0001035704-01-500361.txt : 20011009 0001035704-01-500361.hdr.sgml : 20011009 ACCESSION NUMBER: 0001035704-01-500361 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010926 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23866 FILM NUMBER: 1745535 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-K 1 d90626e10-k.txt FORM 10-K FOR FISCAL YEAR END JUNE 30, 2001 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2001 Commission File No. 0-23866 VARI-L COMPANY, INC. (Name of Issuer in its Charter) Colorado 06-0679347 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 4895 Peoria Street Denver, Colorado 80239 (303) 371-1560 (Address and Telephone Number of Principal Executive Offices) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Title of Class Common Stock, $.01 Par Value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. [X] Yes [ ] No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At August 31, 2001, 7,127,923 shares of Common Stock were outstanding. The aggregate market value of the Common Stock held by non-affiliates on August 31, 2001 was approximately $15 million based on the Pink Sheets LLC closing price of $2.40 per share on that date. 2 PART I ITEM 1. BUSINESS Introduction We design, manufacture and market a wide variety of radio frequency and microwave components and devices for use in wireless communications. Our products are used in many different commercial and military/aerospace applications, including wireless telecommunications networks, wireless point-to-point radio systems, wireless point-to-multi-point radio systems, wireless local area networks, satellite payload and ground communications, radar systems, weapons guidance systems and advanced telemetry systems. We operate as a single business segment. James L. Kiser founded Vari-L in 1953 in Stamford, Connecticut. In 1969, we relocated to Denver, Colorado. Our first contract was with the United States Navy to supply electrically variable inductors. The letter "L" is the symbol for electrical inductance, hence, the name Vari-L. Our corporate headquarters are currently located at 4895 Peoria Street, Denver, Colorado 80239, and the telephone number is (303) 371-1560. Our website is www.vari-l.com. We also conduct certain portions of our operations in three other buildings within a three-mile radius of our headquarters. The three facilities have more than 25,000 square feet of manufacturing space. Recent Developments In late 1999, the Securities and Exchange Commission commenced an investigation into our accounting and reporting practices for the periods prior to and including 1999. The investigation ultimately led to the withdrawal of audit reports issued by our previous auditors for the 1997, 1998 and 1999 financial statements. Because of the absence of audit reports for at least three years, we no longer met the requirements for listing on NASDAQ. On September 11, 2000, our securities began trading on the Pink Sheets. In September 2001 we agreed to a settlement with the Securities and Exchange Commission under which a federal district court will be asked to issue an injunction against future violations of reporting, proxy and anti-fraud provisions by us, but without requiring us to pay any civil penalties or money damages. See "Legal Proceedings." Overview Our products are mainly used as parts or components of other manufacturers' wireless communications products or equipment. Wireless communication is the transmission of voice or data signals through the air, without a physical connection, such as a metal wire or fiber-optic cable. Information transmitted through wireless communications equipment is transmitted by electromagnetic waves, also known as signals. Electromagnetic waves vary in length, or frequency, and intensity. The range of electromagnetic waves is called the spectrum which encompasses sound near the low end and light toward the higher end. In between is the radio spectrum used in most wireless communications. Radio Frequency ("RF") refers to the lower frequencies in the spectrum while "microwave" refers to higher frequencies. For more than 48 years, we have supplied wireless communications products to the military/aerospace industry. In 1992, we decided to expand our capabilities to address the growing demand for commercial wireless communications products. Accordingly, starting in 1993, we expanded our engineering, manufacturing and sales efforts toward this market. Our principal commercial customers are original equipment manufacturers ("OEMs") and contract manufacturers which design and build electronic products and equipment like cellular base stations, -2- 3 pagers and radar systems. Our commercial product lines are marketed to OEM's including Motorola, Ericsson, Nokia, Siemens and Lucent Technologies. We sell our military/aerospace product lines to companies such as Raytheon, Lockheed Martin, Northrup Grumman and Textron. We have been recognized by our customers through the years for our ability to develop, manufacture and deliver highly reliable, innovative products. Our product lines fall into two major categories: products which produce electromagnetic signals, which we refer to as signal source components, and products which receive or process electromagnetic signals, or passive components. Sales of our products are generated through manufacturers' representatives and through our own direct sales force team, and are supplemented by advertising in trade magazines and participating in trade shows. Most of our products are customized according to our customers' specifications, but we also produce some generic standard products. We publish product specifications in trade magazines and in our own catalog. We also design and manufacture custom products in response to specific customer requirements. The majority of our sales are in parts that are customized to meet the unique performance requirements of specific customers. Products We have four product lines: o Commercial Signal