-----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, B0cwsnfI3jy27j8A8yAhl5xUNsKOaSamBdZ26KUh80Wb3EcpUbj5Zr93p4mbny8r nXvXw2z9csxoCUXWak/WmQ== 0000950134-01-501441.txt : 20010511 0000950134-01-501441.hdr.sgml : 20010511 ACCESSION NUMBER: 0000950134-01-501441 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010510 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: 1629075 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 d86614e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2001 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 March 31, 2001 VARI-L COMPANY, INC. (Exact name of Registrant as specified in its charter.) Colorado 06-0679347 ________________________ ____________________________________ (State of Incorporation) (I.R.S. Employer identification No.) 4895 Peoria Street Denver, Colorado 80239 (Address of principal executive offices) (303) 371-1560 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes__________ No_____X______ The number of shares outstanding of each of the issuer's classes of common stock, as of March 31, 2001: Class of Securities Outstanding Securities ------------------- ---------------------- $0.01 par value 7,106,811 shares Common shares ================================================================================ 2 VARI-L COMPANY, INC. March 31, 2001 Index
PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Balance Sheets, March 31, 2001 and June 30, 2000 (unaudited) 2 Statements of Operations, three months ended March 31, 2001 and 2000 and nine months ended March 31, 2001 and 2000 (unaudited) 3-4 Statements of Stockholders' Equity, nine months ended March 31, 2001 (unaudited) 5 Statements of Cash Flows, nine months ended March 31, 2001 and 2000 (unaudited) 6 Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk 18 The unaudited interim financial statements for the three and nine months ended March 31, 2000, 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 were not sufficiently reliable to enable them to perform review procedures relating to the Company's inventory. PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities 19 Item 3. Defaults upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20
1 3 PART I FINANCIAL INFORMATION VARI-L COMPANY, INC. Balance Sheets (unaudited)
March 31, June 30, ASSETS 2001 2000 ------------ ------------ Current assets: Cash and cash equivalents $ 4,704,814 $ 11,030,293 Trade accounts receivable, less allowance for doubtful accounts of $258,030 and $174,634, respectively 6,459,381 5,881,280 Inventories (note 2) 5,566,801 7,434,660 Prepaid expenses and other current assets 581,283 189,485 ------------ ------------ Total current assets 17,312,279 24,535,718 ------------ ------------ Property and equipment: Machinery and equipment 11,565,574 9,845,402 Furniture and fixtures 793,761 720,971 Leasehold improvements 1,576,730 1,538,575 ------------ ------------ 13,936,065 12,104,948 Less accumulated depreciation and amortization 5,969,899 4,767,159 ------------ ------------ Net property and equipment 7,966,166 7,337,789 Intangible and other assets 733,848 697,185 ------------ ------------ Total assets $ 26,012,293 $ 32,570,692 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft $ 301,312 $ 320,798 Trade accounts payable 2,104,958 4,182,270 Accrued compensation 1,483,803 1,499,890 Other accrued expenses 232,336 225,105 Notes payable and current installments of long-term obligations (note 3) 6,791,178 11,566,386 ------------ ------------ Total current liabilities 10,913,587 17,794,449 Long-term obligations (note 3) 53,507 91,666 ------------ ------------ Total liabilities 10,967,094 17,886,115 ------------ ------------ Stockholders' equity Common stock, $.01 par value, 50,000,000 shares authorized; 7,106,811 and 7,070,423 shares issued and outstanding, respectively 71,068 70,704 Additional paid-in capital 36,827,924 40,524,974 Unamortized stock compensation cost (92,936) (4,318,371) Accumulated deficit (21,760,857) (21,592,730) ------------ ------------ Total stockholders' equity 15,045,199 14,684,577 ------------ ------------ Commitments and contingencies (note 6) Total liabilities and stockholders' equity $ 26,012,293 $ 32,570,692 ============ ============
See accompanying notes to financial statements. 2 4 VARI-L COMPANY, INC. STATEMENTS OF OPERATIONS Three months ended March 31, 2001 and 2000 (unaudited)
2001 2000 ---------- ---------- Net sales $9,999,988 $7,746,763 Cost of goods sold 4,438,864 4,399,225 ---------- ---------- Gross profit 5,561,124 3,347,538 ---------- ---------- Operating expenses: Selling 1,101,996 888,719 General and administrative 2,823,555 1,075,797 Research and development 954,930 1,462,607 Expenses relating to accounting restatements and the related shareholder litigation (note 5) 465,489 16,483 ---------- ---------- Total operating expenses 5,345,970 3,443,606 ---------- ---------- Operating profit (loss) 215,154 (96,068) Other income (expense): Interest income 92,322 151,697 Interest expense (258,293) (252,790) Other, net (6,226) 6,370 ---------- ---------- Total other income (expense) (172,197) (94,723) ---------- ---------- Net income (loss) $ 42,957 $ (190,791) ========== ========== Basic earnings (loss) per share $ 0.01 $ (0.03) ========== ========== Basic weighted average shares outstanding 7,087,048 7,014,347 ========== ========== Diluted earnings (loss) per share $ 0.01 $ (0.03) ========== ========== Diluted weighted average shares outstanding 7,119,614 7,014,347 ========== ==========
See accompanying notes to financial statements. 3 5 VARI-L COMPANY, INC. STATEMENTS OF OPERATIONS Nine months ended March 31, 2001 and 2000 (unaudited)
