-----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, IDBhcVH9/7cvN/UaU5o9gKyLULRJNiqYSgCAyE+gTbon9OGf+l9LDyWl6DZlBqc4 mUap63omfq6oBNgseWDR4g== 0000950134-02-001049.txt : 20020414 0000950134-02-001049.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950134-02-001049 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020212 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: 1934 Act SEC FILE NUMBER: 000-23866 FILM NUMBER: 02536244 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 d94132e10-q.txt FORM 10-Q FOR QUARTER ENDED DECEMBER 31, 2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File No. 0-23866 December 31, 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 X No ---- ---- The number of shares outstanding of each of the issuer's classes of common stock, as of December 31, 2001:
Class of Securities Outstanding Securities ------------------- ---------------------- $0.01 par value 7,128,723 shares Common shares
VARI-L COMPANY, INC. December 31, 2001 Index Part I. Financial Information Item 1. Financial Statements: Balance Sheets, December 31, 2001 (unaudited) and June 30, 2001 2 Statements of Operations, three months ended December 31, 2001 and 2000 and six months ended December 31, 2001 and 2000 (unaudited) 3-4 Statement of Stockholders' Equity, six months ended December 31, 2001 (unaudited) 5 Statements of Cash Flows, six months ended December 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 19 Part II. Other Information Item 1. Legal Proceedings 20 Item 2. Changes in Securities 21 Item 3. Defaults upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21
VARI-L COMPANY, INC. Balance Sheets (in thousands of dollars)
DECEMBER 31, JUNE 30, ASSETS 2001 2001 ----------- ---------- (unaudited) Current assets: Cash and cash equivalents $ 1,580 2,013 Trade accounts receivable, net of allowance for doubtful accounts of $171 and $279, respectively 4,588 5,942 Inventories 2,812 3,640 Prepaid expenses and other current assets 541 645 -------- -------- Total current assets 9,521 12,240 -------- -------- Property and equipment: Machinery and equipment 11,897 11,616 Furniture and fixtures 839 822 Leasehold improvements 1,499 1,500 -------- -------- 14,235 13,938 Less accumulated depreciation and amortization 7,279 6,362 -------- -------- Net property and equipment 6,956 7,576 Intangible and other assets, net of accumulated amortization of $133 and $109, respectively 649 638 -------- -------- Total assets $ 17,126 20,454 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 924 1,669 Accrued compensation 722 1,286 Other accrued expenses 261 428 Notes payable and current installments of long-term obligations 1,307 1,764 -------- -------- Total current liabilities 3,214 5,147 Long-term obligations 1,470 1,321 Other liabilities 156 157 -------- -------- Total liabilities 4,840 6,625 -------- -------- Stockholders' equity: Common stock, $.01 par value, 50,000,000 shares authorized; 7,128,723 and 7,107,161 shares issued and outstanding, respectively 71 71 Additional paid-in capital 36,878 36,829 Unamortized stock compensation cost (52) (79) Accumulated other comprehensive income 29 -- Accumulated deficit (24,640) (22,992) -------- -------- Total stockholders' equity 12,286 13,829 -------- -------- Commitments and contingencies Total liabilities and stockholders' equity $ 17,126 20,454 ======== ========
See accompanying notes to financial statements. 2 VARI-L COMPANY, INC. Statements of Operations (in thousands of dollars, except share and per share data)
THREE MONTHS THREE MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 2001 2000 ------------ ------------ (unaudited) (unaudited) Net sales $ 5,607 10,894 Cost of goods sold 3,285 5,705 ----------- ----------- Gross profit 2,322 5,189 ----------- ----------- Operating expenses: Selling 628 1,246 General and administrative 1,521 2,224 Research and development 717 879 Expenses relating to accounting restatements and the related shareholder litigation, net of recoveries (51) 620 ----------- ----------- Total operating expenses 2,815 4,969 ----------- ----------- Operating income (loss) (493) 220 Other income (expense): Interest income 11 104 Interest expense (48) (316) Other, net 2 (18) ----------- ----------- Total other income (expense) (35) (230) ----------- ----------- Net loss $ (528) (10) =========== =========== Loss per share, basic and diluted $ (0.07) * =========== =========== Weighted average shares outstanding, basic and diluted 7,128,503 7,079,692 =========== ===========
* Loss per share is less than $0.01 See accompanying notes to financial statements. 3 VARI-L COMPANY, INC. Statements of Operations (in thousands of dollars, except share and per share data)
SIX MONTHS SIX MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 2001 2000 ----------- ----------- (unaudited) (unaudited) Net sales $ 11,283 22,389 Cost of goods sold 6,815 11,843 ----------- ----------- Gross profit 4,468 10,546 ----------- ----------- Operating expenses: Selling 1,282 2,313 General and administrative 3,400 3,802 Research and development 1,324 2,393 Expenses relating to accounting restatements and the related shareholder litigation, net of recoveries 34 1,868 ----------- ----------- Total operating expenses 6,040 10,376 ----------- ----------- Operating income (loss) (1,572) 170 Other income (expense): Interest income 29 262 Interest expense (98) (645) Other, net (7) 2 ----------- ----------- Total other income (expense) (76) (381) ----------- ----------- Net loss $ (1,648) (211) =========== =========== Loss per share, basic and diluted $ (0.23) (0.03) =========== =========== Weighted average shares outstanding, basic and diluted 7,125,980 7,070,861 =========== ===========
See accompanying notes to financial statements. 4 VARI-L COMPANY, INC. Statement of Stockholders' Equity (in thousands of dollars, except share amounts) (Unaudited)
UNAMORTIZED COMMON STOCK ADDITIONAL STOCK -------------------------- PAID-IN COMPENSATION SHARES AMOUNT CAPITAL COST ---------- ----------- ------------ ------------ Balance, June 30, 2001 7,107,161 $ 71 36,829 (79) Common stock issued under employee stock purchase plan 20,412 -- 48 -- Common stock issued under stock award plan 1,150 -- 1 -- Amortization of stock compensation cost -- -- -- 27 Unrealized gain on marketable securities -- -- -- -- Net loss -- -- -- -- Comprehensive loss ----------- ----------- ----------- ----------- Balance, December 31, 2001 7,128,723 $ 71 36,878 (52) =========== =========== =========== =========== ACCUMULATED OTHER TOTAL COMPREHENSIVE ACCUMULATED COMPREHENSIVE STOCKHOLDERS' INCOME DEFICIT LOSS EQUITY ------------- ----------- ------------- ------------- Balance, June 30, 2001 -- (22,992) 13,829 Common stock issued under employee stock purchase plan -- -- 48 Common stock issued under stock award plan -- -- 1 Amortization of stock compensation cost -- -- 27 Unrealized gain on marketable securities 29 -- 29 29 Net loss -- (1,648) (1,648) (1,648) ----------- Comprehensive loss $ (1,619) =========== ----------- ----------- -------- Balance, December 31, 2001 29 (24,640) 12,286 =========== =========== ========
See accompanying notes to financial statements. 5 VARI-L COMPANY, INC. Statement of Cash Flows (in thousands of dollars)
SIX MONTHS SIX MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, 2001 2000 ------------ ----------- (unaudited) (unaudited) Net loss $(1,648) (211) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation of property and equipment 996 819 Loss on disposal of assets 7 -- Amortization of intangible assets 16 13 Amortization of debt issue costs 8 -- Common stock issued under profit sharing and stock award plans 1 9 Amortization of stock compensation 27 445 Changes in operating assets and liabilities: Trade accounts receivable, net 1,354 (473) Inventories, net 828 1,293 Prepaid expenses and other current assets 133 (395) Trade accounts payable (745) (1,758) Accrued compensation (564) 431 Other accrued expenses and liabilities (167) 13 ------- ------- Total adjustments 1,894 397 ------- ------- Cash provided by operating activities 246 186 ------- ------- Cash flows from investing activities: Purchases of property and equipment (442) (668) Proceeds from sale of equipment 59 -- Increase (decrease) in other assets (35) (25) ------- ------- Cash used in investing activities (418) (693) ------- ------- Cash flows from financing activities: Increase (decrease) in bank overdraft -- (321) Proceeds from notes payable 6,899 -- Payments of notes payable (7,374) (2,700) Proceeds from long-term obligations 308 -- Payments of long-term obligations (142) (36) Proceeds from common stock issued under stock purchase plan 48 -- ------- ------- Cash used in financing activities (261) (3,057) ------- ------- Decrease in cash and cash equivalents (433) (3,564) Cash and cash equivalents at beginning of period 2,013 11,030 ------- ------- Cash and cash equivalents at end of period $ 1,580 7,466 ======= ======= Supplemental disclosure of cash flow information: Cash paid for interest $ 85 739 ======= ======= Cash paid for income taxes $ -- -- ======= =======