Sources o High-Reliability Signal Sources o Military Signal Processing Components o RF Passive Components Our product strategy is to offer standardized design platforms which can be efficiently manufactured in mass production but, at the same time, can also be customized for the needs of each customer. Most of our revenue comes from sales of signal source components namely, voltage-controlled oscillators ("VCOs") and phase locked loop synthesizers ("PLLs"). These signal source components are designed to produce a high quality signal that can be used over a range of radio frequencies. We hold six patents related to signal source design and technology. Commercial Signal Source Components Over the last six years, most of our sales dollars have come from sales of our commercial VCOs. We have seen steadily increasing sales, however, of our PLLs, assemblies which consist of our VCOs integrated with other components. Our VCOs and PLLs are higher performance products. Accordingly, they are used in high-performance cellular base stations and other demanding applications where signal quality is especially important. For example, low phase noise is an extremely desirable quality in a wireless signal because it usually means better signal quality and greater transmission range. Lower phase noise is one of the key features of our VCOs and other signal source products. Through our research and development efforts, we continue to work to improve our products' performance, including our low noise designs. Our signal source products have been designed to permit high-volume, lower cost manufacturing. We have also developed manufacturing techniques that allow parts to be very closely spaced when assembled without sacrificing quality or capacity. This allows a component to be smaller in size or to deliver improved performance in the same size component. We produce these products in surface-mount -3- 4 packages compatible with the high-speed assembly techniques used in the industry and typically delivered to the customers on tape and reel. Not surprisingly, our customers constantly demand even smaller sizes for the same or even higher performance products. Responding to this demand with competitively priced products is one of our biggest challenges. High-Reliability Signal Source Components Our High Reliability, or Hi-Rel, signal source components perform the same function as the Commercial signal source components. Our Hi-Rel signal source components, however, are constructed using different assembly techniques because they are designed to operate in different operating environments. These components are designed for wideband applications (i.e., applications involving a wider range of signal frequencies) and are constructed in hermetically sealed packages for use over extended temperature ranges and in adverse environments. Hi-Rel products are typically specified for both military/aerospace and high-end industrial applications. These components are designed for use in either "through-hole" or "surface-mount" packages, depending on customer requirements. Military Signal Processing Components Our Military signal processing components are primarily used in military and aerospace applications. Among these products are power dividers and combiners used for directing RF and microwave signals, solid state switches used to change the routing of RF and microwave signals, and transformers used to convert signals between different impedances. We also produce mixers, which are used to convert the frequency of RF and microwave signals into baseband signals. The production of custom-designed components usually entails the modification of existing products to meet the specific performance criteria of our customer, but may, in certain instances, require the design of an entirely new product. RF Passive Components We first developed our line of RF Passive components (couplers, transformers and power dividers) for use in commercial communications equipment in 1997. We hold a patent for a high-impedance ratio, wide-band transformer circuit used in the conversion of radio frequency signals to light wave signals (i.e. fiber optics). In 1998, we received a new patent for a further design improvement to the 1997 patent. Demand for the "fiber-optic" transformer circuit comes from a variety of fiber-optic applications, including cable television and point-to-point data transmission networks. These are used in specific wideband, high performance niche applications. Manufacturing We currently manufacture most of our products in our own facilities in Denver, Colorado. Some labor-intensive assembly activities for some of our own RF Passive components are performed by contract manufacturers outside the United States. All of our products are completed and tested at our manufacturing facilities in Denver, Colorado, although we are actively considering increasing our use of overseas contract manufacturers to reduce our production costs. We use automated and semi-automated equipment to manufacture our Commercial signal source components. This equipment includes "pick and place" machines, automated test stations, soldering robots, laser marking equipment and tape and reel equipment. The automated equipment improves -4- 5 product consistency and quality and reduces labor cost. Until late 1997, we subcontracted the "pick and place" assembly process. We now have two of our own automated "pick and place" assembly lines. In 1998 and 1999, we automated other aspects of our manufacturing process and upgraded our "pick and place" capacity to meet increased demand. In 2000 and 2001, we continued to add additional manufacturing capacity, and we now have production capacity of more than twelve million parts per year. We utilize a modular approach to our commercial manufacturing, allowing the equipment to be used for several different products. This approach reduces the set-up time needed to change products, allowing us to respond quickly to customers' demands. Manufacturing