2001 2000 ----------- ----------- Net sales $32,388,724 $21,185,835 Cost of goods sold 16,281,520 11,628,832 ----------- ----------- Gross profit 16,107,204 9,557,003 ----------- ----------- Operating expenses: Selling 3,464,920 2,576,159 General and administrative 6,505,992 3,071,624 Research and development 3,417,849 4,106,110 Expenses relating to accounting restatements and the related shareholder litigation (note 5) 2,333,449 16,483 ----------- ----------- Total operating expenses 15,722,210 9,770,376 ----------- ----------- Operating profit (loss) 384,994 (213,373) Other income (expense): Interest income 354,489 296,449 Interest expense (903,443) (671,619) Other, net (4,167) (1,411) ----------- ----------- Total other income (expense) (553,121) (376,581) ----------- ----------- Net loss $ (168,127) $ (589,954) =========== =========== Loss per share $ (0.02) $ (0.09) =========== =========== Weighted average shares outstanding 7,076,176 6,240,600 =========== ===========
See accompanying notes to financial statements. 4 6 VARI-L COMPANY, INC. STATEMENTS OF STOCKHOLDERS' EQUITY Nine months ended March 31, 2001 (unaudited)
Unamortized Common stock Additional stock Total ---------------------- paid-in compensation Accumulated stockholder's Shares Amount capital cost deficit equity --------- ------- ---------- ------------ ----------- ------------- Balance, June 30, 2000 7,070,423 $70,704 40,524,974 (4,318,371) (21,592,730) 14,684,577 Common stock issued under stock award plan 1,000 10 9,900 -- -- 9,910 Common stock issued under employee stock purchase plan 35,388 354 44,766 -- -- 45,120 Stock options forfeited -- -- (218,609) 218,609 -- -- Reversal of unamortized stock compensation upon repricing of options -- -- (3,533,107) 3,533,107 -- -- Amortization of stock compensation cost -- -- -- 473,719 -- 473,719 Net loss -- -- -- -- (168,127) (168,127) --------- ------- ---------- --------- ----------- ---------- Balance, March 31, 2001 7,106,811 $71,068 36,827,924 (92,936) (21,760,857) 15,045,199 ========= ======= ========== ========= =========== ==========
See accompanying notes to financial statements. 5 7 VARI-L COMPANY, INC. STATEMENTS OF CASH FLOWS Nine months ended March 31, 2001 and 2000 (unaudited)
2001 2000 ----------- ------------ Net loss $ (168,127) $ (589,954) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation of property and equipment 1,247,896 1,022,523 Loss on sale of asset 5,739 -- Amortization of intangible assets 20,995 15,156 Common stock issued under profit sharing and stock award plans 9,910 27,153 Amortization of stock compensation 473,719 364,913 Changes in operating assets and liabilities: Trade accounts receivable, net (578,101) (1,628,163) Inventories, net 1,867,859 (1,688,254) Prepaid expenses and other current assets (391,798) (1,499) Trade accounts payable (2,077,312) 1,066,573 Accrued compensation (16,087) 91,738 Other accrued expenses 7,231 (19,990) ----------- ------------ Total adjustments 570,051 (749,850) ----------- ------------ Cash provided by (used in) operating activities 401,924 (1,339,804) Cash flows from investing activities: Purchases of property and equipment (1,904,234) (930,132) Proceeds from sale of equipment 22,222 -- Increase in other assets (57,658) (119,374) ----------- ------------ Cash used in investing activities (1,939,670) (1,049,506) ----------- ------------ Cash flows from financing activities: Decrease in bank overdraft (19,486) (778,488) Proceeds from notes payable -- 10,377,469 Payments of notes payable (4,779,069) (12,008,115) Proceeds from long-term obligations -- 40,894 Payments of long-term obligations (34,298) (34,734) Proceeds from warrants exercised -- 6,317,521 Proceeds from stock options exercised -- 6,140,561 Proceeds from common stock issued under stock purchase plan 45,120 50,205 Common stock repurchased -- (66,626) ----------- ------------ Cash provided by (used in) financing activities (4,787,733) 10,038,687 ----------- ---------- Increase (decrease) in cash and cash equivalents (6,325,479) 7,649,377 Cash and cash equivalents at beginning of period 11,030,293 4,116,918 ----------- ------------ Cash and cash equivalents at end of period $ 4,704,814 $ 11,766,295 =========== ============ Supplemental disclosure of cash flow information: Cash paid for interest $ 1,057,877 $ 701,379 =========== ============ Cash paid for income taxes $ -- $ -- =========== ============
See accompanying notes to financial statements. 6 8 VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS March 31, 2001 (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 nine months ended March 31, 2001 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) INVENTORIES Inventories, net of allowances for excess and obsolete items, consist of the following:
March 31, June 30, 2001 2000 ---------- ---------- Finished goods $ 349,007 $ 363,549 Work-in-process 1,106,397 1,226,984 Raw materials 4,111,397 5,844,127 ---------- ---------- $5,566,801 $7,434,660 ========== ==========
(3) NOTES PAYABLE AND LONG-TERM OBLIGATIONS Notes payable and long-term obligations consist of the following:
March 31, June 30, 2001 2000 ---------- ----------- Notes payable under Revolving Credit Facility $6,720,931 $11,500,000 Promissory notes 27,816 66,756 Capital leases 95,938 91,296 ---------- ----------- 6,844,685 11,658,052 Less current installments 6,791,178 11,566,386 ---------- ----------- Long-term obligations $ 53,507 $ 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. 7 9 VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS March 31, 2001 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 March 31, 2001, 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. The forbearance agreement increased the interest rate to the prime rate plus 1.5% through December 15, 2000. Additionally, the forbearance agreement limited the maximum loan outstanding to an amount determined by a borrowing base formula which is calculated on the 15th and last day of each month (measurement dates). The formula relates to inventories, accounts receivable aged less than 90 days, and equipment. If the value determined by the formula is less than the loan outstanding on two consecutive measurement dates, the Company is required to reduce the loan balance to the amount determined by the borrowing base formula. 