-----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, SoE38OlIHnY23ucWfAl7/4Ai6NngWrvAeQT57Zvein31M9NSh3hfpmkQbL1sA/0M Y4/B5rdMQ5ZBCPvCdPsQgw== 0000950134-02-004884.txt : 20020509 0000950134-02-004884.hdr.sgml : 20020509 ACCESSION NUMBER: 0000950134-02-004884 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020509 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: 02639359 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 d96173e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2002 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, 2002 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 March 31, 2002: Class of Securities Outstanding Securities ------------------- ---------------------- $0.01 par value 7,178,932 shares Common shares VARI-L COMPANY, INC. March 31, 2002 Index Part I. Financial Information Item 1. Financial Statements: Balance Sheets, March 31, 2002 (unaudited) and June 30, 2001 2 Statements of Operations, three months ended March 31, 2002 and 2001 and nine months ended March 31, 2002 and 2001 (unaudited) 3-4 Statement of Stockholders' Equity, nine months ended March 31, 2002 (unaudited) 5 Statements of Cash Flows, nine months ended March 31, 2002 and 2001 (unaudited) 6 Notes to Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk 21 Part II. Other Information Item 1. Legal Proceedings 22 Item 2. Changes in Securities 23 Item 3. Defaults upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 23
1 VARI-L COMPANY, INC. Balance Sheets (in thousands of dollars)
MARCH 31, JUNE 30, ASSETS 2002 2001 ------------ ------------ (unaudited) Current assets: Cash and cash equivalents $ 1,604 2,013 Trade accounts receivable, net of allowance for doubtful accounts of $228 and $279, respectively 2,752 5,942 Inventories 2,851 3,640 Prepaid expenses and other current assets 687 645 ------------ ------------ Total current assets 7,894 12,240 ------------ ------------ Property and equipment: Machinery and equipment 12,154 11,616 Furniture and fixtures 839 822 Leasehold improvements 1,509 1,500 ------------ ------------ 14,502 13,938 Less accumulated depreciation and amortization 7,687 6,362 ------------ ------------ Net property and equipment 6,815 7,576 Intangible and other assets, net of accumulated amortization of $148 and $109, respectively 787 638 ------------ ------------ Total assets $ 15,496 20,454 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 1,147 1,669 Accrued compensation 949 1,286 Other accrued expenses 257 428 Notes payable and current installments of long-term obligations 642 1,764 ------------ ------------ Total current liabilities 2,995 5,147 Long-term obligations 1,190 1,321 Other liabilities 152 157 ------------ ------------ Total liabilities 4,337 6,625 ------------ ------------ Stockholders' equity: Common stock, $.01 par value, 50,000,000 shares authorized; 7,178,932 and 7,107,161 shares issued and outstanding, respectively 72 71 Additional paid-in capital 36,943 36,829 Unamortized stock compensation cost (39) (79) Accumulated other comprehensive income 34 -- Accumulated deficit (25,851) (22,992) ------------ ------------ Total stockholders' equity 11,159 13,829 ------------ ------------ Commitments and contingencies Total liabilities and stockholders' equity $ 15,496 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 MARCH 31, MARCH 31, 2002 2001 ------------- ------------- (unaudited) (unaudited) Net sales $ 5,163 10,000 Cost of goods sold 3,235 4,521 ------------- ------------- Gross profit 1,928 5,479 ------------- ------------- Operating expenses: Selling 691 1,058 General and administrative 1,551 2,916 Research and development 624 825 Expenses relating to accounting restatements and related legal matters, net of recoveries 222 465 ------------- ------------- Total operating expenses 3,088 5,264 ------------- ------------- Operating income (loss) (1,160) 215 Other income (expense): Interest income 11 92 Interest expense (47) (258) Other, net (15) (6) ------------- ------------- Total other income (expense) (51) (172) ------------- ------------- Net income (loss) $ (1,211) 43 ============= ============= Earnings (loss) per share, basic $ (0.17) 0.01 ============= ============= Weighted average shares outstanding, basic 7,178,451 7,087,048 ============= ============= Earnings (loss) per share, diluted $ (0.17) 0.01 ============= ============= Weighted average shares outstanding, diluted 7,178,451 7,119,614 ============= =============
See accompanying notes to financial statements. 3 VARI-L COMPANY, INC. Statements of Operations (in thousands of dollars, except share and per share data)
NINE MONTHS NINE MONTHS ENDED ENDED MARCH 31, MARCH 31, 2002 2001 ------------- ------------- (unaudited) (unaudited) Net sales $ 16,446 32,389 Cost of goods sold 10,050 16,364 ------------- ------------- Gross profit 6,396 16,025 ------------- ------------- Operating expenses: Selling 1,973 3,326 General and administrative 4,951 6,860 Research and development 1,948 3,121 Expenses relating to accounting restatements and related legal matters, net of recoveries 256 2,333 ------------- ------------- Total operating expenses 9,128 15,640 ------------- ------------- Operating income (loss) (2,732) 385 Other income (expense): Interest income 40 354 Interest expense (145) (903) Other, net (22) (4) ------------- ------------- Total other income (expense) (127) (553) ------------- ------------- Net loss $ (2,859) (168) ============= ============= Loss per share, basic and diluted $ (0.40) (0.02) ============= ============= Weighted average shares outstanding, basic and diluted 7,143,215 7,076,176 ============= =============
See accompanying notes to financial statements. 4 VARI-L COMPANY, INC. Statement of Stockholders' Equity (in thousands of dollars, except share amounts) (Unaudited)
UNAMORTIZED ACCUMULATED COMMON STOCK ADDITIONAL STOCK OTHER -------------------------- PAID-IN COMPENSATION COMPREHENSIVE SHARES AMOUNT CAPITAL COST INCOME ----------- ----------- ----------- ------------ ------------- Balance, June 30, 2001 7,107,161 $ 71 36,829 (79) -- Common stock issued under employee stock purchase plan 76,011 1 123 -- -- Common stock issued under stock award plan 2,000 -- 2 -- -- Amortization of stock compensation cost -- -- -- 36 -- Stock options forfeited -- -- (4) 4 -- Common stock repurchased and retired (6,240) -- (7) -- -- Unrealized gain on marketable securities -- -- -- -- 34 Net loss -- -- -- -- -- Comprehensive loss ----------- ----------- ----------- ----------- ----------- Balance, March 31, 2002 7,178,932 $ 72 36,943 (39) 34 =========== =========== =========== =========== =========== TOTAL ACCUMULATED COMPREHENSIVE STOCKHOLDERS' DEFICIT LOSS EQUITY ----------- ------------- ------------- Balance, June 30, 2001 (22,992) 13,829 Common stock issued under employee stock purchase plan -- 124 Common stock issued under stock award plan -- 2 Amortization of stock compensation cost -- 36 Stock options forfeited -- -- Common stock repurchased and retired -- (7) Unrealized gain on marketable securities -- 34 34 Net loss (2,859) (2,859) (2,859) ----------- Comprehensive loss $ (2,825) ============ ----------- ----------- Balance, March 31, 2002 (25,851) 11,159 =========== ===========
See accompanying notes to financial statements. 5 VARI-L COMPANY, INC. Statement of Cash Flows (in thousands of dollars)
NINE MONTHS NINE MONTHS ENDED ENDED MARCH 31, MARCH 31, 2002 2001 ------------ ------------ (unaudited) (unaudited) Net loss $ (2,859) (168) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization 1,592 1,742 Loss on disposal of assets 30 6 Common stock issued under employee purchase and stock award plans 2 10 Changes in operating assets and liabilities: Trade accounts receivable, net 3,190 (578) Inventories, net 789 1,868 Prepaid expenses and other current assets (8) (392) Trade accounts payable (522) (2,077) Accrued compensation (337) (16) Other accrued expenses and other liabilities (176) 7 ------------ ------------ Total adjustments 4,560 570 ------------ ------------ Cash provided by operating activities 1,701 402 ------------ ------------ Cash flows from investing activities: Purchases of property and equipment (845) (1,904) Proceeds from sale of equipment 59 22 Increase in other assets (129) (58) ------------ ------------ Cash used in investing activities (915) (1,940) ------------ ------------ Cash flows from financing activities: Decrease in bank overdraft -- (19) Proceeds from notes payable 7,089 -- Payments of notes payable (8,570) (4,779) Proceeds from long-term obligations 485 -- Payments of long-term obligations (257) (34) Payment of debt issue costs (59) -- Common stock repurchased (7) -- Proceeds from common stock issued under stock purchase plan 124 45 ------------ ------------ Cash used in financing activities (1,195) (4,787) ------------ ------------ Decrease in cash and cash equivalents (409) (6,325) Cash and cash equivalents at beginning of period 2,013 11,030 ------------ ------------ Cash and cash equivalents at end of period $ 1,604 4,705 ============ ============ Supplemental disclosure of cash flow information: Cash paid for interest $ 120 1,058 ============ ============ Cash paid for income taxes $ -- -- ============ ============
See accompanying notes to financial statements. 6 VARI-L COMPANY, INC. Notes to Financial Statements (unaudited) Three and nine months ended March 31, 2002 and 2001 (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 nine months ended March 31, 2002 are not necessarily indicative of operating results that can be expected for the full year. Certain 2001 amounts have been reclassified to conform to the 2002 presentation. (2) INVENTORIES Inventories, net of allowances for excess and obsolete items, consist of the following:
MARCH 31, JUNE 30, 2002 2001 ------------ ------------ (in thousands of dollars) Finished goods $ 397 463 Work-in-process 541 623 Raw materials 1,913 2,554 ------------ ------------ $ 2,851 3,640 ============ ============
(3) NOTES PAYABLE AND LONG-TERM OBLIGATIONS Notes payable and long-term obligations consist of the following:
MARCH 31, JUNE 30, 2002 2001 ------------ ------------ (in thousands of dollars) Notes payable under Credit Facility: Revolving loan $ -- 1,481 Term Loan 1,629 1,500 Promissory notes 161 21 Capital lease obligations 42 83 ------------ ------------ 1,832 3,085 Less current installments 642 1,764 ------------ ------------ Long-term obligations $ 1,190 1,321 ============ ============