See accompanying notes to financial statements. 6 VARI-L COMPANY, INC. Notes to Financial Statements Three and six months ended December 31, 2001 and 2000 (1) BASIS OF PRESENTATION The accompanying financial statements of the Company have been prepared without audit (except for the balance sheet information as of June 30, 2001, which is derived from the Company's audited financial statements). 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 Annual Report on Form 10-K for the period ended June 30, 2001. In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations for the periods presented. Interim results of operations for the three and six months ended December 31, 2001 are not necessarily indicative of operating results that can be expected for the full year. Certain 2000 amounts have been reclassified to conform to the 2001 presentation. (2) INVENTORIES Inventories, net of allowances for excess and obsolete items, consist of the following:
DECEMBER 31, JUNE 30, 2001 2001 ----------- -------- (in thousands of dollars) Finished goods $ 396 463 Work-in-process 334 623 Raw materials 2,082 2,554 ------- ------ $ 2,812 3,640 ======= ======
(3) NOTES PAYABLE AND LONG-TERM OBLIGATIONS Notes payable and long-term obligations consist of the following:
DECEMBER 31, JUNE 30, 2001 2001 ----------- -------- (in thousands of dollars) Notes payable under Revolving Credit Facility: Revolving loan $1,005 1,481 Term Loan 1,716 1,500 Promissory notes -- 21 Capital lease obligations 56 83 ------ ----- 2,777 3,085 Less current installments 1,307 1,764 ------ ----- Long-term obligations $1,470 1,321 ====== =====
7 VARI-L COMPANY, INC. Notes to Financial Statements Three and six months ended December 31, 2001 and 2000 On June 28, 2001, the Company entered into a credit agreement with Wells Fargo Business Credit, Inc (the "Credit Facility"). The Credit Facility provides for a $6.0 million secured revolving line of credit ("Revolving Loan"), up to a $2.5 million secured term loan ("Term Loan"), and a $1.5 million secured capital expenditures loan ("Capital Expenditures Loan"). The Credit Facility is secured by substantially all of the Company's accounts receivable, inventories and equipment and is subject to covenants that, among other things, impose limitations on capital expenditures and investments, restrict certain payments and distributions and require the Company to maintain certain financial ratios. In September 2001, the Credit Facility was amended to establish revised financial covenants for the fiscal years ending June 30, 2002 and June 30, 2001. At December 31, 2001, the interest rates on the Revolving Loan and the Term Loan were 5.25% and 5.75%, respectively. The Company had additional borrowing availability of $2.1 million under the Revolving Loan. The Company periodically reviews the state of the wireless industry in general and the impact on its financial projections that are provided to Wells Fargo Business Credit, Inc. Due to continued softness of sales demand in the wireless industry, financial projections for the remainder of the fiscal year were revised. Additionally, the Company realized that the continuing softness in the wireless industry and the related impact on sales could have resulted in a violation of the covenants. On February 8, 2002, the Company entered into a second amendment to the Credit Facility. The maximum availability on the Revolving Loan was reduced to $4.0 million, the interest rate was increased to the lender's prime rate plus 1% and the formula for calculating availability no longer includes inventories. The Term Loan was modified to accelerate the amortization period of the loan from 84 months to 42 months and the interest rate was increased to the lender's prime rate plus 2.5%. In addition, the commitment for the Capital Expenditures Loan was cancelled. The Company is required to pay a minimum interest charge on the Credit Facility of $30,000 per calendar quarter. (4) INCOME TAXES A valuation allowance was provided for the income tax benefit of the net operating losses incurred during the three and six months ended December 31, 2001 and 2000. (5) EXPENSES OF ACCOUNTING RESTATEMENTS, SHAREHOLDER LITIGATION AND RELATED MATTERS As discussed in note 6, in early 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 in the Company's Statements of Operations as "Expenses relating to accounting restatements and the 8 VARI-L COMPANY, INC. Notes to Financial Statements Three and six months ended December 31, 2001 and 2000 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. The accounting restatements were completed in February 2001, however the Company continues to incur costs related to shareholder litigation. (6) LITIGATION, COMMITMENTS AND CONTINGENCIES SECURITIES AND EXCHANGE COMMISSION INVESTIGATION In September 2001, the Company agreed to a settlement with the Securities and Exchange Commission under which the Company, without admitting or denying that it violated any laws, consented to the entry of an injunction prohibiting future violations by the Company of certain periodic reporting, record keeping, internal controls, proxy solicitation and antifraud provisions of the Securities Exchange Act of 1934. On November 9, 2001, the Company's settlement with the Securities and Exchange Commission was approved by the United States District Court for the District of Colorado. PRIVATE SECURITIES CLASS ACTION A number of private shareholder class actions alleging violations of federal securities laws were filed against the Company and certain of its former officers in the United States District Court for the District of Colorado beginning in June 2000. Those actions have since been consolidated and an amended consolidated complaint has been filed by the class representatives. On November 21, 2001, the Company filed a motion to dismiss all claims against the Company in the consolidated private securities class action, Rasner v. Vari-L Company, Inc., Civ. No. 00-S-1181, D. Colo. The Company's motion argues that the amended consolidated complaint alleges wrongdoing by former corporate employees in furtherance of their personal interests, as opposed to corporate interests, which does not state a claim for securities fraud against the Company. The class action representatives have filed their response to the Company's motion to dismiss and the Company has filed a reply to that response but the court has not yet ruled on the motion. The Company is engaged in settlement discussions with the class representatives aimed at settling all claims against the Company. While the Company is optimistic that it will be able to reach a settlement agreement with the plaintiffs, there is no assurance that a settlement acceptable to the Company can be achieved or that any settlement reached will not have a material adverse effect on the Company. In addition, any settlement will have to be approved by the court after giving all affected class members an opportunity to express their views concerning the settlement proposal. Moreover, irrespective of the outcome with respect to the Company, the individual defendants may have claims against the Company for advancement or indemnification of their attorneys fees and other costs of defense, which claims may be material. 9 VARI-L COMPANY, INC. Notes to Financial Statements Three and six months ended December 31, 2001 and 2000 As of the date hereof, the Company is unable to reasonably estimate the possible loss, if any, associated with the securities class action. SHAREHOLDER DERIVATIVE SUIT On August 4, 2000, a shareholder derivative action was filed, purportedly on behalf of the Company, in Colorado state court in Denver against the same officers named in the class action as well as the members of the Company's board of directors at the time. The Company was also named as a nominal defendant. The derivative complaint alleged many of the same facts as in the federal securities class action, claiming that those facts demonstrate that the individual defendants breached their fiduciary duties to the Company and the shareholders. The action was dismissed without prejudice in April 2001 but an amended complaint was filed by the same plaintiff in September 2001. On October 9, 2001, the Company filed a motion to dismiss the second shareholder derivative action, on various grounds, including the failure to make the required demands, the failure to commence a new action rather than trying to revive the previously dismissed case, and the availability of new management and a new independent Board member to evaluate the merits, and the timing, of any claims which could be brought by the Company against the individual defendants. Substantially all of the individual named defendants subsequently joined in the Company's motion. Reliance Insurance Company ("Reliance") is the issuer of the $5 million primary directors and officers liability insurance policy in effect for the period of time covered by the securities class action and the derivative action. On October 3, 2001, the Commonwealth Court of Pennsylvania entered an Order of Liquidation for Reliance. In that order, the Pennsylvania court requested, as a matter of comity, that all actions against Reliance, or in which Reliance is obligated to defend a party, that are pending in courts outside of Pennsylvania, be stayed by those courts for a period of ninety days. As a result, the Colorado state court on October 24, 2001 entered an order staying the derivative action involving the Company for said ninety day period. The Reliance liquidator has indicated that claimants will be notified in January 2002 concerning the procedures by which insureds and other claimants may file claims against the Reliance estate. As of the date hereof, the Company is unable to reasonably estimate the possible loss, if any, associated with the derivative action. 