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. The second forbearance agreement also increased the interest rate to the prime rate plus 2.0% through March 31, 2001. On March 15, 2001, the Company was required to reduce the loan outstanding by $579,069, to $8,220,931, the amount determined by the borrowing base formula on that measurement date. On March 31, 2001, the Company entered into a third forbearance agreement, which delayed the bank's right to accelerate payment of the facility to June 30, 2001. Accordingly, the amounts outstanding as of March 31, 2001 have been classified as current. The third forbearance agreement required an additional $1,500,000 reduction in the loan outstanding, to bring the outstanding balance to $6,720,931. The third forbearance agreement requires the Company to maintain a borrowing base of at least $6,720,931. The third forbearance agreement also maintained the interest rate at the prime rate plus 2% through June 30, 2001 (10.0% at March 31, 2001). The Company is seeking a new lender to provide a long-term credit facility with more favorable terms and more capacity than is available under the forbearance agreement with its current lender. There can be no assurance, however, that the Company will be successful in obtaining a new lender or, if it is not successful, in negotiating additional forbearance agreements with its current lender. (4) INCOME TAXES For the three months ended March 31, 2001, the Company's provision for income taxes was offset by a reduction in the valuation allowance for net deferred tax assets. For the three months ended March 31, 2000 and nine months ended March 31, 2001 and 2000, the Company recorded no provision for federal or state income taxes since a valuation allowance was provided for the income tax benefit of the net operating losses incurred during those periods. (5) EXPENSES OF ACCOUNTING RESTATEMENTS AND RELATED MATTERS As discussed in note 6, 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 8 10 VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS March 31, 2001 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. (6) LITIGATION, COMMITMENTS AND CONTINGENCIES LITIGATION 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. The accompanying financial statements for the three and nine months ended March 31, 2000 have been previously restated. 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 May 10, 2001, an amended complaint has not yet been filed and a class has not been certified. 9 11 VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS March 31, 2001 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 former 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 was 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. 10 12 VARI-L COMPANY, INC. NOTES TO FINANCIAL STATEMENTS March 31, 2001 On April 3, 2001, the Colorado District Court dismissed the derivative action, without prejudice, based on the plaintiff's admitted failure to make demand upon the other shareholders to bring the claims before filing suit. Since the dismissal, the derivative plaintiff has requested access to the Company's shareholder list, presumably to make the previously omitted demand on shareholders in preparation for refiling the action. As of May 10, 2001, the Company is unable to reasonably estimate the possible loss associated with these matters. OTHER The Company is a party to other legal proceedings and claims in the ordinary course of its business. The Company believes that the outcome of these other matters will not have a material adverse effect on its financial condition, results of operations or liquidity. 11 13 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 MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2000 Net Sales Net sales for the three months ended March 31, 2001 increased 29.1% to $9,999,988 compared with $7,746,763 for the three months ended March 31, 2000. This improvement primarily reflects increased demand for commercial signal source products. Revenue from commercial signal source products was $8,282,330 for the three months ended March 31, 2001, a 30.7% increase from $6,336,396 for the three months ended March 31, 2000. Revenue from all other products was $1,717,658 for the three months ended March 31, 2001, a 21.8% increase from $1,410,367 for the three months ended March 31, 2000. Gross Profit Gross profit for the three months ended March 31, 2001 increased 66.1% to $5,561,124, or 55.6% of net sales, compared with $3,347,538, or 43.2% of net sales, for the three months ended March 31, 2000. Included in cost of goods sold for the three months ended March 31, 2001 is a charge of $216,040 for an adjustment to inventory carrying costs. The impact of this charge on cost of goods sold is offset by a reduction of $145,952 resulting from a decrease in certain inventory reserves. Included in cost of goods sold for the three months ended March 31, 2000 is a charge of $143,465 for excess and obsolete inventory. The higher gross profit margin in the 2001 period is primarily attributable to reduced labor costs resulting from reduced overtime, reduced material costs due to an improvement in prices paid for raw materials and a substantial reduction in charges for expedited shipments of raw materials, along with improved production yields. 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 $307,399 total amount of stock compensation recorded for the three months ended March 31, 2000, $285,542 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: 12 14
