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.