of our other products is accomplished using hand-assembly techniques and some automated testing. The production cycle for these products varies widely, from one to fifty-two weeks from the time the customer places an order. The volume of products produced is also smaller, with typical production lots of less than 100 pieces. Some of these components are assembled in our class 10,000 "clean room," or by utilizing laminar flow benches. Suppliers We currently have a number of suppliers of raw material and components for our products. In some cases, we utilize a single source of supply for raw materials and components. We are constantly attempting to identify alternative suppliers to minimize the risks of depending on a single supplier and reduce cost. Our ability to use otherwise qualified alternative suppliers is sometimes limited, however, by the fact that some of our customers reserve the right to approve which suppliers we use in manufacturing their products. In the past, we sometimes increased our inventory of certain parts used in our products to reduce the risk of part shortages. This strategy has exposed us to the countervailing risk, however, of accumulating excess inventory. In June 2001, we hired a new Director of Materials Management to oversee our procurement team's activities. One of his principal goals is to develop alternative suppliers to avoid parts shortages, while minimizing the risk of excess and obsolete inventory. Another objective for our procurement team is to purchase more parts directly from component suppliers on a high volume basis instead of from distributors as we have done in the past. Our Hi-Rel Signal Source and Military Signal Processing product lines use custom and unique materials. As demand in the military/aerospace marketplace has declined, some of our suppliers have decided to exit the business and some have adopted minimum lot buy policies. We have found new suppliers to replace them, but, in some cases, we have elected to purchase portions of the excess inventory of those vendors exiting the business for use in our future products. Sales and Marketing Originally, our primary business was to engineer, manufacture and market high-performance, high-reliability, RF and microwave signal source and signal processing components used in military/aerospace applications, such as missile guidance systems, advanced navigational systems and advanced radar systems. In 1993, we expanded our market focus to include the commercial market. We did so to lessen -5- 6 our susceptibility to trends in defense spending and to seek a share of the growing market for commercial wireless communications products. As a result of this shift, fluctuations in our business are now less dependent on U.S. military spending and more dependent on the changes in market demand for the commercial products built with our components. Our success remains heavily dependent, however, on our ability to deliver technological innovations of our own and in response to other requests. In the past, we have seen various aspects our business, and wireless communications generally, affected by governmental actions or policies. For example, the delays and other problems encountered, in the U.S. and elsewhere, in the authorization and allocation of new wireless frequencies in the last decade made it difficult to forecast demand for many of our products. Also, in some cases, the export of our products to certain countries may be restricted by the U.S. government for military or political reasons. These governmental actions are beyond our control, yet may significantly affect demand for our products. Our Commercial signal source product line accounted for 84% and 85% of revenue for the year ended June 30, 2001 and the six months ended June 30, 2000, respectively. The following table summarizes our net sales by product line (in thousands of dollars):
Fiscal Twelve Six Six Year Months Months Months Year Ended Ended Ended Ended Ended June 30, June 30, June 30, June 30, December 31, 2001 2000 2000 1999 1999 ------------- ------------- ------------- ------------- ------------- Commercial Signal Source $ 34,899 25,079 14,609 8,188 18,658 Components Hi-Rel Signal Source 2,808 2,621 1,238 941 2,324 Components Military Signal Processing 1,318 1,366 667 930 1,629 Components RF Passive Components 2,352 1,531 644 714 1,601 ------------- ------------- ------------- ------------- ------------- $ 41,377 30,597 17,158 10,773 24,212 ============= ============= ============= ============= =============
We sell our products primarily through manufacturers' representatives who promote and solicit orders for our products on a commission basis in exclusive marketing territories. We select our sales representatives on the basis of technical and marketing expertise, reputation within the industry, and financial stability. Our goal is to engage manufacturers' representatives which also represent other manufacturers with products complementary to, rather than competitive with, our products. We typically engage 14 to 16 manufacturers' representative firms in the U.S. We also have 16 manufacturers' representatives covering 18 foreign countries. In addition, we have a direct-sales force team lead by the following principal positions: o Vice President of Sales & Marketing o Region Sales Manager - East o Region Sales Manager - West o Region Sales Manager - International o Manager of Military Accounts o Directors of Strategic Accounts(2) -6- 7 We also use various methods to directly promote our products, including field visits to customers, advertising in trade journals, authoring technical articles for publication in trade journals and participating in trade show product seminars and exhibitions. Backlog In our business, it is common practice for our large OEM customers (Ericsson, Lucent, Motorola, Nokia, Nortel and Siemens) to negotiate pricing with us in advance based on their estimated annual purchase volumes. Then, on a weekly