Three months ended -------------------------- March 31, March 31, 2001 2000 ---------- ---------- Selling: Non-cash stock compensation $ 4,577 $ 49,186 Other selling expenses 1,097,419 839,533 ---------- ---------- Total selling expenses $1,101,996 881,719 ========== ========== General and administrative: Non-cash stock compensation $ 10,584 $ 114,471 Other general and administrative expenses 2,812,971 961,326 ---------- ---------- Total general and administrative expenses $2,823,555 $1,075,797 ========== ========== Research and development: Non-cash stock compensation $ 13,445 $ 143,742 Other research and development expenses 941,485 1,318,865 ---------- ---------- Total research and development expenses $ 954,930 $1,462,607 ========== ==========
Selling Expenses Selling expenses for the three months ended March 31, 2001 increased 25.0% to $1,101,996, or 11.0% of net sales, compared with $881,719, or 11.4% of net sales, for the three months ended March 31, 2000. Excluding non-cash stock compensation, selling expenses for the three months ended March 31, 2001 increased 30.7% to $1,097,419, or 11.0% of net sales, compared with $839,533, or 10.8% of net sales, for the three months ended March 31, 2000. The increase in selling expenses was primarily attributable to higher commissions paid to manufacturer's representatives. General and Administrative Expenses General and administrative expenses for the three months ended March 31, 2001 increased 162.5% to $2,823,555, or 28.2% of net sales, compared with $1,075,797, or 13.9% of net sales, for the three months ended March 31, 2000. Excluding non-cash stock compensation, general and administrative expenses for the three months ended March 31, 2001 increased 192.6% to $2,812,971, or 28.1% of net sales, compared with $961,326, or 12.4% of net sales, for the three months ended March 31, 2000. The increase was primarily attributable to higher amounts paid to independent contractors for interim management and accounting services, stay bonuses paid to employees, and higher insurance premiums. Research and Development Expenses Research and development expenses for the three months ended March 31, 2001 decreased 34.7% to $954,930, or 9.5% of net sales, compared with $1,462,607 or 18.9% of net sales, for the three months ended March 31, 2000. Excluding non-cash compensation, research and development expenses for the three months ended March 31, 2001 decreased 28.6% to $941,485, or 9.4% of net sales, compared with $1,318,865, or 17.0% of net sales, for the three months ended March 31, 2000. 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. 13 15 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 March 31, 2001 and 2000, were $465,489 and $16,483, respectively. 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 decreased 39.1% to $92,322 for the three months ended March 31, 2001 compared with $151,697 for the three months ended March 31, 2000. The decrease was attributable to lower average cash balances available in the quarter for investing. Interest expense and other, net, increased 7.3% to $264,519 for the three months ended March 31, 2001 compared with $246,420 for the three months ended March 31, 2000. The increase was primarily attributable to interest and fees associated with the forbearance agreement, along with higher interest rates on the Company's credit facility. Net Income (Loss) and Income (Loss) Per Share The net income for the three months ended March 31, 2001 was $42,957, or $0.01 per share, compared with a net loss of $190,791, or $0.03 per share, for the three months ended March 31, 2000. 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 March 31, 2001 would have been $537,052 or $0.08 per share (basic and diluted), compared with a net income of $133,091, or $0.02 per share, for the three months ended March 31, 2000. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE NINE MONTHS ENDED MARCH 31, 2000 Net Sales Net sales for the nine months ended March 31, 2001 increased 52.9% to $32,388,724 compared with $21,185,835 for the nine months ended March 31, 2000. This improvement primarily reflects increased demand for commercial signal source products. Revenue from commercial signal source products was $26,971,568 for the nine months ended March 31, 2001, a 64.7% increase from $16,379,270 for the nine months ended March 31, 2000. The nine months ended March 31, 2001 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 $5,417,156 for the nine months ended March 31, 2001, a 12.7% increase from $4,806,565 for the nine months ended March 31, 2000. Gross Profit Gross profit for the nine months ended March 31, 2001 increased 68.5% to $16,107,204, or 49.7% of net sales, compared with $9,557,003, or 45.1% of net sales, for the nine months ended March 31, 2000. Included in cost of goods sold for the nine months ended March 31, 2001 is a charge of $739,580 for obsolete and excess inventory and a charge of $216,040 for an adjustment to inventory carrying costs. Included in the cost of goods sold for the nine months ended March 31, 2000 is a charge of $216,339 for obsolete and excess inventory. The higher gross profit margin in the 2001 period principally reflected the benefit from the end-of-life production run 14 16 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 in the first two quarters of fiscal 2001, as well as an increase in the provision for obsolete and excess inventory. 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 $473,719 total amount of stock compensation recorded in the nine months ended March 31, 2001, $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:
Nine months ended ----------------- March 31, 2001 March 31, 2000 -------------- -------------- Selling: Non-cash stock compensation $ 75,797 $ 58,389 Other selling expenses 3,389,123 2,517,770 ---------- ---------- Total selling expenses $3,464,920 $2,576,159 ========== ========== General and administrative: Non-cash stock compensation $ 176,337 $ 135,888 Other general and administrative expenses 6,329,655 2,935,736 ---------- ---------- Total general and administrative expenses $6,505,992 $3,071,624 ========== ========== Research and development: Non-cash stock compensation $ 221,585 $ 170,636 Other research and development expenses 3,196,264 3,935,474 ---------- ---------- Total research and development expenses $3,417,849 $4,106,110 ========== ==========