7 VARI-L COMPANY, INC. Notes to Financial Statements (unaudited) Three and nine months ended March 31, 2002 and 2001 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, 2001 and June 30, 2002. 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 in November 2001. Additionally, the Company recognized that the continuing softness in the wireless industry and the related impact on sales could have resulted in a violation of the covenants. Accordingly, 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. At March 31, 2002, the interest rates on the Revolving Loan and the Term Loan were 5.75% and 7.25%, respectively. The Company had additional borrowing availability of $1.9 million under the Revolving Loan. 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 nine months ended March 31, 2002 and 2001. (5) EXPENSES OF ACCOUNTING RESTATEMENTS, SHAREHOLDER LITIGATION AND RELATED MATTERS 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 8 VARI-L COMPANY, INC. Notes to Financial Statements (unaudited) Three and nine months ended March 31, 2002 and 2001 Statements of Operations as "Expenses relating to accounting restatements and related legal matters, net of recoveries." Expenses included in this classification include the cost of external counsel for services provided in connection with shareholder lawsuits, the Commission's investigation of the Company, legal fees and expenses of the Special Litigation Committee of the Board of Directors, 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 and legal fees and expenses of the Special Litigation Committee. (6) ACQUISITIONS On January 25, 2002, the Company acquired certain assets of Asvan Technologies, LLC ("Asvan") for approximately $313,000. The purchase price included $100,000 in cash, a two year promissory note in the amount of $175,000 secured by a letter of credit and approximately $38,000 in direct costs of acquisition. The note has principal and interest payable in equal monthly installments at an annual rate of 10%. The fair value of assets acquired was approximately $201,000, resulting in goodwill of approximately $112,000. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which was adopted by the Company. Under SFAS No. 142, goodwill and intangible assets with indefinite useful lives will no longer be amortized, but will instead be tested periodically for impairment. SFAS No. 142 also requires that intangible assets with definite lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed periodically for impairment. Accordingly, goodwill of $112,000 recorded in connection with the acquisition of certain assets of Asvan will not be amortized and will be reviewed for impairment at least annually. (7) PROFIT SHARING AND STOCK OPTION PLANS PROFIT SHARING PLAN Effective December 31, 2001, the Company's Board of Directors terminated the Vari-L Company, Inc. Profit Sharing Plan and Trust (the "Plan"). Under termination of the Plan, participants became fully vested in their accounts. The assets of the Plan, which were primarily comprised of shares of the Company's common stock, were distributed on March 15, 2002. STOCK OPTION PLAN Effective April 25, 2002, the Company filed a Tender Offer (the "Offer") with the Securities and Exchange Commission which offers employees the right to exchange all outstanding options to purchase shares of Company common stock with an exercise price equal to $34.50 per share for replacement options to be granted no earlier than six months and one day from the expiration of the 9 VARI-L COMPANY, INC. Notes to Financial Statements (unaudited) Three and nine months ended March 31, 2002 and 2001 Offer at an exercise price equal to no less than the fair market value of the common stock on that date. (8) 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. 10 VARI-L COMPANY, INC. Notes to Financial Statements (unaudited) Three and nine months ended March 31, 2002 and 2001 SHAREHOLDER DERIVATIVE SUIT On August 4, 2000, a shareholder derivative action was filed, purportedly on behalf of the Company, in District Court, City and County of 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. On April 4, 2002, the court granted the plaintiff's motion for a stay of the shareholders derivative action against certain of the Company's former officers and directors pending the results of the investigation by the Company's Special Litigation Committee of the claims raised in that action. INSURANCE CLAIMS 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. In January 2002, the Reliance liquidator notified claimants concerning the procedures by which insureds and other claimants may file claims against the Reliance estate. 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 was held in February 2002 before the U.S. Magistrate assigned to this declaratory judgment action brought by the Company's excess liability directors and officers liability insurance carrier. Representatives of the excess insurer, the Company, the individual defendants in the securities class action, and the plaintiffs in the securities class action attended the conference. While meaningful discussions were held at that conference, no settlement was reached and no further settlement conference has been scheduled. 11 VARI-L COMPANY, INC. Notes to Financial Statements (unaudited) Three and nine months ended March 31, 2002 and 2001 COMPANY ACTION AGAINST FORMER OFFICERS On December 5, 2001, the Company formed a Special Litigation Committee of the Board of Directors. The Special Litigation Committee is comprised of two outside directors who joined the Company's Board subsequent to the time of certain alleged wrongdoings as discussed below. On December 20, 2001, the Special Litigation Committee (the "Committee") retained independent counsel to advise the Committee in its investigation of the allegations of wrongdoing during prior periods by former employees, as well as current and former members of the Company's Board of Directors. Additionally, the Special Litigation Committee suspended the advancement of certain legal fees and expenses being paid on behalf of former officers of the Company. On March 19, 2002, the Company filed a lawsuit in the District Court, City and County of Denver, against Mr. David Sherman, Mr. Joseph Kiser, individuals, and J.C. Enterprises, a Colorado general partnership. Mr. Sherman is the former president of the Company and Mr. Kiser is the former Chairman of the Company's Board of Directors and Chief Scientific Officer. Additionally, Mr. Kiser is the General Partner of J.C. Enterprises. On April 2, 2002, the Company filed an Amended Complaint and Jury Demand. In its lawsuit, the Company seeks to rescind certain employment and consulting agreements between the Company and Messrs. Kiser and Sherman, and to rescind certain stock option grants made to them, on the basis that such agreements were entered into, and such option grants were made, based upon mistaken or misrepresented information regarding the Company's true financial performance. The Company also seeks to recover the compensation and bonuses paid to them as a result of such mistaken or misrepresented information. In addition, the Company seeks to recover excessive rent it paid pursuant to a lease agreement between the Company and J.C. Enterprises in reliance on misrepresented information provided by Mr. Kiser and Mr. Sherman. At March 31, 2002, the Company had approximately $422,000 recorded as liabilities for post-employment benefits and severance payments related to certain employment and consulting agreements between the Company and Messrs. Kiser and Sherman. Included in this liability is approximately $57,000 for which the Company is contingently liable for a guarantee of indebtedness owed by Mr. Sherman to a former officer. Additionally, the Company is contingently liable for a guarantee of indebtedness owed by Mr. Kiser to a former officer for approximately $37,000. FINANCIAL IMPACT OF LITIGATION All of these legal actions have the potential of a possible loss to the Company. The Insurance Claims, Declaratory Judgment Action by Excess Insurer and the Company Action against Former Officers are potential gain contingencies for the Company. At this time, we are unable to reasonably estimate the possible future cost or net loss or gain, if any, associated with these matters. Accordingly, we have not recorded any loss or gain contingencies associated with these matters as of 12 VARI-L COMPANY, INC. Notes to Financial Statements (unaudited) Three and nine months ended March 31, 2002 and 2001 March 31, 2002. It is reasonably possible that such amounts could be material to our financial condition, results of operations or liquidity. OTHER The Company is a party to other legal proceedings and claims in the ordinary course of its business. The Company believes that the outcome of these other matters will not have a material adverse affect on its financial condition, results of operations or liquidity. 13 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, 2002 Compared to the Three Months Ended March 31, 2001 Net Sales Net sales for the three months ended March 31, 2002 decreased 48.4% to $5.2 million compared with $10.0 million for the three months ended March 31, 2001. This decline is primarily due to a decrease in demand for the quantity of commercial signal source products consistent with an overall slowdown in the wireless telecommunications industry. Revenue from commercial signal source products was $3.6 million for the three months ended March 31, 2002, a 56.6% decrease from $8.3 million for the three months ended March 31, 2001. Revenue from all other products was $1.5 million for the three months ended March 31, 2002, an 11.8% decrease from $1.7 million for the three months ended March 31, 2001. Revenue from all other products for the three months ended March 31, 2002 included fees earned from contract termination of approximately $179,000. Gross Profit Gross profit for the three months ended March 31, 2002 decreased 64.8% to $1.9 million, or 37.3% of net sales, compared with $5.5 million, or 54.8% of net sales, for the three months ended March 31, 2001. The gross profit percent in any period can be affected significantly by volume. Fixed manufacturing overhead adversely affects gross profit at lower sales volumes. Accordingly, the reduced sales level for the three months ended March 31, 2002 had the effect of lowering gross profit as a percentage of sales. Additionally, changes in market demand for our products, combined with changes in product design can result in excess inventory parts, such as printed circuit boards. 