10 VARI-L COMPANY, INC. Notes to Financial Statements Three and six months ended December 31, 2001 and 2000 DECLARATORY JUDGMENT ACTION BY EXCESS INSURER On June 5, 2001, Agricultural Excess and Surplus Insurance Company ("AESIC"), which had issued to the Company a $2.5 million excess directors and officers liability insurance policy for the period of time covered by the shareholder and class action litigation referenced above, filed suit in United States District Court for the District of Colorado asking the court to find that it is not obligated to provide coverage, or in the alternative, seeking permission to rescind its policy. A settlement conference has been scheduled for February 2002 by the U.S. Magistrate assigned to the case. As of the date hereof, the Company is unable to reasonably estimate the possible loss, if any, associated with declaratory judgment action. FORMATION OF SPECIAL LITIGATION COMMITTEE On December 5, 2001, the Company formed a Special Litigation Committee of the Board of Directors to investigate allegations of wrongdoing during prior financial periods by former employees, as well as current and former members of the Company's Board of Directors. The Special Litigation Committee is comprised of two outside directors who joined the Company's Board subsequent to the time of the alleged wrongdoing. The Special Litigation Committee has retained separate counsel to complete the investigation. OTHER The Company is a party to other legal proceedings and claims in the ordinary course of its business. The Company believes that the outcome of these other matters will not have a material adverse affect on its financial condition, results of operations or liquidity. (7) SUBSEQUENT EVENT On January 25, 2002, the Company acquired certain assets of Asvan Technologies, LLC. The purchase price was $100,000 in cash and a two year promissory note in the amount of $175,000 secured by a letter of credit. The note has principal and interest payable in equal monthly installments at an annual rate of 10%. 11 VARI-L COMPANY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations for the Three Months Ended December 31, 2001 Compared to the Three Months Ended December 31, 2000 Net Sales Net sales for the three months ended December 31, 2001 decreased 48.5% to $5.6 million compared with $10.9 million for the three months ended December 31, 2000. This decline is primarily due to a decrease in demand for commercial signal source products consistent with an overall slowdown in the wireless telecommunications industry. Revenue from commercial signal source products was $4.4 million for the three months ended December 31, 2001, a 52.7% decrease from $9.3 million for the three months ended December 31, 2000. Revenue for the three months ended December 31, 2000 included fees earned from contract modification of approximately $0.3 million. Revenue from all other products was $1.2 million for the three months ended December 31, 2001, a 25.0% decrease from $1.6 million for the three months ended December 31, 2000. Gross Profit Gross profit for the three months ended December 31, 2001 decreased 55.3% to $2.3 million, or 41.4% of net sales, compared with $5.2 million, or 47.6% of net sales, for the three months ended December 31, 2000. The gross profit percent in any period can be affected significantly by volume and unusual items. Fixed manufacturing overhead adversely affects gross profit at lower sales volumes. Accordingly, the reduced sales level for the three months ended December 31, 2001 had the effect of lowering gross profit as a percentage of sales. In prior years, we sometimes increased our inventory of certain parts used in our products to reduce the risk of part shortages. However, this strategy has exposed us to the countervailing risk of accumulating excess inventory. In June 2001, we hired a Director of Materials Management to minimize the risk of excess and obsolete inventory. The Director of Materials Management has introduced new procurement processes that minimize future purchase commitments in excess of our firm order demand, although, parts previously identified as excess inventory continue to exist. On a quarterly basis, we review our inventory on hand and firm purchase commitments versus our sales forecast to determine the adequacy of the existing reserve for excess and obsolete inventory. Included in cost of goods sold for the three months ended December 31, 2001 and 2000 are charges of $66,000 and $340,000, respectively, for excess and obsolete inventory. Additionally, for the three months ended December 31, 2001, we charged $65,000 to cost of goods sold for severance costs related to a reduction in our work force. These charges were offset by $268,000 of recoveries for previously written-off inventory. 12 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 $235,000 total amount of stock compensation recorded for the three months ended December 31, 2000, $218,000 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. Selling Expenses Selling expenses for the three months ended December 31, 2001 decreased 49.6% to $0.6 million, or 11.2% of net sales, compared with $1.2 million, or 11.4% of net sales, for the three months ended December 31, 2000. The decrease in selling expenses was primarily attributable to lower commissions paid to manufacturer's representatives as a result of reduced sales volume and a decrease in charges for non-cash stock compensation. General and Administrative Expenses General and administrative expenses for the three months ended December 31, 2001 decreased 31.6% to $1.5 million, or 27.1% of net sales, compared with $2.2 million, or 20.4% of net sales, for the three months ended December 31, 2000. The dollar decrease was primarily attributable to significantly reduced spending on independent contractors for interim management and accounting services and a decrease in charges for non-cash stock compensation, partially offset by an increase in salaries and wages for new employees hired in 2001. Additionally, we recognized a $145,000 benefit from an insurance recovery for undocumented travel advances to a former employee offset by $20,000 for severance costs related to a reduction in our work force. Research and Development Expenses Research and development expenses for the three months ended December 31, 2001 decreased 18.4% to $0.7 million, or 12.8% of net sales, compared with $0.9 million or 8.1% of net sales, for the three months ended December 31, 2000. The decrease was primarily attributable to a decrease in charges for non-cash stock compensation offset by $16,000 for severance costs related to a reduction in our work force. Expenses Relating to Accounting Restatements and the Related Shareholder Litigation Expenses relating to the accounting restatements and the related shareholder litigation include the cost of external counsel for services provided in connection with shareholder lawsuits and the Securities and Exchange Commission investigation, the cost of certain consultants and temporary labor hired to assist in the accounting restatements, and reimbursements to current and former employees for their legal fees and expenses. Included in expenses relating to accounting restatements and the related shareholder litigation for the three months ended December 31, 2001, is a benefit of $117,000 resulting from an adjustment of an estimated liability recorded in a previous period. Expenses relating to the accounting restatements and the related shareholder litigation for the three months ended December 31, 2000 were $0.6 million. 