basis, they place firm orders approximately six weeks prior to shipment. Our policy is to report as backlog only firm orders for our products as represented by a purchase order. While we believe that the orders currently in our backlog are firm, changes in the wireless communications industry have caused our customers to defer or cancel some orders altogether. In some specific cases, this has resulted in cancellation charges. In other cases, no cancellation charges are billed. This practice has resulted in both significant one-time benefits, as well as material and adverse effects. Therefore, we do not believe that our backlog is necessarily an accurate indicator of future sales. At June 30, 2001, our backlog of undelivered orders was $6,249,000. Because prior management used different standards to measure backlog, we have been unable to generate reliable comparative information for prior periods. Customers Our major customers are OEM's of communications equipment in either the commercial or military/aerospace marketplace. Many of our customers are large international and domestic companies with worldwide operations or prime contractors for military/aerospace work. We believe we have a strong reputation with these and other customers for high-performance products and solutions. Our key customers include ACAL Electronics, Agere, Ericsson, Lucent Technologies, Motorola, Netro, Nokia and Siemens in the commercial market, and Harris, Hughes, Lockheed Martin, Mitsubishi, Textron, Northrop Grumman, Raytheon and Saab Ericsson in the military/aerospace market. The following represents the sales revenues from our largest customers as a percentage of our total sales:
Fiscal year ended Six months ended Year ended June 30, 2001 June 30, 2000 December 31, 1999 ----------------------- ---------------------- ----------------------- ACAL Electronics (Siemens) 25% 14% <10% Nokia 15% 14% 15% Motorola 13% 20% 22%
Our customers have historically purchased products from us as needed, rather than through long-term supply contracts. We do, however, enter into long-term purchase agreements with some of our larger customers that establish preferred vendor status for us and, in most cases, indicate estimated purchase quantities over the term of the agreement. Competition The market for virtually all of our products is extremely competitive. Many of our competitors, including divisions of major corporations, have significantly greater resources than those currently available to us. -7- 8 Additionally, some of our customers actually compete with us by manufacturing certain components themselves, rather than purchasing them from us. Some multi-national manufacturing firms also have the ability to manufacture competitive products in larger production runs than us. We believe that our surface-mount products for commercial applications compete with other manufacturers' products on the basis of their unique features, price and performance. We believe that our products manufactured for military/aerospace applications, including our Signal Processing Components and High Rel VCOs, compete on the basis of quality and performance. These products are typically high-performance, high-reliability components which are required to meet high quality system standards. We consider Mini-Circuits, M/A-COM, Matsushita, ALPs and Temex to be our largest competitors in the commercial signal source components market. Additionally, we believe Merrimac Industries is our largest competitor in the military signal processing components market. Remec/Magnum is our primary competitor in the Hi-Rel signal source components market. We intend to continue to compete in these markets on the strength of our product performance and our ongoing commitment to technological innovation. Research and Development We are focusing our research and development efforts in the following areas: o Application engineering, o Improvement of the Commercial Signal Source product line, and o Development of new product lines. Our research and development team focuses on developing both new base technologies and design methodologies for existing base technologies. The application and design engineering team uses these efforts and modifies and/or extends them to meet specific customer needs. We have an ongoing product improvement program designed to improve the technology gap between us and our competitors. To this end, we are dedicating resources to the improvement of the phase noise performance of our commercial product lines. In addition, we are developing products to service customers in the emerging broadband communications markets. This market requires wide-band signal sources with better phase noise specifications than traditionally offered. The last area of product development is focused at the introduction of a new line of microwave signal sources (frequencies greater than 10 GHz). This line of oscillators is directed toward microwave broadband wireless communications equipment manufacturers. Patents Consistent with other companies in our business, we rely on nondisclosure agreements and trade secret laws to protect our confidential and proprietary information. Due to the rapid rate of technological change in the market, we believe that the ability to innovate is of greater importance in our business than the availability of patents and proprietary rights protection. Barriers to competitor entry for non-patented technology include the time and expense to design and manufacture components and the difficulty of marketing to our customers who have already designed our components into their equipment. -8- 9 We currently have nine active U.S. Patents, of which six patents relate to signal source products. Our current design methodologies utilize three of these patents. To the best of our knowledge, there are no asserted claims by other parties against these patents or our other proprietary technologies. Government Regulation In certain instances, we are required to obtain both