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.