13 Other Income (Expense) Interest income decreased 89.4% to $11,000 for the three months ended December 31, 2001 compared with $104,000 for the three months ended December 31, 2000. The decrease was attributable to lower average cash balances available in the quarter for investing, along with lower interest rates on invested balances. Interest expense and other, net, decreased 86.2% to $46,000 for the three months ended December 31, 2001 compared with $334,000 for the three months ended December 31, 2000. The decrease was primarily attributable to reduction in the outstanding debt associated with the new credit facility and lower interest rates on the new credit facility. Net Loss and Loss per Share The net loss for the three months ended December 31, 2001 was $528,000 or $0.07 per share. Excluding the impact of stock compensation, which is a non-cash charge, expenses relating to accounting restatements and the related shareholder litigation (which management believes are not indicative of continuing operating expenses) and severance costs associated with the reduction in our workforce, offset by the benefit of the inventory recovery and the insurance recovery for undocumented travel advances, net loss would have been $878,000 or $0.12 per share. For the three months ended December 31, 2000, the net loss was $10,000, or less than $0.01 per share. Excluding the impact of stock compensation, which is a non-cash charge and expenses relating to accounting restatements (which management believes are not indicative of continuing operating expenses) net income for the three months ended December 31, 2000 would have been $845,000 or $0.12 per share. Results of Operations for the Six Months Ended December 31, 2001 Compared to the Six Months Ended December 31, 2000 Net Sales Net sales for the six months ended December 31, 2001 decreased 49.6% to $11.3 million compared with $22.4 million for the six months ended December 31, 2000. This decline is primarily due to a decrease in demand for commercial signal source products consistent with an overall slowdown in the wireless telecommunications industry. Revenue from commercial signal source products was $8.7 million for the six months ended December 31, 2001, a 53.5% decrease from $18.7 million for the six months ended December 31, 2000. Revenue for the six months ended December 31, 2000 included fees earned from a contract modification of approximately $0.3 million. Revenue from all other products was $2.6 million for the six months ended December 31, 2001, a 29.7% decrease from $3.7 million for the six months ended December 31, 2000. Revenue for the six months ended December 31, 2000 included a significant end-of-life production run generating net sales of approximately $0.8 million. Gross Profit Gross profit for the six months ended December 31, 2001 decreased 57.6% to $4.5 million, or 39.6% of net sales, compared with $10.5 million, or 47.1% of net sales, for the six months ended December 31, 2000. The gross profit percent in any period can be affected significantly by volume and unusual items. 14 Fixed manufacturing overhead adversely affects gross profit at lower sales volumes. Accordingly, the reduced sales level for the six months ended December 31, 2001 had the effect of lowering gross profit as a percentage of sales. In prior years, we sometimes increased our inventory of certain parts used in our products to reduce the risk of part shortages. However, this strategy has exposed us to the countervailing risk of accumulating excess inventory. In June 2001, we hired a Director of Materials Management to minimize the risk of excess and obsolete inventory. The Director of Materials Management has introduced new procurement processes that minimize future purchase commitments in excess of our firm order demand, although, parts previously identified as excess inventory continue to exist. On a quarterly basis, we review our inventory on hand and firm purchase commitments versus our sales forecast to determine the adequacy of the existing reserve for excess and obsolete inventory. Included in cost of goods sold for the six months ended December 31, 2001 and 2000 are charges of $122,000 and $886,000, respectively, for excess and obsolete inventory. Additionally, for the six months ended December 31, 2001, we charged $65,000 to cost of goods sold for severance costs related to a reduction in our work force. These charges were offset by $268,000 of recoveries for previously written-off 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 $445,000 total amount of stock compensation recorded for the six months ended December 31, 2000, $409,000 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. Selling Expenses Selling expenses for the six months ended December 31, 2001 decreased 44.6% to $1.3 million, or 11.4% of net sales, compared with $2.3 million, or 10.3% of net sales, for the six months ended December 31, 2000. The decrease in selling expenses was primarily attributable to lower commissions paid to manufacturer's representatives as a result of reduced sales volume and a decrease in charges for non-cash stock compensation. General and Administrative Expenses General and administrative expenses for the six months ended December 31, 2001 decreased 10.6% to $3.4 million, or 30.1% of net sales, compared with $3.8 million, or 17.0% of net sales, for the six months ended December 31, 2000. The dollar decrease was primarily attributable to reduced spending on independent contractors for interim management and accounting services and a decrease in charges for non-cash stock compensation, partially offset by an increase in salaries and wages for new employees hired in 2001. Additionally, we recognized a $145,000 benefit from an insurance recovery for undocumented travel advances to a former employee offset by $20,000 for severance costs related to a reduction in our work force. Research and Development Expenses Research and development expenses for the six months ended December 31, 2001 decreased 44.7% to $1.3 million, or 11.7% of net sales, compared with $2.4 million or 10.7% of net sales, 15 for the six months ended December 31, 2000. The decrease was primarily attributable to lower salaries and benefits from the permanent transfer of personnel to assist in business development efforts, fewer employees engaged in research and development efforts and a decrease in charges for non-cash stock compensation offset by $16,000 for severance costs related to a reduction in our work force. Expenses Relating to Accounting Restatements and the Related Shareholder Litigation Expenses relating to the accounting restatements and the related shareholder litigation for the six months ended December 31, 2001 and 2000, were $34,000 and $1.9 million, respectively. Included in expenses relating to accounting restatements and the related shareholder litigation for the six months ended December 31, 2001, is a benefit of $117,000 resulting from an adjustment of an estimated liability recorded in a previous period. These expenses include the cost of external counsel for services provided in connection with shareholder lawsuits and the Securities and Exchange Commission investigation, the cost of certain consultants and temporary labor hired to assist in the accounting restatements, and reimbursements to current and former employees for their legal fees and expenses. Other Income (Expense) Interest income decreased 88.9% to $29,000 for the six months ended December 31, 2001 compared with $262,000 for the six months ended December 31, 2000. The decrease was attributable to lower average cash balances available in the quarter for investing, along with lower interest rates on invested balances. Interest expense and other, net, decreased 83.7% to $105,000 for the six months ended December 31, 2001 compared with $643,000 for the six months ended December 31, 2000. The decrease was primarily attributable to reduction in the outstanding debt associated with the new credit facility and lower interest rates on the new credit facility. Net Loss and Loss per Share The net loss for the six months ended December 31, 2001 was $1.6 million or $0.23 per share. Excluding the impact of stock compensation, which is a non-cash charge, expenses relating to accounting restatements and the related shareholder litigation (which management believes are not indicative of continuing operating expenses) and severance costs associated with the reduction in our workforce, offset by the benefit of the inventory recovery and the insurance recovery for undocumented travel advances, net loss would have been $1.9 million or $0.27 per share. For the six months ended December 31, 2000, the net loss was $211,000, or $0.03 per share. Excluding the impact of stock compensation, which is a non-cash charge and expenses relating to accounting restatements (which management believes are not indicative of continuing operating expenses) net income for the three months ended December 31, 2000 would have been $2.1 million or $0.30 per share (basic and diluted). Liquidity and Capital Resources As of December 31, 2001, working capital was $6.3 million, including cash and cash equivalents of $1.6 million. Working capital at June 30, 2001 was $7.1 million, including cash and cash equivalents of $2.0 million. Operating activities generated $246,000 of cash, largely from the reduction of accounts receivable through collections and lower sales volumes in the quarter. Additionally, we continued our focus on reducing inventory levels and increasing inventory turns. The cash generated from these efforts was partially offset by the net loss, adjusted for