Selling Expenses Selling expenses for the nine months ended March 31, 2001 increased 34.5% to $3,464,920, or 10.7% of net sales, compared with $2,576,159, or 12.2% of net sales, for the nine months ended March 31, 2000. Excluding non-cash stock compensation, selling expenses for the nine months ended March 31, 2001 increased 34.6% to $3,389,123, or 10.5% of net sales, compared with $2,517,770, or 11.9% of net sales, for the nine months ended March 31, 2000. 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. 15 17 General and Administrative Expenses General and administrative expenses for the nine months ended March 31, 2001 increased 111.8% to $6,505,992, or 20.1% of net sales, compared with $3,071,624, or 14.5% of net sales, for the nine months ended March 31, 2000. Excluding non-cash stock compensation, general and administrative expenses for the nine months ended March 31, 2001 increased 115.6% to $6,329,655, or 19.5% of net sales, compared with $2,935,736, or 13.9% of net sales, for the nine months ended March 31, 2000. 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 nine months ended March 31, 2001 decreased 16.8% to $3,417,849, or 10.6% of net sales, compared with $4,106,110, or 19.4% of net sales for the nine months ended March 31, 2000. Excluding non-cash compensation, research and development expenses for the nine months ended March 31, 2001 decreased 18.8% to $3,196,264, or 9.9% of net sales, compared with $3,935,474, or 18.6% of net sales, for the nine months ended March 31, 2000. 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 nine months ended March 31, 2001 and 2000, were $2,333,449 and $16,483, respectively. 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 19.6% to $354,489 for the nine months ended March 31, 2001 compared with $296,449 for the nine months ended March 31, 2000. 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 34.9% to $907,610 for the nine months ended March 31, 2001 compared with $673,030 for the nine months ended March 31, 2000. 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 nine months ended March 31, 2001 was $168,127, or $0.02 per share, compared with a net loss of $589,954, or $0.09 per share, for the nine months ended March 31, 2000. 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 nine months ended March 31, 2001 would have been $2,639,041, or $0.37 per share, compared with a net loss of $208,558, or $0.03 per share, for the nine months ended March 31, 2000. 16 18 LIQUIDITY AND CAPITAL RESOURCES The Company's working capital at March 31, 2001 was $13,119,623, excluding notes payable under the Company's credit facility with its current bank of $6,720,931. Including the notes payable, working capital at March 31, 2001 was $6,398,692. Working capital at March 31, 2001 includes cash and cash equivalents of $4,704,814. Working capital at June 30, 2000, excluding notes payable under the Company's credit facility with its current bank of $11,500,000, was $18,241,269. Including the notes payable, working capital at June 30, 2000 was $6,741,269. Working capital at June 30, 2000 includes cash and cash equivalents of $11,030,293. Cash provided by operating activities was $401,924 for the nine months ended March 31, 2001. Cash provided by operating activities before changes in working capital items was $1,590,132. 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. Cash used in operating activities was $1,339,804 for the nine months ended March 31, 2000. Cash provided by operating activities before changes in working capital items was $839,791. Cash was also provided by increases in accrued compensation and accounts payable, which was offset by increased accounts receivable and inventories as a result of higher net sales volume. Cash used in investing activities was $1,939,670 for the nine months ended March 31, 2001 and was used principally for capital expenditures. The capital expenditures for the nine months ended March 31, 2001 related to additional production and test equipment to increase manufacturing capacity. Cash used in investing activities for the nine months ended March 31, 2000 was $1,049,506 and were for capital expenditures. The capital expenditures for the nine months ended March 31, 2000 also primarily related to additional production and test equipment to increase manufacturing capacity. Cash used in financing activities were $4,787,733 for the nine months ended March 31, 2001. Repayments of $4,779,069 on notes payable to the Company's primary lender along with repayments to other lenders of $34,298 were the principal uses of cash. Cash flows provided by financing activities for the nine months ended March 31, 2000 were $10,038,687, including the proceeds from stock options and warrants exercised of $12,458,082. These proceeds were offset by net repayments of $1,624,486 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 10% at March 31, 2001. 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 March 31, 2001, 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. The forbearance agreement increased the interest rate to the prime rate plus 1.5% through December 15, 2000. Additionally, the forbearance agreement limited the maximum loan outstanding to an amount 17 19 determined by a borrowing base formula which is calculated on the 15th and last day of each month (measurement dates). The formula relates to inventories, accounts receivable aged less than 90 days, and equipment. If the value determined by the formula is less than the loan outstanding on two consecutive measurement dates, the Company is required to reduce the loan balance to the amount determined by the borrowing base formula. 