Department of Commerce and Department of State export licenses before filling foreign orders. The Bureau of Export Administration has listed certain criteria whereby some of our products are regulated for export for reasons of national security, missile technology, and regional stability, principally with regard to military/aerospace applications. Any foreign sales of our products requiring export licenses must comply with these regulations. Employees As of June 30, 2001, excluding contract/agency personnel, our team consists of 204 employees. We believe that management has a good relationship with our employees and that employee morale is good at all levels. ITEM 2. DESCRIPTION OF PROPERTY We currently lease four buildings. o We lease a 31,000 square foot building in Denver, Colorado that is our principal executive office. This facility houses our administrative, sales and engineering functions as well as a pilot plant for pre-production and prototype development. The lease expires in 2013. The current lease rate on this building is $41,204 per month. o We lease a 13,500 square foot building in Denver, Colorado that is our main commercial products manufacturing facility. We lease this facility from a partnership that includes our Chief Scientific Officer as the general partner. This lease expires in 2005 and the current lease rate is $10,801 per month. o We lease a 20,600 square foot building in Denver, Colorado that is our military/aerospace products manufacturing facility. This lease expires on July 1, 2002, and we have notified the landlord of our intention not to renew this lease and to vacate the facility on or before that date. If we are not successful in relocating to a new, single building by then, we plan to move these manufacturing operations into our principal executive office building. The current lease rate is $10,571 per month. o We lease a 6,000 square foot warehouse facility in Denver, Colorado that is used as a machine shop and for storage of inventory, supplies, excess machinery and equipment, and corporate records. The lease expires in 2003 and the lease payment is $3,000 per month. o We previously leased a 5,800 square foot building in Denver, Colorado that was used as a machine shop and for storage of inventory, supplies, excess machinery and equipment, and corporate records. We leased this facility from our Chief Scientific Officer at lease rates consistent with the current market rate. On August 1, 2001, we vacated this facility and moved the contents to our warehouse facility. While we believe that these facilities are adequate for our current operations, we believe that a single building or facility would be more efficient and cost effective. Accordingly, we are in the process of -9- 10 identifying potential new sites. At this time, we are limiting the search to facilities within a six mile radius of our current facilities. Based on current conditions in the greater metropolitan Denver, Colorado real estate market, the rent we are paying for two of our buildings may be higher than current market rates. One of the two buildings is leased from a partnership that includes the current Chief Scientific Officer. The other building, our principal executive office, is leased from an unrelated party. ITEM 3. LEGAL PROCEEDINGS In December of 1999, the Company learned that the U.S. Securities and Exchange Commission (the "Commission") was conducting an investigation to determine whether there were violations of the federal securities laws by the Company or any of its officers, directors, or employees. The Commission's investigation was focused primarily on the Company's prior financial reporting and its accounting practices and procedures. In September 2001, the Commission and the Company agreed to a settlement under which the Company, without admitting or denying that it violated any laws, will consent to the entry of an injunction prohibiting future violations by the Company of certain of the reporting, proxy and antifraud provisions of the Securities Exchange Act of 1934. The proposed settlement would not require the Company to pay any civil penalties or money damages. The settlement is subject to court approval. The Company's settlement with the Commission will not resolve or affect actions or proceedings by the Commission against any current or former officers of the Company arising out of the same investigation. A number of private shareholder class actions alleging violations of federal securities laws were filed against the Company in the U.S. District Court for the District of Colorado beginning in June 2000. On August 30, 2000, all of these class actions were consolidated into a single action, Rasner v. Vari-L Company, Inc., et. al., Civ. No. 00-S-1181, U.S.D.C., D. Colo. Lead counsel for the plaintiff class members have been appointed, but pursuant to the court's order, the Company's obligation to respond to the complaints has been deferred until such time as the lead plaintiff files an amended complaint. As of September 17, 2001, an amended complaint has not yet been filed. The various class action complaints were filed on behalf of persons who purchased shares of the Company's stock between 1997 and sometime in 2000 (the "Class Period"). All of the complaints name the Company; David G. Sherman, the Company's former President and Chief Executive Officer; Joseph H. Kiser, the Company's Chief Scientific Officer and former Chairman; and Jon L. Clark, the Company's former Chief Financial Officer, as defendants. Some of the complaints also name Derek L. Bailey, the Company's former Executive Vice President of Sales and Marketing, as an additional defendant. The various complaints allege that the Company's financial statements for the years 1997, 1998 and 1999 did not conform to generally accepted accounting principles and were materially false and misleading. The complaints allege violations of Section 10(b) of the Securities Exchange Act of 1934; and seek to impose "control