non- 16 cash charges, the payment of annual bonuses to employees and reduced accounts payable due to lower costs and expenses attributable to lower sales volumes. Capital expenditures for the six months ended December 31, 2001 were $442,000. We focused capital expenditures primarily on information technology hardware and software. We reduced our notes payable and long-term obligations by $0.3 million as of December 31, 2001 as compared to June 30, 2001. Our new credit facility under Wells Fargo Business Credit, Inc. allows us to borrow and re-pay our obligations based upon our cash flow needs at any time subject to maximum loan amounts as determined by a calculated borrowing base. We are involved in legal proceedings and claims in the ordinary course of our business for which we may be exposed to a certain amount of risk. We are unable to estimate the possible loss, if any, associated with these matters. While we believe that a single building or facility would be more efficient and cost effective, we have not yet found a facility at this time which fits our needs. We are continuing to review various alternatives on our facilities. Credit Facility On June 28, 2001, we entered into a credit agreement with Wells Fargo Business Credit, Inc (the "Credit Facility"). Concurrent with the closing of the Credit Facility, we paid our former lender, Bank One, in full. The Credit Facility provides for a $6.0 million secured revolving line of credit ("Revolving Loan"), a $2.5 million secured term loan ("Term Loan"), and a $1.5 million secured capital expenditures loan ("Capital Expenditures Loan"). The Credit Facility is secured by substantially all of our accounts receivable, inventories and equipment and is subject to covenants that, among other things, impose limitations on capital expenditures and investments, restrict certain payments and distributions and requires us to maintain certain financial ratios. In September 2001, the Credit Facility was amended to establish revised financial covenants for the fiscal years ending June 30, 2002 and June 30, 2001. The Company periodically reviews the state of the wireless industry in general and the impact on its financial projections that are provided to Wells Fargo Business Credit, Inc. Due to continued softness of sales demand in the wireless industry, financial projections for the remainder of the fiscal year were revised. Additionally, the Company realized that the continuing softness in the wireless industry and the related impact on sales could have resulted in a violation of the covenants. On February 8, 2002, the Company entered into a second amendment to the Credit Facility. The maximum availability on the Revolving Loan was reduced to $4.0 million, the interest rate was increased to the lender's prime rate plus 1% and the formula for calculating availability no longer includes inventories. The Term Loan was modified to accelerate the amortization period of the loan from 84 months to 42 months and the interest rate was increased to the lender's prime rate plus 2.5%. In addition, the commitment for the Capital Expenditures Loan was cancelled. 17 At December 31, 2001, the interest rates on the Revolving Loan and the Term Loan were 5.25% and 5.75%, respectively. The Company had additional borrowing availability of $2.1 million under the Revolving Loan. We are required to pay a minimum interest charge on the Credit Facility of $30,000 per calendar quarter. We believe that anticipated cash flows from operations and borrowings available under the Credit Facility will be adequate to fund our currently planned working capital and capital expenditure requirements at least through June 30, 2002. Forward-Looking Statements Some of the statements we make in this report are "forward-looking statements" as that term is used in the Private Securities Litigation Reform Act of 1995. In most cases, when we use words like "believe," "expect," "estimate," "anticipate," "project," or "plan" to describe something which has not yet occurred, we are making a forward-looking statement. Forward-looking statements we make are based on a number of assumptions by us about the future, usually based on current conditions or on the broader expectations of others. These assumptions may or may not prove to be correct and, as a result, our own forward-looking statements may also be inaccurate. On the other hand, based on what we know today and what we expect in the future, we believe that the forward-looking statements we make in this report are reasonable. The tragic events of September 11, 2001 have created broad uncertainty on the global economy as a whole. We and our customers are still in the process of assessing the impact on the telecommunications industry in general and more specifically, on the wireless infrastructure market. We cannot list here all of the risks and uncertainties that could cause our actual future financial and operating results to differ materially from our historical experience and our present expectations or projections but we can identify many of them. For example, our future results could be affected by the overall market for various types of wireless communications products, the success of the specific products into which our products are integrated, governmental action relating to wireless communications, licensing and regulation, the accuracy of our internal projections as to the demand for certain types of technological innovation, competitors' products and pricing, the success of new product development efforts, the timely release for production and the delivery of products under existing contracts and the ultimate outcome of pending and threatened litigation and regulatory action. It is also important to remember that forward-looking statements speak only as of the date when they are made and we do not promise that we will publicly update or revise those statements whenever conditions change or future events occur. Accordingly, we do not recommend that any person seeking to evaluate our company should place undue reliance on any forward-looking statement in this report. Effect of Recently Issued Accounting Standards The Financial Accounting Standards Board recently issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Statement No. 144 supersedes the accounting and reporting provisions of Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, with respect to when certain 18 asset impairment losses must be measured and recorded. Statement No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. We do not anticipate a material impact on our financial condition or results of operations as a result of implementing this standard. Statement No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain market risks, including the effects of adverse changes in interest rates. Our exposure to changes in interest rates results from borrowings with floating interest rates. At the present time, we have no financial instruments in place to manage the impact of changes in interest rates. As of December 31, 2001, we had notes payable outstanding under our Credit Facility of $2.7 million. Of this amount, $1.7 million was outstanding on our Term Loan at an interest rate of 5.75% and $1.0 million was outstanding on our Revolving Loan at an interest rate of 5.25%. 19 VARI-L COMPANY, INC. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The following should be read in conjunction with Note 6 to the financial statements. SECURITIES AND EXCHANGE COMMISSION INVESTIGATION On November 9, 2001, the Company's settlement with the Securities and Exchange Commission was approved by the United States District Court for the District of Colorado. PRIVATE SECURITIES CLASS ACTION On November 21, 2001, the Company filed a motion to dismiss all claims against the Company in the consolidated private securities class action, Rasner v. Vari-L Company, Inc., Civ. No. 00-S-1181, D. Colo. The Company's motion argues that the amended consolidated complaint alleges wrongdoing by former corporate employees in furtherance of their personal interests, as opposed to corporate interests, which does not state a claim for securities fraud against the Company. The class action representatives have filed their response to the Company's motion to dismiss and the Company has filed a reply to that response but the court has not yet ruled on the motion. The Company is engaged in settlement discussions with the class representatives aimed at settling all claims against the Company. While the Company is optimistic that it will be able to reach a settlement agreement with the plaintiffs, there is no assurance that a settlement acceptable to the Company can be achieved or that any settlement reached will not have a material adverse effect on the Company. Any settlement will have to be approved by the court after giving all affected class members an opportunity to express their views concerning the settlement proposal. Moreover, irrespective of the outcome with respect to the Company, the individual defendants may have claims against