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. The second forbearance agreement also increased the interest rate to the prime rate plus 2.0% through March 31, 2001. On March 15, 2001, the Company was required to reduce the loan outstanding by $579,069, to $8,220,931, the amount determined by the borrowing base formula on that measurement date. On March 31, 2001, the Company entered into a third forbearance agreement, which delayed the bank's right to accelerate payment of the facility to June 30, 2001. Accordingly, the amounts outstanding as of March 31, 2001 have been classified as current. The third forbearance agreement required an additional $1,500,000 reduction in the loan outstanding, to bring the outstanding balance to $6,720,931. The third forbearance agreement requires the Company to maintain a borrowing base of at least $6,720,931. The third forbearance agreement also maintained the interest rate at the prime rate plus 2% through June 30, 2001. The Company is seeking a new lender to provide a long-term credit facility with more favorable terms and additional capacity than is available under the forbearance agreement. There can be no assurance, however, that the Company will be successful in obtaining a new lender or, if it is not successful, in negotiating additional forbearance agreements with its current lender. Even if the Company is successful in obtaining a new lender or negotiating an additional forbearance agreement with its current lender, there can be no assurance that the terms of such an agreement would provide adequate financing for additional equipment and working capital required to support the Company's current growth plans. Forward-Looking Statements Some of the statements contained in this report are forward-looking statements. The accuracy of these statements cannot be guaranteed as they are subject to a variety of risks, including but not limited to general economic conditions in the United States and the overseas markets served by the Company, 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 March 31, 2001, the Company had notes payable outstanding under a bank credit facility of $6,720,931 with an interest rate of 10%. The third forbearance agreement expires on June 30, 2001, when the notes are payable in full. 18 20 VARI-L COMPANY, INC. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The following note should be read in conjunction with Note 6 to the financial statements. On August 4, 2000, a shareholder derivative action was filed purportedly on behalf of the Company in Colorado state court in Denver. The Company was 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. On April 3, 2001, the Colorado District Court dismissed the derivative action, without prejudice, based on the plaintiff's admitted failure to make demand upon the other shareholders to bring the claims before filing suit. Since the dismissal, the derivative plaintiff has requested access to the Company's shareholder list, presumably to make the previously omitted demand on shareholders in preparation for refiling the action. 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 loan inception. As of March 31, 2001, 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. The forbearance agreement increased the interest rate to the prime rate plus 1.5% through December 15, 2000. Additionally, the forbearance agreement limited the maximum loan outstanding to an amount determined by a borrowing base formula which is calculated on the 15th and last day of each month (measurement dates). The formula relates to inventories, accounts receivable aged less than 90 days, and equipment. If the value determined by the formula is less than the loan outstanding on two consecutive measurement dates, the Company is required to reduce the loan balance to the amount determined by the borrowing base formula. 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. The second forbearance agreement also increased the interest rate to the prime rate plus 2.0% through March 31, 2001. On March 15, 2001, the Company was required to reduce the loan outstanding by $579,069, to $8,220,931, the amount determined by the borrowing base formula on that measurement date. On March 31, 2001, the Company entered into a third forbearance agreement, which delayed the bank's right to accelerate payment of the facility to June 30, 2001. Accordingly, the amounts outstanding as of March 31, 2001 have been classified as current. The third forbearance agreement required an additional $1,500,000 reduction in the loan outstanding, to bring the outstanding balance to $6,720,931. The third forbearance agreement requires the Company to maintain a borrowing base 19 21 of at least $6,720,931. The third forbearance agreement also maintained the interest rate at the prime rate plus 2% through June 30, 2001. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10.1 Executive Employment Agreement with Richard P. Dutkiewicz dated January 22, 2001. (b) Reports on Form 8-K A report on Form 8-K dated January 10, 2001 under Item 5, 7 and 9 was filed with the Commission on January 19, 2001. 20 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VARI-L COMPANY, INC. Date: May 10, 2001 By: /s/ Richard P. Dutkiewicz ------------------------------- ------------------------------- Richard P. Dutkiewicz, Vice President of Finance and Chief Financial Officer 21 23 INDEX TO EXHIBITS
Exhibit Number Description - ------- ----------- 10.1 Executive Employment Agreement with Richard P. Dutkiewicz dated January 22, 2001.