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 March 31, 2002 and 2001 is a charge of $41,000 and $70,000, respectively, for excess and obsolete inventory. Selling Expenses Selling expenses for the three months ended March 31, 2002 decreased 34.7% to $691,000, or 13.4% of net sales, compared with $1.1 million, or 10.6% of net sales, for the three months ended March 31, 2001. The dollar decrease in selling expenses was primarily attributable to lower commissions paid to manufacturer's representatives as a result of reduced sales volume. 14 General and Administrative Expenses General and administrative expenses for the three months ended March 31, 2002 decreased 46.8% to $1.6 million, or 30.0% of net sales, compared with $2.9 million, or 29.2% of net sales, for the three months ended March 31, 2001. The dollar decrease was primarily attributable to significantly reduced spending on independent contractors for interim management and accounting services and the timing of audit fees paid in connection with the audit of our financial statements for the year ended June 30, 2000, partially offset by an increase in salaries and wages for new employees hired in 2002. Additionally, for the three months ended March 31, 2002 we recognized a $125,000 benefit from the recovery of a disputed amount that was written off in a previous period. Research and Development Expenses Research and development expenses for the three months ended March 31, 2002 decreased 24.4% to $624,000, or 12.1% of net sales, compared with $825,000 or 8.3% of net sales, for the three months ended March 31, 2001. The dollar decrease was primarily attributable to lower salaries and benefits from the permanent transfer of personnel to assist in business development efforts and a reduction in stay bonuses and production bonuses paid to employees. Expenses Relating to Accounting Restatements and Related Legal Matters, Net of Recoveries Expenses relating to the accounting restatements and related legal matters, net of recoveries for the three months ended March 31, 2002 and 2001 were $222,000 and $465,000, respectively. There were no amounts recorded as recoveries for the three months ended March 31, 2002 and 2001. These expenses include the cost of external counsel for services provided in connection with shareholder lawsuits and the Securities and Exchange Commission (SEC) 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. The accounting restatements were completed in February 2001, however we continue to incur costs related to shareholder litigation. In September 2001, we agreed to a settlement with the SEC. In December 2001, we formed a Special Litigation Committee of our Board of Directors. The Special Litigation Committee (the "Committee") retained independent counsel to advise the Committee in its investigation of allegations of wrong doing during prior periods by former employees, as well as current and former members of our Board of Directors. For the three months ended March 31, 2002, approximately $115,000 of these expenses related to fees charged by the independent counsel to our Special Litigation Committee. Other Income (Expense) Interest income decreased 88.0% to $11,000 for the three months ended March 31, 2002 compared with $92,000 for the three months ended March 31, 2001. 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 76.5% to $62,000 for the three months ended March 31, 2002 compared with $264,000 for the three months ended March 31, 2001. The decrease was primarily attributable to less interest expense as a result of a reduction in the outstanding debt and a decrease in the lender's prime rate. 15 Net Loss and Loss per Share We believe that the disclosure of as adjusted net income (loss) and earnings (loss) per share, calculated based on criteria determined by management, provides useful information regarding our operations and excludes the impact of stock compensation, which is a non-cash charge, expenses relating to accounting restatements and related legal matters (which management believes are not indicative of normal operating expenses, but will continue until the litigation is resolved), offset by the benefit from recovery of a disputed amount. However, as adjusted financial information should not be considered a substitute for operating income (loss) or cash flow from operations determined in accordance with generally accepted accounting principles. The following table reconciles the reported net income (loss) to as adjusted net income (loss) and earnings (loss) per share for the three months ended March 31, 2002 and 2001:
Three Months Three Months Ended Ended March 31, 2002 March 31, 2001 -------------- -------------- Net income (loss), as reported $ (1,211,000) $ 43,000 Stock compensation 10,000 29,000 Expenses related to accounting restatements and related legal matters, net of recoveries 222,000 465,000 Benefit of recovery of disputed amount (125,000) -- ------------ ------------ As adjusted net income (loss) $ (1,104,000) $ 537,000 ============ ============ Earnings (loss) per share - basic and diluted (0.17) 0.01 ============ ============ As adjusted earnings (loss) per share - basic and diluted $ (0.15) $ 0.08 ============ ============
Results of Operations for the Nine Months Ended March 31, 2002 Compared to the Nine Months Ended March 31, 2001 Net Sales Net sales for the nine months ended March 31, 2002 decreased 49.2% to $16.4 million compared with $32.4 million for the nine months ended March 31, 2001. This decline is primarily due to a decrease in demand for the quantity of commercial signal source products consistent with an overall slowdown in the wireless telecommunications industry. Revenue from commercial signal source products was $12.3 million for the nine months ended March 31, 2002, a 54.4% decrease from $27.0 million for the nine months ended March 31, 2001. Revenue for the nine months ended March 31, 2001 included fees earned from a contract modification of approximately $295,000. Revenue from all other products was $4.1 million for the nine months ended March 31, 2002, a 24.1% decrease from $5.4 million for the nine months ended March 31, 2001. Revenue for the nine months ended March 31, 2001 included a significant end-of-life production run generating net sales of approximately $809,000. 16 Gross Profit Gross profit for the nine months ended March 31, 2002 decreased 60.1% to $6.4 million, or 38.9% of net sales, compared with $16.0 million, or 49.5% of net sales, for the nine months ended March 31, 2001. 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 nine months ended March 31, 2002 had the effect of lowering gross profit as a percentage of sales. Additionally, changes in market demand for our products, combined with changes in product design can result in excess inventory parts, such as printed circuit boards. 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 nine months ended March 31, 2002 and 2001 are charges of $183,000 and $156,000, respectively, for excess and obsolete inventory. Additionally, for the nine months ended March 31, 2002, 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 $474,000 total amount of stock compensation expense recorded for the nine months ended March 31, 2001, $409,000 relates to options granted in December 1999. In December 2001, 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 2001. Selling Expenses Selling expenses for the nine months ended March 31, 2002 decreased 40.7% to $2.0 million, or 12.0% of net sales, compared with $3.3 million, or 10.3% of net sales, for the nine months ended March 31, 2001. The dollar 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 nine months ended March 31, 2002 decreased 27.8% to $5.0 million, or 30.1% of net sales, compared with $6.9 million, or 21.2% of net sales, for the nine months ended March 31, 2001. The dollar decrease was primarily attributable to reduced spending on independent contractors for interim management and accounting services, the timing of audit fees paid in connection with the audit of our financial statements for the year ended June 30, 2001 and 2000 and a decrease in charges for non-cash stock compensation, partially offset by an increase in salaries and wages for new employees hired in 2002. Additionally, we recognized a $125,000 benefit from the recovery of a disputed amount that was written off in a previous period and a $145,000 benefit from an insurance recovery for undocumented travel advances to a former officer, offset by $20,000 for severance costs related to a reduction in our work force. 17 Research and Development Expenses Research and development expenses for the nine months ended March 31, 2002 decreased 37.6% to $1.9 million, or 11.8% of net sales, compared with $3.1 million or 9.6% of net sales, for the nine months ended March 31, 2001. The dollar 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, a reduction in stay bonuses and production bonuses paid to employees 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 Related Legal Matters, Net of Recoveries Expenses relating to the accounting restatements and related legal matters, net of recoveries for the nine months ended March 31, 2002 and 2001 were $256,000 and $2.3 million, respectively. Included in these expenses for the nine months ended March 31, 2002, 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. The accounting restatements were completed in February 2001, however we continue to incur costs related to shareholder litigation. In September 2001, we agreed to a settlement with the SEC. In December 2001, we formed a Special Litigation Committee of our Board of Directors. The Special Litigation Committee (the "Committee") retained independent counsel to advise the Committee in its investigation of allegations of wrong doing during prior periods by former employees, as well as current and former members of our Board of Directors. For the nine months ended March 31, 2002, approximately $135,000 of these expenses related to fees charged by the independent counsel to our Special Litigation Committee. Other Income (Expense) Interest income decreased 88.7% to $40,000 for the nine months ended March 31, 2002 compared with $354,000 for the nine months ended March 31, 2001. 