the Company for advancement or indemnification of their attorneys fees and other costs of defense, which claims may be material. SHAREHOLDER DERIVATIVE SUIT On October 3, 2001, the Commonwealth Court of Pennsylvania entered an Order of Liquidation for Reliance Insurance Company, the issuer of the Company's $5 million primary directors and officers insurance policy in force for the period of time covered by the class action and derivative litigation. In that order, the Pennsylvania court requested, as a matter of comity, that all actions against Reliance, or in which Reliance is obligated to defend a party, that are pending in courts outside of Pennsylvania, be stayed by those courts for a period of ninety days. As a result, the 20 Colorado state court on October 24, 2001 entered an order staying the derivative action against the Company for said ninety day period. The Reliance liquidator has indicated that claimants will be notified in January 2002 concerning the procedures by which insureds and other claimants may file claims against the Reliance estate. On October 9, 2001, the Company filed a motion to dismiss the shareholder derivative action, on various grounds, including the failure to make the required demands, the failure to commence a new action rather than trying to revive the previously dismissed case, and the availability of new management and a new independent Board member to evaluate the merits, and the timing, of any claims which could be brought by the Company against the individual defendants. Substantially all of the individual named defendants subsequently joined in the Company's motion. DECLARATORY JUDGMENT ACTION BY EXCESS INSURER A settlement conference has been scheduled for February 2002 by the U.S. Magistrate assigned to this declaratory judgment action brought by the Company's excess liability directors and officers liability insurance carrier. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 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 Employee Stock Purchase Plan as of November 30, 2001. (b) Reports on Form 8-K A report on Form 8-K dated October 30, 2001 under Item 9 was filed with the Commission on October 31, 2001. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VARI-L COMPANY, INC. Date: February 11, 2002 By:/s/ RICHARD P. DUTKIEWICZ ----------------- ----------------------------- Richard P. Dutkiewicz, Vice President of Finance and Chief Financial Officer 22 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- Exhibit 10.1 Employee Stock Purchase Plan as of November 30, 2001.
EX-10.1 3 d94132ex10-1.txt EMPLOYEE STOCK PLAN EXHIBIT 10.1 VARI-L COMPANY, INC. EMPLOYEE STOCK PURCHASE PLAN AS OF NOVEMBER 30, 2001 ARTICLE I. - PURPOSE 1.01. PURPOSE. The Vari-L Company, Inc. Employee Stock Purchase Plan is intended to provide a method whereby employees of Vari-L Company, Inc. (hereinafter referred to, unless the context otherwise requires, as the "Company") will have an opportunity to acquire a proprietary interest in the Company through the purchase of shares of the Common Stock of the Company. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. ARTICLE II. - DEFINITIONS 2.01. BASE PAY. "Base Pay" shall mean regular straight-time earnings including payments for overtime, shift premium, bonuses and other special payments, commissions and other marketing incentive payments. 2.02. COMMITTEE. "Committee" shall mean the individuals described in Article XI. 2.03. EMPLOYEE. "Employee" means any person who is customarily employed on a full-time or part-time basis by the Company and is regularly scheduled to work more than 20 hours per week. ARTICLE III. - ELIGIBILITY AND PARTICIPATION 3.01. INITIAL ELIGIBILITY. All individuals employed by the Company shall be eligible to participate in offerings under the Plan. 3.02. LEAVE OF ABSENCE. For purposes of participation in the Plan, a person on leave of absence shall be deemed to be an employee for the first 180 days of such leave of absence and such employee's employment shall be deemed to have terminated at the close of business on the 180th day of such leave of absence unless such employee shall have returned to regular full-time or part-time employment (as the case may be) prior to the close of business on such 180th day. Termination by the Company of any employee's leave of absence, other than termination of such leave of absence on return to full-time or part-time employment, shall terminate an employee's employment for all purposes of the Plan and shall terminate such employee's participation in the Plan and right to exercise any option. 3.03. RESTRICTIONS ON PARTICIPATION. Notwithstanding any provisions of the Plan to the contrary, no employee shall be granted an option to participate in the Plan: (a) if, immediately after the grant, such employee would own stock, and/or hold outstanding options to purchase stock, possessing 5% or more of the total combined voting power or value of all classes of stock of the Company (for purposes of this paragraph, the rules of Section 424(d) of the Code shall apply in determining stock ownership of any employee); or (b) which permits the employee's rights to purchase stock under all employee stock purchase plans of the Company to accrue at a rate which exceeds $25,000 in fair market value of the stock for each calendar year. 3.04. COMMENCEMENT OF PARTICIPATION. An eligible employee may become a participant by completing an authorization for a payroll deduction on the form provided by the Company and delivering it to the Company's Vice President of Finance on or before the date set therefor by the Committee, which date shall be prior to the Offering Commencement Date for the Offering (as such terms are defined below). Payroll deductions for a participant shall commence on the applicable Offering Commencement Date when his authorization for a payroll deduction becomes effective and shall end on the Offering Termination Date of the Offering to which such authorization is applicable unless sooner terminated by the participant as provided in Article VIII. 2 ARTICLE IV. - OFFERINGS 4.01. ANNUAL OFFERINGS. The Plan was originally implemented by six annual offerings of the Company's Common Stock beginning on the 10th day of March, 1995 and the 1st day of January in each of the years 1996, 1997, 1998, 1999 and 2000, each offering terminating on December 31 of the same year (the "Pre-2001 Offerings"). The Company will make four additional annual offerings of the Company's Common Stock (the "Offerings") beginning on March 16, 2001, July 1, 2001, January 7, 2002, and July 8, 2002. The maximum number of shares issued in the respective years shall be: o From January 1, 1999 to December 31, 1999: 189,216 shares. o From January 1, 2000 to December 31, 2000: 189,216 shares plus unissued shares from the prior Offerings, whether offered or not. o From January 1, 2001 to December 31, 2001: 189,216 shares plus unissued shares from the prior Offerings, whether offered or not. o From January 7, 2002 to January 6, 2003: 189,216 shares plus unissued shares from the prior Offerings, whether offered or not. For the 2002 Offerings, the maximum number of shares to be issued shall be one-half (1/2) of the number of shares set forth for the annual period in which the 2002 Offering falls, plus, if the Offering is the second Offering in 2002, unissued shares, whether offered or not, from the immediately preceding 2002 Offering. As used in the Plan, "Offering Commencement Date" means the date in January (except for the March 10, 1995 and March 16, 2001 beginning dates) or July, as the case may be, on which the particular Offering begins and "Offering Termination Date" means the date in June, July, December or January, as the case may be, on which the particular Offering terminates. ARTICLE V. - PAYROLL DEDUCTIONS 5.01. AMOUNT OF DEDUCTION. At the time a participant files his authorization for payroll deduction, he shall elect to have deductions made from his pay on each payday during the time he is a participant in an Offering at the rate of 1, 2, 3, 4, 5, 6, 7, 8, 9 or 10% of his base pay in effect at the Offering Commencement Date of such Offering. In the case of a part-time, hourly employee, such employee's base pay during an Offering shall be determined by multiplying such employee's hourly rate of pay in effect on the Offering Commencement Date by the number of regularly scheduled hours of work for such employee during such Offering. 3 5.02. PARTICIPANT'S ACCOUNT. All payroll deductions made for a participant shall be credited to his account under the Plan. A participant may not make any separate cash payment into such account except when on leave of absence and then only as provided in Section 5.04. 5.03. CHANGES IN PAYROLL DEDUCTIONS. A participant may discontinue his participation in the Plan as provided in Article VIII, but no other change can be made during an Offering and, specifically, a participant may not alter the amount of his payroll deductions for that Offering. 