be covered under the terms of any medical and dental plans of the Company (or any subsidiary) immediately prior to the termination, the Company will provide Employee and those dependents with the same or equivalent coverages until one year after any such termination of employment. The Company may, at its election, procure such coverages 9 10 apart from, and outside of the terms of, the plans applicable to other employees. The Company's obligation to provide such coverages will be limited by the requirement that Employee and Employee's dependents comply with all of the conditions of the medical or dental plans applicable to employees generally and the Company is under no obligation to obtain special coverages for Employee which would not be covered by the plans applicable to employees generally. In consideration for these benefits, Employee must make contributions equal to those required from time to time from other employees for equivalent coverages under the medical or dental plans. IX. LIFE INSURANCE. A. GROUP LIFE INSURANCE. The Company shall provide Employee with personal life insurance under the Company's group life insurance policy as in effect from time to time. In addition, the Company will procure, or reimburse Employee for the cost of, $200,000 in term life insurance on Employee's life payable to a beneficiary chosen by Employee. B. KEY MAN LIFE INSURANCE. Employee hereby consents to the purchase by the Company, at the Company's option, of one or more Key Man life insurance policies on Employee's life naming the Company or its designee as beneficiary (the "Key Man Policies"); provided, however, that the Company shall not be required to obtain such insurance. Employee agrees that he shall taken any reasonable actions which may be requested by the Company, and otherwise fully cooperate with the Company, in its efforts to purchase and maintain the Key Man Policies. The Key Man Policies will be owned by the Company and the proceeds made payable to the Company or its designee. If purchased by the Company, the Key Man Policies shall be for the purpose of providing funds necessary to obtain a replacement for Employee and for any other reasonable business purpose as may be determined by the Company in amounts sufficient to accomplish their intended purposes. X. DIRECTORS AND OFFICER INSURANCE. The Company shall maintain and keep in force directors and officers liability insurance coverage on all directors and officers in such an amount as the Company deems reasonable and necessary under the circumstances but in no event less than $7.5 million of aggregate coverage. XI. POST-TERMINATION CONSULTING. In the event of Employee's Involuntary or Voluntary Termination or Retirement, the Company hereby agrees to engage Employee as a consultant to the Company for a period of up to five years (the "Consulting Period"), in exchange for an annual salary of $1.00 per year. While the Consulting Period will only begin after termination of employment under this Agreement, Employee shall nevertheless continue to be an "employee" of the Company during the Consulting Period for purposes of the Company's Tandem Stock Option and Stock Appreciation Rights Plan and Stock Bonus Plan, although the scope of Employee's services and responsibilities shall be diminished in such manner and amounts as may be agreed upon by the Company and Employee. Employee shall have the right to decline to provide any consulting services after an Involuntary Termination, Voluntary Termination or Retirement. If Employee does elect to provide consulting services, Employee may determine to cease providing such services to the Company at any time by giving at least fifteen (15) days prior written notice of such 10 11 determination to the Company. The Company agrees to engage Employee to provide the consulting services for a period of not less than two (2) years after a Voluntary Termination or Retirement, but the Company may terminate such engagement at any time thereafter for good cause. For purposes hereof, "good cause" shall mean misappropriation of Company funds or property, conviction of a crime involving dishonesty or moral turpitude, or willful disregard of any directive of the Company's Board of Directors. Notwithstanding the above, in the event that Employee violates any of the provisions of Section VII hereof during the term of such engagement, the Company may consider such violation as grounds for terminating the Consulting Agreement immediately without prior notice. XII. NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and delivered in person or sent by registered or certified mail to Employee's residence in the case of Employee or to its principal office in the case of the Company. XIII. WAIVER. The waiver of any provision of this Agreement shall not operate or be construed as a waiver of any other provision of this Agreement. No waiver shall be valid unless in writing and executed by the party to be charged therewith. XIV. SEVERABILITY/MODIFICATION. In the event that any clause or provision of this Agreement shall be determined to be invalid, illegal or unenforceable, such clause or provision may be severed or modified to the extent necessary, and, as severed and/or modified, this Agreement shall remain in full force and effect. XV. ASSIGNMENT. Except for a transfer by will or by the laws of descent or distribution, Employee's right to receive payments or benefits under this Agreement shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise. In the event of any attempted assignment or transfer contrary to this paragraph, the Company shall have no liability to pay any amount so attempted to be assigned or transferred. Employee acknowledges that the services to be rendered under this Agreement are unique and personal. Accordingly, Employee may not assign such duties or obligations under this Agreement. XVI. SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns (including, without limitation, any company into or with which the Company may merge or consolidate). The Company agrees that it will not effect the sale or other disposition of all or substantially all of its assets unless either (i) the person or entity acquiring the assets or a substantial portion of the assets shall expressly assume by an instrument in writing all duties and obligations of the Company under this Agreement or (ii) the Company shall provide, through the establishment of a separate reserve or otherwise, for the payment in full of all amounts which are or may reasonably be expected to become payable to Employee under this Agreement. XVII. ENTIRE AGREEMENT. This Agreement incorporates by reference the Stay Bonus Agreement dated September 20, 2000 and, together with such agreement, constitutes the entire agreement concerning the employment arrangement between the parties and shall, as of the effective date hereof, supersede all other such agreements between the parties, including but not limited to the Executive Employment Agreement dated January 1, 11 12 1997, and the Nondisclosure and Noncompete Agreement dated May 31, 1994, provided, however, that nothing in this Agreement shall prevent the Company from granting additional or special compensation or benefits to Employee after the date of execution of this Agreement. This Agreement may not be amended except by an agreement in writing signed by both parties. XVIII. GOVERNING LAW AND JURISDICTION. This Agreement shall be interpreted, construed, and enforced under the laws of the State of Colorado. The courts of the State of Colorado shall have sole jurisdiction and venue over all controversies which may arise with respect to this Agreement. XIX. TIME. In comparing any period of time prescribed or allowed by this Agreement, the day of the act, event or default from which the designated period of time begins to run shall not be included. Time accounting shall begin upon midnight of the following calendar day. All periods of time shall be assumed to be specified in calendar days unless otherwise noted. In the case of fractional days of time, the appropriate equivalent hours can be calculated and accounted for against midnight of the calendar day in which the period of time started. For purposes of calculating the duration of the covenant not to compete the time period of such covenant shall be extended by one day for each day that Employee competes with Company in violation of such covenant. XX. COLORADO WAGE ACT. The Company and Employee agree that the Severance Amount, if any, payable under this Agreement shall be considered "wages" for purposes of the Colorado Wage Act, C.R.S. Section 8-4-101 et seq. IN WITNESS WHEREOF, the parties have executed this Agreement the date and year indicated below. THE COMPANY: VARI-L COMPANY, INC. By: /s/ G. Peter Pappas G. Peter Pappas, Chief Executive Officer EMPLOYEE: /s/ Derek L. Bailey Derek L. Bailey 12 -----END PRIVACY-ENHANCED MESSAGE-----