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 81.6% to $167,000 for the nine months ended March 31, 2002 compared with $907,000 for the nine months ended March 31, 2001. The decrease was primarily attributable to less interest expense as a result of a reduction in the outstanding debt and a decrease in the lender's prime rate. Net Loss and Loss per Share We believe that the disclosure of as adjusted net income (loss) and earnings (loss) per share, calculated based on criteria determined by management, provides useful information regarding our operations and excludes the impact of stock compensation, which is a non-cash charge, expenses relating to accounting restatements and related legal matters (which management believes are not indicative of normal operating expenses, but will continue until the litigation is resolved), and severance costs associated with the reduction in our workforce, offset by the benefit from recovery of a disputed amount, the benefit of an inventory recovery and an insurance recovery for undocumented travel advances. However, as adjusted financial information should not be considered 18 a substitute for operating income (loss) or cash flow from operations determined in accordance with generally accepted accounting principles. The following table reconciles the reported net income (loss) to as adjusted net income (loss) and earnings (loss) per share by each discrete element for the nine months ended March 31, 2002 and 2001:
Nine Months Nine Months Ended Ended March 31, 2002 March 31, 2001 ------------- -------------- Net loss, as reported $ (2,859,000) $ (168,000) Stock compensation 36,000 474,000 Expenses related to accounting restatements and related legal matters, net of recoveries 256,000 2,333,000 Severance costs 101,000 -- Benefit of recoveries (538,000) -- ------------ ------------ As adjusted net income (loss) $ (3,004,000) $ 2,639,000 ============ ============ Loss per share - basic and diluted (0.40) (0.02) ============ ============ As adjusted earnings (loss) per share - basic and diluted $ (0.42) $ 0.37 ============ ============
Liquidity and Capital Resources As of March 31, 2002, working capital was $4.9 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 $1.7 million of cash, largely from the reduction of accounts receivable through collections and lower sales volumes for the year to date period. 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-cash charges, the payment of semi-annual bonuses to employees and reduced accounts payable due to lower costs and expenses attributable to lower sales volumes. Capital expenditures for the nine months ended March 31, 2002 were $854,000. We focused capital expenditures primarily on information technology hardware and software. As of March 31, 2002 as compared to June 30, 2001, we reduced our notes payable and long-term obligations by approximately $1.4 million offset by a $175,000 two year note payable as part of our acquisition of certain assets of Asvan Technologies, LLC. Our new credit facility from 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. At March 31, 2002, we had approximately $422,000 recorded as liabilities for post-employment benefits and severance payments related to certain employment and consulting agreements between us and Messrs. Kiser and Sherman. Included in this liability is approximately $57,000 for which the Company is contingently liable for a guarantee of indebtedness owed by Mr. Sherman to a former officer. Additionally, the Company is contingently liable for a guarantee of indebtedness owed by Mr. Kiser to a former officer for approximately $37,000. 19 We are involved in legal proceedings and claims, as discussed in Note 8, for which we may be exposed to a certain amount of risk. At this time, we are unable to reasonably estimate the possible future cost or net loss or gain, if any, associated with these matters. Accordingly, we have not recorded any loss or gain contingencies associated with these matters as of March 31, 2002. It is reasonably possible that such amounts could be material to our financial condition, results of operations or liquidity. We believe that anticipated cash flows from operations and borrowings available from the Credit Facility will be adequate to fund our currently planned working capital and capital expenditure requirements at least through March 31, 2003. 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, 2001 and June 30, 2002. 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 in November 2001. Additionally, the Company recognized that the continuing softness in the wireless industry and the related impact on sales could have resulted in a violation of the covenants. Accordingly 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. At March 31, 2002, the interest rates on the Revolving Loan and the Term Loan were 5.75% and 7.25%, respectively. The Company had additional borrowing availability of $1.9 million under the Revolving Loan. We are required to pay a minimum interest charge on the Credit Facility of $30,000 per calendar quarter. 20 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. Many events over the past twelve months 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. 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 March 31, 2002, we had notes payable outstanding of approximately $1.6 million under our Term Loan at an interest rate of 7.25%. No amounts were outstanding on our Revolving Loan. Additionally, we had approximately $160,000 outstanding on a two-year promissory note at an interest rate of 10.0%. 21 VARI-L COMPANY, INC. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The following should be read in conjunction with Note 8 to the financial statements. PRIVATE SECURITIES CLASS ACTION The Company continues to engage in meaningful 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. SHAREHOLDER DERIVATIVE SUIT On April 4, 2002, the court granted the plaintiff's motion for a stay of the shareholders derivative action against certain of the Company's former officers and directors pending the results of the investigation by the Company's Special Litigation Committee of the claims raised in that action. DECLARATORY JUDGMENT ACTION BY EXCESS INSURER A settlement conference was held in February 2002 before the U.S. Magistrate assigned to this declaratory judgment action brought by the Company's excess liability directors and officers liability insurance carrier. Representatives of the excess insurer, the Company, the individual defendants in the securities class action, and the plaintiffs in the securities class action attended the conference. While meaningful discussions were held at that conference, no settlement was reached and no further settlement conference has been scheduled. COMPANY ACTION AGAINST FORMER OFFICERS On December 20, 2001, the Company's Special Litigation Committee (the "Committee") retained independent counsel to advise the Committee in its investigation of allegations of wrongdoing during prior periods by former employees, as well as current and former members of the Company's Board of Directors. Additionally, the Special Litigation Committee suspended the advancement of certain legal fees and expenses being paid on behalf of former officers of the Company. On March 19, 2002, the Company filed a lawsuit in the District Court, City and County of Denver, against Mr. David Sherman, Mr. Joseph Kiser, individuals, and J.C. Enterprises, a Colorado general partnership. Mr. Sherman is the former president of the Company and Mr. Kiser is the former Chairman of the Company's Board of Directors and Chief Scientific Officer. 22 Additionally, Mr. Kiser is the general partner of J.C. Enterprises. On April 2, 2002, the Company filed an Amended Complaint and Jury Demand. In its lawsuit, the Company seeks to rescind certain employment and consulting agreements between the Company and Messrs. Kiser and Sherman, and to rescind certain stock option grants made to them, on the basis that such agreements were entered into, and such option grants were made, based upon mistaken or misrepresented information regarding the Company's true financial performance. The Company also seeks to recover the compensation and bonuses paid to them as a result of such mistaken or misrepresented information. In addition, the Company seeks to recover excessive rent it paid pursuant to a lease agreement between the Company and J.C. Enterprises in reliance on misrepresented information provided by Mr. Kiser and Mr. Sherman. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On January 9, 2002, the Company issued 55,599 restricted shares of its $.01 par value Common Stock to 30 of its employees who purchased the shares under the Company's Employee Stock Purchase Plan (the "Purchase Plan"). The aggregate amount paid for the shares was $75,614.64, which was 85% of the fair market value per share on December 31, 2001, as provided in the Purchase Plan. The offer and sale of these shares were exempt from registration under Section 4(2) of the Securities Act of 1933. The securities were sold for investment purposes only and not for resale or distribution. The transfer or resale of the shares was appropriately restricted by the Company on the stock certificates. 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 Tandem Stock Option and Stock Appreciation Rights Plan as of January 1, 2002. Exhibit 10.2 Stock Grant Plan as of January 1, 2002. (b) Reports on Form 8-K A report on Form 8-K dated February 12, 2002 under Item 9 was filed with the Commission on February 15, 2002, and a report on Form 8-K dated March 19, 2002 under Item 5 was filed with the Commission on March 22, 2002. 23 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 9, 2002 By: /s/ RICHARD P. DUTKIEWICZ --------------------------- ------------------------------ Richard P. Dutkiewicz, Vice President of Finance and Chief Financial Officer 24 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.1 Tandem Stock Option and Stock Appreciation Rights Plan as of January 1, 2002. 10.2 Stock Grant Plan as of January 1, 2002.