person" liability on the individual defendants pursuant to Section 20(a) of the Exchange Act. The complaints generally seek compensatory damages in an unspecified amount, attorneys' fees and costs of suit, equitable and injunctive relief as permitted by law, including the imposition of a constructive trust on the assets of the individual defendants, and any other relief the court deems just and proper. Although the Company has had settlement discussions with the class representatives, there can be no assurance that a settlement acceptable to the Company can be reached or that any settlement reached will not have a material adverse effect on the Company. In addition, the individual defendants in the class action -10- 11 may have claims against the Company for indemnification of their cost of defense, which claims may be material. See "Certain Relationships and Certain Transactions." On August 4, 2000, a shareholder derivative action was filed purportedly on behalf of the Company in Colorado state court in Denver. The Company was named in that action as a nominal defendant. A shareholder derivative action is a state law action in which shareholders assert claims against third parties on behalf of the corporation. The derivative complaint alleges some of the same facts as were asserted in the class actions in federal court and claims that those facts demonstrate that the officers named in the class actions, as well as the Company's directors, breached their fiduciary duties to the Company and the shareholders in connection with the Company's erroneous reporting of its financial results. On April 3, 2001, the Colorado District Court dismissed the derivative action, without prejudice, based on the plaintiff's admitted failure to make demand upon the other shareholders to bring the claims before filing suit. Since the dismissal, counsel for the derivative plaintiff has requested access to the Company's shareholder list, presumably to make the previously omitted demand on shareholders in preparation for refiling the action, but no such action has been filed. 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 U.S. District Court in Denver asking the court to find that it is not obligated to provide coverage, or in the alternative, seeking permission to rescind its policy. The Company is reviewing the claim and intends to take all steps necessary to ensure that the coverage to which it is entitled, and for which it has paid, remains in force. The Company has had preliminary discussions with AESIC, but there can be no assurance that a mutually acceptable resolution can be reached with AESIC. The Company is also seeking coverage from Reliance Insurance Company, the issuer of the $5 million primary directors and officers liability insurance policy in effect at the same time as the AESIC policy. Reliance Insurance has not yet informed the Company whether it intends to dispute coverage under its policy. Reliance Insurance is currently operating under the supervision of the Pennsylvania Insurance Commission pursuant to an Order of Rehabilitation against the insurer. In addition, the parent corporation of Reliance Insurance, Reliance Holdings, is currently in bankruptcy reorganization. The Pennsylvania Insurance Commissioner has indicated that, in general, policy benefits of Reliance Insurance policyholders will continue to be paid in accordance with the terms of the policies. There can be no assurance, however, that Reliance Insurance will not dispute its obligation to provide coverage to the Company or its officers and directors or that, even if it does not contest such coverage, that it will have the financial resources to satisfy its obligations to the Company and its other insureds. Any such failure by Reliance Insurance could have an adverse effect on the Company's future financial results, ability to settle the class action litigation and on the Company's liability for indemnification of its officers and directors. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None -11- 12 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Our common stock is quoted on the Pink Sheets LLC under the symbol "VARL". Formerly, our common stock was traded on the Nasdaq National Market until July 7, 2000 when it was suspended by Nasdaq. During the period from July 7, 2000 through September 9, 2000 when the stock was delisted by Nasdaq, there was no active public trading market for our stock. It was first quoted on the Pink Sheets on September 11, 2000. The following table sets forth the high and low prices for the common stock for the periods indicated:
NASDAQ National Market: High Low ----------------------- ---- --- 1999 Quarter ended September 30, 1999 $13-13/16 $8-3/4 Quarter ended December 31, 1999 $36-7/16 $10 2000 Quarter ended March 31, 2000 $34 $20-15/16 Quarter ended June 30, 2000 $24 $9-5/8 Period from July 1 to July 7, 2000 $12-5/8 $11-5/8 Pink Sheets LLC Period from September 11 to September 30, 2000 $6-3/64 $2-1/2 Quarter ended December 31, 2000 $4-1/2 $3/4 Quarter ended March 31, 2001 $4-3/4 $1-1/4 Quarter ended June 30, 2001 $3 $1-1/4
Holders As of August 31, 2001, there were approximately 226 holders of record and in excess of 1,000 beneficial owners of our common stock. Dividends We have never declared or paid a cash dividend on our common stock. Our Board of Directors presently intends to retain all earnings for use in the business and, therefore, does not anticipate paying cash dividends in the foreseeable future. The declaration of cash dividends, if any, in the future would be subject to the discretion of the Board of Directors, which may consider such factors as our results of operations, financial condition, capital needs, and any contractual or other restrictions. -12- 13 ITEM 6. SELECTED FINANCIAL DATA The selected historical financial information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" which follows and our financial statements and related notes thereto beginning on page F-1.