EX-10.1 2 d86614ex10-1.txt EXECUTIVE EMPLOYMENT AGREEMENT 1 VARI-L COMPANY, INC. EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT, effective January 22, 2001, is made and entered into by and between VARI-L COMPANY, INC. (the "Company") and RICHARD P. DUTKIEWICZ ("Employee"). WHEREAS, the Company wishes to engage Employee as the Company's Chief Financial Officer and Vice President-Finance to lead the Company's accounting department and to manage, coordinate and actively participate in the Company's corporate finance, accounting, banking, investor relations and financial reporting functions, as part of the Company's continuing efforts to build shareholder value; and WHEREAS, the Company's 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 inducing Employee to accept a position with the Company and to continue to provide diligent and efficacious services to the Company during his 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 January 22, 2001, and expiring January 21, 2003 (the "Initial Term"). On January 21 of each year, beginning in 2003, 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 Chief Financial Officer and Vice President-Finance of the Company, to have primary responsibility for and authority over the management and direction of all accounting, finance and tax functions of the Company, including the management and coordination of, and active participation in, the Company's corporate finance, accounting, banking, investor relations and financial reporting functions, and such other duties as may be assigned to Employee by the Audit Committee of the Company's Board of Directors, subject only to the direction of the Audit Committee and, to the extent such authority is delegated by the Audit Committee to the Chief Executive Officer or any other officers of the Company, the direction or supervision of such other officers. IV. EXTENT OF SERVICES. 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 2 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 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. ANNUAL BASE SALARY. For all services rendered by Employee under this Agreement, the Company shall pay Employee an annual base salary of at least $150,000, 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. Upon Employee's completion of ninety (90) days employment under this Agreement, the Company will pay an initial signing bonus of $10,000 to Employee. In addition to and not as a substitute for such bonus, Employee may receive such additional bonuses, payable in cash or shares of the Company's stock, as may be 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: (i) Employee's success in meeting his personal performance goals, as established by the Audit Committee of the Board of Directors; (ii) Employee's merit, including but not limited to the quality of the services provided by Employee and his industriousness and diligence in performing such services; and (iii) the Company's financial success and progress in the prior fiscal year. It is anticipated that, if Employee is judged to have been successful under the foregoing criteria, his annual bonus would be equal to approximately thirty percent (30%) of his annual base salary for the preceding year. C. VACATION. Employee shall be entitled to accrue three (3) weeks of paid vacation for each year of service provided. After one year of service, that amount will increase to four (4) weeks per year. 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 Section VIII hereof. Employee shall be required to take at least two (2) weeks vacation per year, including in at least one case a vacation lasting no less than five (5) consecutive business days. D. EMPLOYEE BENEFITS. 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. It is agreed that, in 2001, Employee will be granted options to purchase 20,000 shares of the Company's common stock under the Company's Tandem Stock Option and Stock Appreciation Rights Plan, which option shall vest ratably over a four year period and shall be subject to the other terms and conditions of that plan. Employee's right to receive grants in subsequent years will be determined on the same basis as other senior 2 3 executives of the Company considering, in Employee's case, the performance standards set forth in Section V. B above. E. WORKING FACILITIES. 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. EXPENSES. Subject to limits which may be imposed by the Chief Executive Officer, President or the Board of Directors, including any committee thereof, 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, 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 shall appropriately document the business purpose of such expenditures. Employee's expenses must be submitted to and approved by the Audit Committee or another officer or employee designated by the Audit Committee to review and approve such expenses. 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 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 3 4 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, provided, however, that the Company acknowledges and agrees that Employee may, for a period of up to three (3) months after the date of this Agreement, provide consulting services on a part time basis to his former employer in order to assist it in the transition and training of his replacement. 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 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 4 5 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, the Company shall pay to Employee's estate any unpaid wages or other amounts owing at the time of death and shall pay, in addition to and not as a substitute for the proceeds from any life insurance policies on Employee's life paid for by the Company, an amount equal to the Severance Amount which would have been payable to Employee if there had been a Voluntary Termination on the date of Employee's death and all notice and other requirements for the payment of such Severance Amount had been satisfied. 