EX-10.1 3 d96173ex10-1.txt TANDEM STOCK OPTION-STOCK APPRECIATION RIGHTS PLAN EXHIBIT 10.1 VARI-L COMPANY, INC. TANDEM STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN TABLE OF CONTENTS 1. Purpose.....................................................................................................1 2. General Provisions..........................................................................................1 3. Eligibility.................................................................................................2 4. Number of Shares Subject to Plan............................................................................2 5. Stock Option................................................................................................2 6. Stock Appreciation Rights...................................................................................6 7. Capital Adjustments.........................................................................................7 8. Nontransferability..........................................................................................7 9. Amendment, Suspension, or Termination of Plan...............................................................8 10. Effective Date..............................................................................................8 11. Termination Date............................................................................................8 12. Resale of Shares Purchased..................................................................................9 13. Acceleration of Options.....................................................................................9 14. Written Notice Required; Tax Withholding....................................................................9 15. Compliance with Securities Laws............................................................................10 16. Waiver of Vesting Restrictions by Committee................................................................10 17. Reports to Participants....................................................................................10 18. No Employee Contract.......................................................................................10
TANDEM STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN AS AMENDED AND RESTATED AS OF JANUARY 1, 2002 1. Purpose. Vari-L Company, Inc. (the "Company") hereby establishes the Tandem Stock Option and Stock Appreciation Rights Plan (the "Plan"). The purpose of the Plan is to advance the interests of the Company and its stockholders by providing a means by which the Company shall be able to attract and retain competent officers, directors, key employees, advisors and consultants by providing them with an opportunity to participate in the increased value of the Company which their effort, initiative, and skill have helped produce. 2. General Provisions. (a) The Plan will be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee"). The Committee shall be comprised of two or more independent outside directors designated by the Board of Directors. The Committee shall have full power to construe and interpret the Plan and to establish and amend rules and regulations for its administration. Notwithstanding the foregoing, if it would be consistent with all applicable law, including, without limitation, Rule 16b-3 promulgated under the Securities Exchange Act of 1934 as amended ("Rule 16b-3") and the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations promulgated thereunder (including, without limitation, the regulations relating to Section 162(m) of the Code), then the Plan may be administered by the Board of Directors, and if so administered all subsequent references to the Committee shall be read as referring to the Board of Directors. Any action of the Committee with respect to the Plan shall be taken by majority vote or by the unanimous written consent of the Committee members. (b) The Committee shall determine, in its sole discretion, which participants under the Plan shall be granted stock options or stock appreciation rights, the time or times at which options and rights are granted, as well as the number of shares and the duration of the options or rights which are granted to participants, provided, however, that no participant may be granted more than 300,000 options during any three year period under the Plan. (c) The Committee shall also determine any other terms and conditions relating to options and rights granted under the Plan as the Committee may prescribe, in its sole discretion. (d) The Committee may, in its discretion, delegate its administrative duties with respect to the Plan to an officer or employees, or to a committee composed of officers or employees, of the Company. (e) The Committee shall make all other determinations and take all other actions which it deems necessary or advisable for the administration of the Plan. (f) All decisions, determinations and interpretations made by the Committee shall be binding and conclusive on all participants in the Plan and on their legal representatives, heirs and beneficiaries. (g) Notwithstanding anything to the contrary herein, the Committee shall have no authority to determine the amount, price or timing of grants hereunder to members of the Committee, unless, and only to the extent that, its exercise of such authority is consistent with all applicable laws, including, without limitation, Rule 16b-3. 3. Eligibility. Officers, directors and employees of the Company and advisors and consultants to the Company shall be eligible to participate in the Plan and to receive options and rights hereunder, provided, however, that: (i) Incentive Stock Options may only be granted to employees (including officers and directors who are employees) of the Company or its subsidiaries; and (ii) advisors and consultants shall be eligible for grants only if they provide bona fide services that are not rendered in connection with the offer or sale of securities or in a capital-raising transaction. 4. Number of Shares Subject to Plan. The aggregate number of shares of the Company's $.01 par value Common Stock which may be granted to participants shall be 3,624,000 shares, subject to adjustment only as provided in Sections 5(h) and 7 hereof. These shares may consist of shares of the Company's authorized but unissued Common Stock or shares of the Company's authorized and issued Common Stock reacquired by the Company and held in its treasury or any combination thereof. If an option granted under this Plan is surrendered, or for any other reason ceases to be exercisable in whole or in part, the shares as to which the option ceases to be exercisable shall be available for options to be granted to the same or other participants under the Plan, except to the extent that an option is deemed surrendered by the exercise of a tandem stock appreciation right and that right is paid by the Company in stock, in which event the shares issued in satisfaction of the right shall not be available for new options or rights under the Plan. 5. Stock Option. (a) Type of Options. Options granted on or after January 28, 1994 may be either Nonqualified Stock Options or Incentive Stock Options as determined by the Committee in its sole discretion and as reflected in the Notice of Grant issued by the 2 Committee. All Options granted under the Plan prior to January 28, 1994 were nonqualified stock options. "Incentive Stock Option" means an option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. "Nonqualified Stock Option" means an option not intended to qualify as an Incentive Stock Option or an Incentive Stock Option which is converted to a Nonqualified Stock Option under Section 5(f) hereof. (b) Option Price. The price at which options may be granted under the Plan shall be determined as follows: (i) For Incentive Stock Options the option price shall be equal to 100% of the Fair Market Value of the stock on the date the option is granted provided, however, that Incentive Stock Options granted to any person who, at the time such option is granted owns (as defined in Section 422 of the Code) shares possessing more than 10% of the total combined voting power of all classes of shares of the Company or its parent or subsidiary corporation, the Option Price shall be 110% of the Fair Market Value. (ii) For Nonqualified Stock Options the option price may be less than the Fair Market Value of the stock on the date of grant, but in no event shall the option price be less than fifty percent 50% of the Fair Market Value of the stock on the date the option is granted. (iii) For purposes of this Plan, and except as otherwise set forth herein, "Fair Market Value" shall mean (a) if there is an established market for the Company's Common Stock on a stock exchange, in an over-the-counter market or otherwise, the closing price on the date of grant, or (b) as otherwise specified by the Committee. In the case of automatic grants to Committee members, the Fair Market Value shall be the closing price on the date of grant. (c) Exercise of Option. The right to purchase shares covered by any option or options under this Plan shall be exercisable only in accordance with the terms and conditions of the grant to the participant. Such terms and conditions may include a time period or schedule whereby some of the options granted may become exercisable, or "vested", over time and certain conditions, such as continuous service or specified performance criteria or goals, must be satisfied for such vesting. The determination as to whether to impose any such vesting schedule or requirements, and the terms of such schedule or requirements, shall be within the sole discretion of the Committee. These terms and conditions may be different for different participants so long as all options satisfy the requirements of the Plan. Options shall be paid for in cash or in shares of the Company's Common Stock, which shares shall be valued at the Fair Market Value of the shares on the date of exercise, or any combination thereof. The Committee may, in its discretion and subject to ratification by the entire Board of Directors, loan one or more participants all or a portion of 3 the exercise price, together with the amount of any tax liability incurred by the participant as a result of the exercise of the option, for up to three (3) years with interest payable at the prime rate