5.04. LEAVE OF ABSENCE. If a participant goes on a leave of absence, such participant shall have the right to elect: (a) to withdraw the balance in his or her account pursuant to Section 7.02; (b) to discontinue contributions to the Plan but remain a participant in the Plan, or (c) to remain a participant in the Plan during such leave of absence, authorizing deductions to be made from payments by the Company to the participant during such leave of absence and undertaking to make cash payments to the Plan at the end of each payroll period to the extent that amounts payable by the Company to such participant are insufficient to meet such participant's authorized Plan deductions. ARTICLE VI. - GRANTING OF OPTION 6.01. NUMBER OF OPTION SHARES. On the Commencement Date of each Offering, a participating employee shall be deemed to have been granted an option to purchase a maximum number of shares of the stock of the Company equal to an amount determined as follows: an amount equal to (i) that percentage of the employee's base pay which he has elected to have withheld (but not in any case in excess of 10%) multiplied by (ii) the employee's base pay during the period of the offering (iii) divided by 85% of the market value of the stock of the Company on the applicable Offering Commencement Date. The market value of the Company's stock shall be determined as provided in paragraphs (a) and (b) of Section 6.02 below. An employee's base pay during the period of an offering shall be determined by multiplying, in the case of a one-year offering, his normal weekly rate of pay (as in effect on the last day prior to the Commencement Date of the particular offering) by 52 or the hourly rate by 2,080 or, in the case of a six-month offering, by 26 or 1,040, as the case may be, provided that, in the case of a part-time, hourly employee, the employee's base pay during the period of an offering shall be determined by multiplying such employee's hourly rate by the number of regularly scheduled hours of work for such employee during such Offering. 4 6.02. OPTION PRICE. The option price of stock purchased with payroll deductions made during such annual offering for a participant therein shall be the lower of: (a) 85% of the closing price of the stock on the nearest business day prior to the Offering Commencement Date on which trading occurred on the Nasdaq SmallCap Market, the Nasdaq National Market, the OTC Bulletin Board or on any other U.S. or Canadian stock exchange on which the Company's stock are listed for trading; or (b) 85% of the closing price of the stock on the Offering Termination Date or the nearest prior business day on which trading occurred on the Nasdaq SmallCap, the Nasdaq National Market, the OTC Bulletin Board or on any other U.S. or Canadian stock exchange on which the Company's stock are listed for trading. If the Common Stock of the Company is not admitted to trading on any of the aforesaid dates for which closing prices of the stock are to be determined, then reference shall be made to the fair market value of the stock on that date, as determined on such basis as shall be established or specified for the purpose by the Committee. If the Company's stock is traded on more than one exchange or quotation service, the Company's Board of Directors shall designate the exchange or quotation service that will be used for setting the option price. For purposes hereof, The Pink Sheets LLC shall be considered a quotation service which may be used to set the option price. ARTICLE VII. - EXERCISE OF OPTION 7.01. AUTOMATIC EXERCISE. Unless a participant gives written notice to the Company as hereinafter provided, his option for the purchase of stock with payroll deductions made during any offering will be deemed to have been exercised automatically on the Offering Termination Date applicable to such offering, for the purchase of the number of full shares of stock which the accumulated payroll deductions in his account at that time will purchase at the applicable option price (but not in excess of the number of shares for which options have been granted to the employee pursuant to Section 6.01), and any excess in his account at that time will be returned to him. 7.02. WITHDRAWAL OF ACCOUNT. By written notice to the Vice President of Finance of the Company, at any time prior to the Offering Termination Date applicable to any Offering, a participant may elect to withdraw all the accumulated payroll deductions in his account at such time. 7.03. FRACTIONAL SHARES. Fractional shares will not be issued under the Plan and any accumulated payroll deductions which would have been used to purchase fractional shares will be returned to any employee promptly following the termination of an Offering, without interest. 5 7.04. TRANSFERABILITY OF OPTION. During a participant's lifetime, options held by such participant shall be exercisable only by that participant. 7.05. DELIVERY OF STOCK. As promptly as practicable after the Offering Termination Date of each Offering, the Company will deliver to each participant, as appropriate, the stock purchased upon exercise of his option. ARTICLE VIII. - WITHDRAWAL 8.01. IN GENERAL. As indicated in Section 7.02, a participant may withdraw payroll deductions credited to his account under the Plan at any time by giving written notice to the Company's Vice President of Finance. All of the participant's payroll deductions credited to his account will be paid to him promptly after receipt of his notice of withdrawal, and no further payroll deductions will be made from his pay during such Offering. The Company may, at its option, treat any attempt to borrow by an employee on the security of his accumulated payroll deductions as an election, under Section 7.02, to withdraw such deductions. 8.02. EFFECT ON SUBSEQUENT PARTICIPATION. A participant's withdrawal from any Offering will not have any effect upon his eligibility to participate in any succeeding Offering or in any similar plan which may hereafter be adopted by the Company; except that participants subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934, as amended, may not elect to participate in a succeeding Offering commencing within six months of a withdrawal by such individual. 8.03. TERMINATION OF EMPLOYMENT. Upon termination of the participant's employment for any reason, including retirement (but excluding death while in the employ of the Company or continuation of a leave of absence for a period beyond 180 days), the payroll deductions credited to his account will be returned to him, or, in the case of his death subsequent to the termination of his employment, to the person or persons entitled thereto under Section 12.01. 8.04. TERMINATION OF EMPLOYMENT DUE TO DEATH. Upon termination of the participant's employment because of his death, his beneficiary (as defined in Section 12.01) shall have the right to elect, by written notice given to the Vice President of Finance of the Company prior to the earlier of the Offering Termination Date or the expiration of a period of sixty (60) days commencing with the date of the death of the participant, either: (a) to withdraw all of the payroll deductions credited to the participant's account under the Plan, or 6 (b) to exercise the participant's option for the purchase of stock on the Offering Termination Date next following the date of the participant's death for the purchase of the number of full shares of stock which the accumulated payroll deductions in the participant's account at the date of the participant's death will purchase at the applicable option price, and any excess in such account will be returned to said beneficiary, without interest. In the event that no such written notice of election shall be duly received by the President of the Company, the beneficiary shall automatically be deemed to have elected, pursuant to paragraph (b), to exercise the participant's option. 8.05. LEAVE OF ABSENCE. A participant on leave of absence shall, subject to the election made by such participant pursuant to Section 5.04, continue to be a participant in the Plan so long as such participant is on continuous leave of absence. A participant who has been on leave of absence for more than 180 days and who therefore is not an employee for the purpose of the Plan shall not be entitled to participate in any offering commencing after the 180th day of such leave of absence. Notwithstanding any other provisions of the Plan, unless a participant on leave of absence returns to regular full-time or part-time employment with the Company at the earlier of: the termination of such leave of absence or three months from the 180th day of such leave of absence, such participant's participation in the Plan shall terminate on whichever of such dates first occurs. ARTICLE IX. - INTEREST 9.01. PAYMENT OF INTEREST. No interest will be paid or allowed on any money paid into the Plan or credited to the account of any participant employee. 