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 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, and (iii) 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 5 6 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 three (3) months 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 fifty (50) miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or 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"), 6 7 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"). 5. "SEVERANCE AMOUNT" is equal to: a. in the case of an Involuntary Termination not following a Change of Control, one-half of Employee's annual base salary payable ratably over a six (6) month period on the Company's regular payroll dates, in addition to and not as a substitute for compensation payable to Employee on account of post-termination consulting services provided by Employee to the Company, if any, pursuant to Section XI hereof. In the case of a Involuntary Termination following a Change of Control, the Severance Amount shall be an amount equal to 7 8 seventy five percent (75%) of Employee's then annual base salary, payable in a single lump sum no later than thirty (30) days following such termination. In the event of Voluntary Termination, no Severance Amount shall be payable until Employee has completed one (1) year of service under this Agreement, in which case the Severance Amount will be equal to one (1) month's salary for every year of service completed under this Agreement, up to a maximum of three (3) months, payable ratably on the Company's regular payroll dates. b. In the case of a Voluntary Termination or an Involuntary Termination resulting from Employee's resignation following 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 thirty (30) days prior written notice of such termination. d. 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 for 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. F. SECTION 280G PAYMENT. In the unlikely 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, such Severance Amount shall be reduced by the amount necessary to avoid such classification. G. MEDICAL AND DENTAL BENEFITS. If Employee's employment by the Company or any subsidiary or successor of the Company is terminated because of Death, Disability, or Involuntary Termination, then to the extent that Employee or any of Employee's 8 9 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 three (3) months after any such termination of employment. The Company may, at its election, procure such coverages 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. If and to the extent that Employee is eligible to participate in a medical, dental or other health insurance plan of another employer after the termination of his employment by the Company, then the benefit provided by this section shall be eliminated or commensurately diminished. 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 which shall be payable to a beneficiary designated by Employee in addition to, and not as a substitute for, any Severance Amount payable under Section VIII.B. above. Employee acknowledges that, while the Company currently maintains group life insurance which provides for a death benefit equal to three (3) times an officer's annual base salary at the time of death as well as an accidental death and dismemberment policy (the AD&D Policy") which also provides for an additional benefit in the same amount as the group life insurance if the cause of death is covered by the AD&D Policy, such coverages may be altered or amended in the future on a Company-wide basis, provided, however, that under no circumstances will such coverages be reduced unless other officers of comparable rank within the Company are correspondingly reduced. 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 take 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 OFFICERS 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. 9 10 XI. POST-TERMINATION CONSULTING. In the event of Employee's Involuntary or Voluntary Termination, Employee agrees to provide services to the Company as a consultant for a period of ninety (90) days following the termination of his employment (the "Consulting Period"), in exchange for cash compensation at the rate of $100 per hour. 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 or Voluntary Termination but such refusal will result in the forfeiture of Employee's right to the Severance Amount hereunder. If Employee does elect to provide consulting services, Employee shall be obligated to provide no more than ten (10) hours of consulting services per week during the Consulting Period, if and to the extent requested by the Company. Employee may determine to cease providing such services to the Company at any time but such a determination, to the extent it is made prior to the completion of the full ninety (90) day Consulting Period, shall proportionately reduce Employee's entitlement to the Severance Amount payable hereunder. 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 as indicated in Employee's personnel file at in the Company's records 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 10 11 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 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, 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. XXI. COUNTERPARTS. This Agreement may be signed in one or more counterparts which, taken together, shall constitute a single binding agreement between the parties. Photocopies or telecopies of the parties' original signatures hereto may be relied upon as originals for all purposes. 11 12 IN WITNESS WHEREOF, the parties have executed this Agreement the date and year indicated below. THE COMPANY: VARI-L COMPANY, INC. By: ------------------------------------------------- G. Peter Pappas, Chief Executive Officer EMPLOYEE: ----------------------------------------------------- Richard P. Dutkiewicz 12 -----END PRIVACY-ENHANCED MESSAGE-----