quoted in the Wall Street Journal on the date of exercise. Members of the Committee may receive such loans for the exercise of their options without Committee approval or Board ratification. The Committee may also permit a participant to effect a net exercise of an option without tendering any shares of the Company's stock as payment for the option. In such an event, the participant will be deemed to have paid for the exercise of the option with shares of the Company's stock and shall receive from the Company a number of shares equal to the difference between the shares that would have been tendered and the number of options exercised. The Committee may also cause the Company to enter into arrangements with one or more licensed stock brokerage firms whereby participants may exercise options without payment therefor but with irrevocable orders to such brokerage firm to immediately sell the number of shares necessary to pay the exercise price for the option and the withholding taxes, if any, and then to transmit the proceeds from such sales directly to the Company in satisfaction of such obligations. (d) Duration of Options. Unless otherwise prescribed by the Committee or this Plan, options granted hereunder shall expire ten (10) years from the date of grant, subject to early termination as provided in Section 5(f) hereof. (e) Incentive Stock Options Limitations. In no event shall an Incentive Stock Option be granted to any person who, at the time such option is granted, owns (as defined in Section 422 of the Code) shares possessing more than 10% of the total combined voting power of all classes of shares of the Company or of its parent or subsidiary corporation, unless the option price is at least 110% of the Fair Market Value of the stock subject to the Option, and such Option is by its terms not exercisable after the expiration of five (5) years from the date such Option is granted. Moreover, the aggregate Fair Market Value (determined as of the time that option is granted) of the shares with respect to which Incentive Stock Options are exercisable for the first time by any individual employee during any single calendar year under the Plan shall not exceed $100,000. In addition, in order to receive the full tax benefits of an Incentive Stock Option, the employee must not resell or otherwise dispose of the stock acquired upon exercise of the Incentive Stock Option until two (2) years after the date the option was granted and one (1) year after it was exercised. (f) Early Termination of Options. In the event a participant's employment with or service to the Company shall terminate as the result of total disability or the result of retirement at 65 years of age or later, then any options granted to such participant 4 shall terminate and may no longer be exercised three (3) months after the time such participant is no longer an employee, officer or director of, or advisor or consultant to, the Company. If the participant dies while employed or engaged by the Company, to the extent that the option was exercisable at the time of the participant's death, such option may, within one year after the participant's death, be exercised by the person or persons to whom the participant's rights under the option shall pass by will or by the applicable laws of descent and distribution; provided, however, that an option may not be exercised to any extent after the expiration of the option as originally granted. In the event a participant's employment or engagement by the Company shall terminate as the result of any circumstances other than those referred to above, whether terminated by the participant or the Company, with or without cause, then all options granted to such participant under this Plan shall terminate and no longer be exercisable as of the date of such termination, provided, however, that if an employee with an Incentive Stock Option terminates employment prior to its exercise, but after such termination becomes or remains a non-employee officer, director, advisor or consultant eligible for Nonqualified Stock Options hereunder, then the Incentive Stock Option shall be converted to a Nonqualified Stock Option on the date the Incentive Stock Option would otherwise have terminated. An employee who is absent from work with the Company because of total disability, as defined below, shall not by virtue of such absence alone be deemed to have terminated such participant's employment with the Company. All rights which such participant would have had to exercise options granted hereunder will be suspended during the period of such absence and may be exercised cumulatively by such participant upon his return to the Company so long as such rights are exercised prior to the expiration of the option as originally granted. For purposes of this Plan, "total disability" shall mean disability, as a result of sickness or injury, to the extent that the participant is prevented from engaging in any substantial gainful activity and is eligible for and receives a disability benefit under Title II of the Federal Social Security Act. (g) Automatic Grants to Committee Members. Except as provided in Section 2(g) hereof, no action may be taken by the Committee to grant any options to members of the Committee. Notwithstanding the foregoing and irrespective of any action by the Committee, for each meeting during a given month of the Board of Directors or a standing committee thereof, each member of the Board of Directors or of such committee (other than members who are officers or employees of the Company) that attends such meeting in person shall receive a grant of a ten year fully vested Nonqualified Stock Options to purchase 500 shares of the Company's Common Stock at an exercise price equal to the Fair Market Value calculated in accordance with Section 5(b) on the first trading day of the month following the month in which the director attended a meeting. (h) Reload by Payment in Shares. To the extent that a participant pays for the exercise of an option with shares of the Company's stock rather than cash, the tendered 5 shares shall be deemed to be added back to the Plan, increasing the total number of shares subject to and reserved for the Plan by that amount. 6. Stock Appreciation Rights. (a) Grant. Stock appreciation rights may be granted by the Committee under this Plan upon such terms and conditions as it may prescribe. A stock appreciation right may be granted only in connection with an option previously granted to or to be granted under this Plan. Each stock appreciation right shall become nonexercisable and be forfeited if the related option is exercised. "Stock appreciation right" as used in this Plan means a right to receive the excess of Fair Market Value, on the date of exercise, of a share of the Company's Common Stock on which an appreciation right is exercised over the option price provided for in the related option and is issued in consideration of services performed for the Company or for its benefit by the participant. Such excess is hereafter called "the differential." (b) Exercise of Stock Appreciation Rights. Stock appreciation rights shall be exercisable and be payable in the following manner: (i) A stock appreciation right shall be exercisable by the participant at the same time or times that the option to which it relates could be exercised. A participant wishing to exercise a stock appreciation right shall give written notice of such exercise to the Company. Upon receipt of such notice, the Company shall determine, in its sole discretion, whether the participant's stock appreciation rights shall be paid in cash or in shares of the Company's Common Stock or any combination of cash and shares and thereupon shall, without deducting any transfer or issue tax, deliver to the person exercising such right an amount of cash or shares of the Company's Common Stock or a combination thereof with a value equal to the differential. The date the Company receives the written notice of exercise hereunder is the exercise date. The shares issued upon the exercise of a stock appreciation right may consist of shares of the Company's authorized but unissued Common Stock or of its authorized and issued Common Stock reacquired by the Company and held in its treasury or any combination thereof. No fractional share of Common Stock shall be issued; rather, the Committee shall determine whether cash shall be given in lieu of such fractional share or whether such fractional share shall be eliminated. (ii) The exercise of a stock appreciation right shall automatically result in the surrender of the related stock option by the participant on a share for share basis. Likewise, the exercise of a stock option shall automatically result in the surrender of the related stock appreciation right. Shares covered by surrendered options shall be available for granting further options under this Plan except to the extent and in the amount 6 that such rights are paid by the Company with shares of stock, as more fully discussed in Section 4 hereof. (iii) The Committee may impose any other terms and conditions it prescribes upon the exercise of a stock appreciation right, which conditions may include a condition that the stock appreciation right may only be exercised in accordance with rules and regulations adopted by the Committee from time to time. (c) Limitation on Payments. Notwithstanding any other provision of this Plan, the Committee may from time to time determine, including at the time of exercise, the maximum amount of cash or stock which may be given upon exercise of any stock appreciation right in any year, provided, however, that all such amounts shall be paid in full no later than the end of the year immediately following the year in which the participant exercised such stock appreciation rights. Any determination under this paragraph may be changed by the Committee from time to time provided that no such change shall require the participant to return to the Company any amount theretofore received or to extend the period within which the Company is required to make full payment of the amount due as the result of the exercise of the participant's stock appreciation rights. (d) Expiration or termination of stock appreciation rights. (i) Each stock appreciation right and all rights and obligations thereunder shall expire on the date on which the related option expires or terminates. (ii) A stock appreciation right shall terminate and may no longer be exercised upon the expiration or termination of the related option. 