7 ARTICLE X. - STOCK 10.01. MAXIMUM SHARES. The maximum number of shares which shall be issued under the Plan, subject to adjustment upon changes in capitalization of the Company as provided in Section 12.04 shall not exceed 800,000 shares for all Offerings. If the total number of shares for which options are exercised on any Offering Termination Date in accordance with Article VI exceeds the maximum number of shares for the applicable Offering, the Company shall make a pro rata allocation of the shares available for delivery and distribution in a nearly uniform manner as it shall be practicable and as it shall determine to be equitable, and the balance of payroll deductions credited to the account of each participant under the Plan shall be returned to him as promptly as possible. 10.02. PARTICIPANT'S INTEREST IN OPTION STOCK. The participant will have no interest in stock covered by his option until such option has been exercised. 10.03. REGISTRATION OF STOCK. Stock to be delivered to a participant under the Plan will be registered in the name of the participant, or, if the participant so directs by written notice to the Vice President of Finance of the Company prior to the Offering Termination Date applicable thereto, in the names of the participant and one such other person as may be designated by the participant, as joint tenants with rights of survivorship or as tenants by the entireties, to the extent permitted by applicable law. 10.04. RESTRICTIONS ON EXERCISE. The Board of Directors may, in its discretion, require as conditions to the exercise of any option that the shares of Common Stock reserved for issuance upon the exercise of the option shall have been duly qualified, upon official notice of issuance, for trading on Nasdaq or other applicable stock exchange or quotation service, and that either: (a) a Registration Statement under the Securities Act of 1933, as amended, with respect to said shares shall be effective, or (b) the participant shall have represented at the time of purchase, in form and substance satisfactory to the Company, that it is the participant's intention to purchase the shares for investment and not for resale or distribution. 8 ARTICLE XI. - ADMINISTRATION 11.01. APPOINTMENT OF COMMITTEE. A special committee of the Board of Directors or, failing the appointment of such a committee, the Board of Directors itself (the "Committee") shall administer the Plan. 11.02. AUTHORITY OF COMMITTEE. Subject to the express provisions of the Plan, the Committee shall have plenary authority in its discretion to interpret and construe any and all provisions of the Plan, to adopt rules and regulations for administering the Plan, and to make all other determinations deemed necessary or advisable for administering the Plan. The Committee's determination on the foregoing matters shall be conclusive. 11.03. RULES GOVERNING THE ADMINISTRATION OF THE COMMITTEE. If a special committee is appointed by the Board of Directors, the Board may from time to time appoint members of the Committee in substitution for or in addition to members previously appointed and may fill vacancies, however caused, in the Committee. The Committee may select one of its members as its Chairman and shall hold its meetings at such times and places as it shall deem advisable and may hold telephonic meetings. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. The Committee may correct any defect or omission or reconcile any inconsistency in the Plan, in the manner and to the extent it shall deem desirable. Any decision or determination reduced to writing and signed by a majority of the members of the Committee shall be as fully effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary and shall make such rules and regulations for the conduct of its business as it shall deem advisable. ARTICLE XII. - MISCELLANEOUS 12.01. DESIGNATION OF BENEFICIARY. A participant may file a written designation of a beneficiary who is to receive any stock and/or cash. Such designation of beneficiary may be changed by the participant at any time by written notice to the Company's Vice President of Finance. Upon the death of a participant and upon receipt by the Company of proof of identity and existence at the participant's death of a beneficiary validly designated by him under the Plan, the Company shall deliver such stock and/or cash to such beneficiary. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such stock and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such stock and/or cash to the spouse or to any one or more dependents of the participant as the Company may designate. No beneficiary shall, prior to the death of the participant by whom he has been designated, acquire any interest in the stock or cash credited to the participant under the Plan. 9 12.02. TRANSFERABILITY. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive stock under the Plan may be assigned, transferred, pledged, or otherwise disposed of in any way by the participant other than by will or the laws of descent and distribution. Any such attempted assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 7.02. 12.03. USE OF FUNDS. All payroll deductions received or held by the Company under this Plan may be used by the Company for any corporate purpose and the Company shall not be obligated to segregate such payroll deductions. 12.04. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. (a) If, while any options are outstanding, the outstanding shares of Common Stock of the Company have increased, decreased, changed into, or been exchanged for a different number or kind of shares or securities of the Company through reorganization, merger, recapitalization, reclassification, stock split, reverse stock split or similar transaction, appropriate and proportionate adjustments may be made by the Committee in the number and/or kind of shares which are subject to purchase under outstanding options and on the option exercise price or prices applicable to such outstanding options. In addition, in any such event, the number and/or kind of shares which may be offered in the Offerings described in Article IV hereof shall also be proportionately adjusted. No adjustments shall be made for stock dividends. For the purposes of this paragraph, any distribution of shares to shareholders in an amount aggregating 20% or more of the outstanding shares shall be deemed a stock split and any distributions of shares aggregating less than 20% of the outstanding shares shall be deemed a stock dividend. (b) Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon a sale of substantially all of the property or stock of the Company to another corporation, the holder of each option then outstanding under the Plan will thereafter be entitled to receive at the next Offering Termination Date upon the exercise of such option for each share as to which such option shall be exercised, as nearly as reasonably may be determined, the cash, securities and/or property which a holder of one share of the Common stock was entitled to receive upon and at the time of such transaction. The Board of Directors shall take such steps in connection with such transactions as the Board shall deem necessary to assure that the provisions of this Section 12.04 shall thereafter be applicable, as nearly as reasonably may be determined, in relation to the said cash, securities and/or property as to which such holder of such option might thereafter be entitled to receive. 12.05. AMENDMENT AND TERMINATION. The Board of Directors shall have complete power and authority to terminate or amend the Plan; provided, however, that the Board of Directors shall not, without the approval of the stockholders of the Corporation (i) increase the maximum number of shares which may be issued 10 under any Offering (except pursuant to Section 12.04); or (ii) amend the requirements as to the class of employees eligible to purchase stock under the Plan. No termination, modification, or amendment of the Plan may, without the consent of an employee then having an option under the Plan to purchase stock, adversely affect the rights of such employee under such option. 12.06. EFFECTIVE DATE. The Plan shall become effective as of March 10, 1995. 12.07. NO EMPLOYMENT RIGHTS. The Plan does not, directly or indirectly, create any right for the benefit of any employee or class of employees to purchase any shares under the Plan, or create in any employee or class of employees any right with respect to continuation of employment by the Company, and it shall not be deemed to interfere in any way with the Company's right to terminate, or otherwise modify, an employee's employment at any time. 12.08. EFFECT OF PLAN. The provisions of the Plan shall, in accordance with its terms, be binding upon, and inure to the benefit of, all successors of each employee participating in the Plan, including, without limitation, such employee's estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such employee. 12.09. GOVERNING LAW. The laws of the State of Colorado will govern all matters relating to this Plan except to the extent it is superseded by the laws of the United States. 11 -----END PRIVACY-ENHANCED MESSAGE-----