7. Capital Adjustments. The aggregate number of shares of the Company's Common Stock subject to this Plan, the maximum number of shares as to which options may be granted to any one participant hereunder, and the number of shares and the price per share subject to outstanding options, shall be appropriately adjusted by the Committee for any increase or decrease in the number of shares of Common Stock which the Company has issued resulting from any stock split, reverse stock split, stock dividend, combination of shares or any other change, or any exchange for other securities or any reclassification, merger, reorganization, consolidation, redesignation, recapitalization, or otherwise. Similar adjustments shall be made to the terms of stock appreciation rights. 8. Nontransferability. During a participant's lifetime, an option may be exercisable only by the participant and options granted under the Plan and the rights and privileges conferred thereby shall not be subject to execution, attachment or similar process and may not be transferred, assigned, pledged or hypothecated in any manner (whether by 7 operation of law or otherwise) other than by will or by the applicable laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by applicable law and Rule 16b-3, the Committee may (i) permit a recipient of a Nonqualified Stock Option to designate in writing during the participant's lifetime a beneficiary to receive and exercise the participant's Nonqualified Stock Options in the event of such participant's death (as provided in Section 5(f)), (ii) grant Nonqualified Stock Options that are transferable to the immediate family or a family trust of the recipient, and (iii) modify existing Nonqualified Stock Options to be transferable to the immediate family or a family trust of the recipient. Any other attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any option under the Plan or of any right or privilege conferred thereby, contrary to the provisions of the Plan shall be null and void. 9. Amendment, Suspension, or Termination of Plan. The Board of Directors or the Committee may at any time suspend or terminate the Plan and may amend it from time to time in such respects as the Board of Directors or the Committee may deem advisable in order that options and rights granted hereunder shall conform to any change in the law, or in any other respect which the Board of Directors or the Committee may deem to be in the best interests of the Company; provided, however, that no such amendment shall, without the participant's consent, alter or impair any of the rights or obligations under any option or stock appreciation rights theretofore granted to him under the plan; and provided further that no such amendment shall, without shareholder approval: increase the total number of shares available for grants of options or rights under the Plan (except as provided by Section 7 hereof); or effect any change to the Plan which is required to be approved by shareholder by law, including, without limitation, the regulations promulgated under Section 422 and Section 162(m) of the Code. In addition, the provisions of Section 5(g) relating to the amount, price and timing of grants to members of the Committee shall not be amended more than once every six (6) months other than to comport with applicable changes to the Code, the Employee Retirement Income Security Act or rules thereunder. 10. Effective Date. The effective date of the Plan shall be December 31, 1987, provided, however, that the effective date of the Plan as it relates to Incentive Stock Options shall be January 28, 1994 and no Incentive Stock Option may be granted hereunder before January 28, 1994. If the January 28, 1994 amendment to and restatement of the Plan is not approved by the affirmative vote of a majority of the Company's shareholders on or before January 28, 1995, then the Plan shall remain in effect as it was last amended on June 14, 1990. The failure of the shareholders to approve such amendment and restatement of the Plan shall not, however, affect the validity, duration or any other terms and conditions of options or rights granted prior to January 28, 1994, and shall affect the terms and conditions of options or rights granted after that date only to the extent required by law. 9 11. Termination Date. Unless this Plan shall have been previously terminated by the Committee, this Plan shall terminate on January 28, 2004, except as to options and rights theretofore granted and outstanding under the Plan at that date, and no stock option or stock appreciation rights shall be granted after that date. 12. Resale of Shares Purchased. All shares of stock purchased under this Plan may be freely resold, subject to applicable state and federal securities laws restricting their transfer. As a condition to exercise of an option, the Company may impose various conditions, including a requirement that the person exercising such option represent and warrant that, at the time of such exercise, the shares of Common Stock being purchased are being purchased for investment and not with a view to resale or distribution thereof. The resale of shares purchased upon the exercise of Incentive Stock Options may, however, cause the employee to lose certain tax benefits if the employee fails to comply with the holding period requirements described in Section 5(e) hereof. 13. Acceleration of Options. If the Company or its shareholders enter into an agreement to dispose of all or substantially all of the assets or stock of the Company by means of a sale, merger or other reorganization, liquidation, or otherwise, any option granted pursuant to the Plan shall become immediately exercisable with respect to the full number of shares subject to that option during the period commencing as of the date of the agreement to dispose of all or substantially all of the assets or stock of the Company and ending when the disposition of assets or stock contemplated by that agreement is consummated or the option is otherwise terminated in accordance with its provisions or the provisions of the Plan, whichever occurs first; provided that no option shall be immediately exercisable under this Section on account of any agreement of merger or other reorganization where the shareholders of the Company immediately before the consummation of the transaction will own 50% or more of the total combined voting power of all classes of stock entitled to vote of the surviving entity (whether the Company or some other entity) immediately after the consummation of the transaction. In the event the transaction contemplated by the agreement referred to in this section is not consummated, but rather is terminated, canceled or expires, the options granted pursuant to the Plan shall thereafter be treated as if that agreement had never been entered into. 14. Written Notice Required; Tax Withholding. Any option or right granted pursuant to the Plan shall be exercised when written notice of that exercise by the participant has been received by the Company at its principal office and, with respect to options, when such notice is received and full payment for the shares with respect to which the option is exercised has been received by the Company. Participant agrees that, to the extent required by law, the Company shall withhold or require the payment by participant of any state, federal or local taxes resulting from the exercise of an option or right, provided however that to the extent permitted by law, the Committee may in its discretion, permit some or all of such 9 withholding obligation to be satisfied by the delivery by the participant of, or the retention by the Company of, shares of its Common Stock. 15. Compliance with Securities Laws. Shares shall not be issued with respect to any option or right granted under the Plan unless the exercise of that option and the issuance and delivery of the shares pursuant thereto shall comply with all relevant provisions of state and federal law, including without limitation the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder and the requirements of any stock exchange or automated quotation system upon which the shares may then be listed or traded, and shall be further subject to the approval of counsel for the Company with respect to such compliance. Further, each participant must consent to the imposition of a legend on the certificate representing the shares of Common Stock issued upon the exercise of the option or right restricting their transferability as may be required by law, the option, or the Plan. 16. Waiver of Vesting Restrictions by Committee. Notwithstanding any provision of the Plan, in the event a participant dies, becomes disabled, retires as an employee, officer or director of, or as an advisor or consultant to, the Company, the Committee shall have the discretion to waive any vesting restrictions on the retiree's options, or the early termination of any Nonqualified Stock Options held by the retiree. 17. Reports to Participants. The Company shall furnish to each participant a copy of the annual report sent to the Company's shareholders. Upon written request, the Company shall furnish to each participant a copy of its most recent annual report and each quarterly report to shareholders issued since the end of the Company's most recent fiscal year. 18. No Employee Contract. The grant of an option or right under the Plan shall not confer upon any participant any right with respect to continuation of employment by, or the rendition of advisory or consulting services to, the Company, nor shall it interfere in any way with the Company's right to terminate the participant's employment or services at any time. 10 EX-10.2 4 d96173ex10-2.txt STOCK GRANT PLAN EXHIBIT 10.2 VARI-L COMPANY, INC. STOCK GRANT PLAN ADOPTED JUNE 16, 1995 AMENDED JANUARY 24, 1997, JUNE 19, 1998 AND JANUARY 1, 2002 Section 1. Purpose. The purpose of the Stock Grant Plan (the "Plan") is to provide incentives for selected persons to promote the financial success and progress of Vari-L Company, Inc. (the "Company") through the award of shares of the Company's $.01 par value Common Stock ("Awards"). Section 2. General Provisions of the Plan. a. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee"). The Committee shall be comprised of two or more independent outside directors designated by the Board of Directors. Notwithstanding the foregoing, if it would be consistent with all applicable laws, including, without limitation, Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended ("Rule 16b-3"), then the Plan may be administered by the Board of Directors, and if so administered all subsequent references to the Committee shall be read as referring to the Board of Directors. Any action of the Committee with respect to the Plan shall be taken by majority vote or by the unanimous written consent of the Committee members. b. The Committee shall have full power to construe, interpret and administer the Plan and to establish, amend and rescind rules and regulations for its administration, and to make all other determinations and take all other actions which it deems necessary or advisable for the administration of the plan. c. The Committee shall determine, in its sole discretion, which participants under the Plan shall be granted Awards, the time or times at which Awards are granted, and the number of shares in each Award. d. The Committee shall also determine any other terms and conditions relating to Awards granted under the Plan as the Committee may prescribe, in its sole discretion. e. The Committee may, in its discretion, delegate its administrative duties with respect to the Plan to an officer of employees, or to a committee composed of officers or employees, of the Company. f. All decisions, determinations and interpretations made by the Committee shall be binding and conclusive on all participants in the Plan and on their legal representative, heirs and beneficiaries. g. Notwithstanding anything to the contrary herein, the Committee shall have no authority to determine the amount, price or timing of Awards hereunder to members of the Committee, unless, and only to the extent that, its exercise of such authority is consistent with all applicable laws, including, without limitation, Rule 16b-3. Section 3. Eligibility. Subject to the terms of the Plan, Awards may be granted only to such officers, directors, employees, consultants, advisors, and independent contractors providing bona fide services to the Company, as the Committee shall select from time to time in its sole discretion provided that, with respect to consultants, advisors and independent contractors such services may not be in connection with the offer or sale of securities in a capital-raising transaction. A person may be granted more than one Award under this Plan. Section 4. Number of Shares Subject to Plan. The maximum aggregate number of shares of the Company's Common Stock which may be granted to participants shall be 100,000, subject to adjustment as provided in this Plan. These shares may consist of shares of the Company's authorized but unissued Common Stock or shares of the Company's authorized and issued Common Stock reacquired by the Company and held in its treasury, or any combination thereof. Section 5. Grants of Awards. The Committee may impose such conditions on Awards granted under the Plan as it may, in its discretion, determine. The terms and conditions of Awards granted under the Plan may differ from one another as the Committee shall in its discretion determine so long as all Awards granted under the Plan satisfy the requirements of the Plan. No grant will be made if, in the judgment of the Committee, such a grant would constitute a public distribution within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), or the rules and relations promulgated thereunder, or corresponding state securities laws. Section 6. Automatic Grants to Committee Members. Except as provided in Section 2(g) hereof, no action may be taken by the Committee to grant any Awards to members of the Committee. Notwithstanding the foregoing and irrespective of any action by the Committee, so long as the Plan is in effect and shares are available for grant, each member of a standing committee of the Board of Directors (other than members who are officers or employees of the Company) will receive an automatic grant of 150 shares per quarter on the first business day of the first month of each quarter. Section 7. Tax Withholding. The grant of any Award is subject to the condition that if at any time the Company shall determine, in its discretion, that the satisfaction of withholding tax or other withholding liabilities under any state or federal law is necessary or desirable as a condition of, or in connection with, such grant, exercise or the delivery or purchase of shares pursuant thereto, then in such event, the grant of the Award shall not be effective unless such withholding shall have been effected or obtained in a manner acceptable to the Company. 2 Section 8. Delivery of Award Stock. As promptly as practicable after the Committee has authorized the grant of an Award, and the recipient of the Award has satisfied the conditions, if any, specified by the grant of the Award, a certificate or certificates registered in that person's name, representing the number and shares of Common Stock that were granted shall be issued and delivered. Shares shall not be issued with respect to any Award granted under the Plan unless the grant of that Award and the issuance and delivery of the shares pursuant thereto shall comply with all relevant provisions of state and federal law, including without limitation the Securities Act, the rules and regulations promulgated thereunder and the requirements of any stock exchange or quotation system upon which the shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. Further, each recipient of an Award shall consent to the imposition of a legend on the certificate representing the shares of Common Stock issued upon the grant of the Award restricting their transferability as required by law, the Award, or by the Plan. Section 9. Employment of Recipient. Nothing in the Plan or in any Award granted hereunder shall confer upon any recipient of an Award any right to continued employment or retainer by the Company, or limit in any way the right of the Company at any time to terminate or alter the terms of any employment or consulting arrangement. Section 10. Rights Upon Termination of Employment, Consultant, Advisor or Independent Contractor Status. If the recipient of an Award ceases to be employed by the Company or ceases to serve as a consultant, advisor or independent contractor of the Company, or otherwise ceases to provide bona fide services as specified in the eligibility requirements set forth in Section 3, any portion of his Award for which the conditions specified in the grant of the Award have not been satisfied shall immediately terminate. Section 11. Privileges of Stock Ownership. Notwithstanding the authorization of an Award granted pursuant to the terms of the Plan, no person shall have any of the rights or privileges of a shareholder of the Company in respect of any shares of stock issuable upon the grant of an Award until certificates representing the shares have been issued and delivered. No shares shall be required to be issued and delivered upon the authorization of any Award until there has been full compliance with all of the conditions of the Award, the requirements of law and of all regulatory agencies having jurisdiction over the issuance and delivery of the securities. Section 12. Capital Adjustments. If the outstanding shares of Common Stock are increased, decreased, changed into or exchanged for a different number or kind of shares or securities through merger, consolidation, combination, exchange of shares, other reorganization, recapitalization, reclassification, stock dividend, stock split or reverse stock split, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares as to which Awards may be granted under the Plan. 3 Section 13. Amendment, Suspension, or Termination of Plan. The Board of Directors or the Committee may at any time suspend or terminate the Plan and may amend it from time to time in such respects as the Board of Directors or the Committee may deem advisable in order that the rights granted hereunder shall conform to any change in the law, or in any other respect which the Board of Directors or the Committee may deem to be in the best interests of the Company; provided, however, that no such amendment shall, without the participant's consent, alter or impair any of the rights or obligations under any Award rights theretofore granted to him under the plan; and provided further that no such amendment shall, without shareholder approval: increase the total number of shares available for Awards under the Plan (except as provided by Section 12 hereof); effect any change to the Plan which is required to be approved by the Company's Shareholders by law, including, without limitation, the Internal Revenue Code of 1986, as amended. Section 14. Waiver of Conditions. Notwithstanding any provision of the Plan, in the event a participant dies, becomes disabled, retires as an employee, officer or director of, or as an advisor, consultant or independent contractor to, the Company, the Committee shall have the discretion to waive any conditions in the retiree's Award. Section 15. Effective Date. The effective date of the Plan is June 16, 1995 (the "Effective Date"). Section 16. Termination Date. Unless the Plan shall have been previously terminated by the Committee, it shall terminate on June 15, 2005, except as to any Awards that are outstanding under the Plan at that time and no Awards shall be granted after that time. 4 Adopted by the Board of Directors on June 16, 1995 and approved by the Company's Shareholders on June 26, 1996. Amended by the Compensation Committee on January 24, 1997 and approved by the Company's Shareholders on June 20, 1997 to conform with recent amendments to SEC Rule 16b-3, and to permit greater flexibility in the administration of the plan. Amended by the Board of Directors on June 19, 1998 to add stock grants to members of the Audit Committee (not to just the Compensation Committee) who are not officers or employees of the Company. Amended by the Compensation Committee on October 25, 2001 to be effective January 1, 2002 to change the automatic stock grants to a quarterly basis rather than monthly and to change automatic stock grants to standing committees of the Board. 5 -----END PRIVACY-ENHANCED MESSAGE-----