Fiscal Twelve Six Six Year Months Months Months Year Ended Ended Ended Ended Ended June 30, June 30, June 30, June 30, December 31, 2001 2000 2000 1999 1999 ------------ ------------ ------------ ------------ ------------ (in thousands of dollars, except share and per share data) Statement of Operations Data(1): Net sales $ 41,377 30,597 17,158 10,773 24,212 Cost of goods sold 21,747 17,540 10,311 5,582 12,811 ------------ ------------ ------------ ------------ ------------ Gross profit 19,630 13,057 6,847 5,191 11,401 ------------ ------------ ------------ ------------ ------------ Operating expenses: Selling 4,445 3,636 1,948 1,478 3,166 General and administrative 9,222 4,436 2,440 1,655 3,651 Research and development 4,286 5,646 3,003 2,209 4,852 Expenses related to accounting restatements and the related shareholder litigation 2,387 469 469 -- -- ------------ ------------ ------------ ------------ ------------ Total operating expenses 20,340 14,187 7,860 5,342 11,669 ------------ ------------ ------------ ------------ ------------ Operating loss (710) (1,130) (1,013) (151) (268) Other income (expense): Interest income 416 460 315 117 262 Interest expense (1,062) (873) (453) (459) (879) Other, net (43) (35) (28) (25) (32) ------------ ------------ ------------ ------------ ------------ Total other income (expenses) (689) (448) (166) (367) (649) ------------ ------------ ------------ ------------ ------------ Net loss $ (1,399) (1,578) (1,179) (518) (917) ============ ============ ============ ============ ============ Loss per share $ (0.20) (0.25) (0.17) (0.09) (0.16) ============ ============ ============ ============ ============ Weighted average shares outstanding 7,083,866 6,232,964 7,042,247 5,499,713 5,680,287 ============ ============ ============ ============ ============ Balance Sheet Data at Period End(1): Cash and cash equivalents $ 2,013 11,030 11,030 3,338 14,721 Working capital (deficit) 7,093 6,742 6,742 (3,620) 7,520 Total assets 20,454 32,571 32,571 17,702 30,240 Notes payable and current installments of long-term obligations 1,764 11,566 11,566 11,176 11,159 Long-term obligations 1,321 92 92 70 102 Total stockholders' equity 13,829 14,685 14,685 3,238 14,373
(1) Information prior to January 1, 1999 is not available. -13- 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the selected financial data in Item 6 and our financial statements and the notes thereto beginning on page F-1. The financial statements for periods prior to June 30, 2000 have not been audited. Our fiscal year end was changed to June 30 effective in 2000. Previously, our fiscal year ended on December 31. Our operations consist of a single business segment -- the design, manufacture and sale of a wide variety of radio frequency and microwave components and devices mainly used in the wireless communications industry. Results of Operations for the Fiscal Year Ended June 30, 2001 Compared with the Twelve Months Ended June 30, 2000 Net Sales Net sales for the year ended June 30, 2001 increased 35.3% to $41.4 million compared with $30.6 million for the twelve months ended June 30, 2000. This improvement primarily reflects increased demand for commercial signal source products. Net sales from commercial signal source products was $34.9 million for the year ended June 30, 2001, a 39.0% increase from the $25.1 million for the twelve months ended June 30, 2000. The year ended June 30, 2001 included a significant end-of-life production run generating net sales of $809,000 and fees earned from contract modifications of approximately $295,000. Net sales from all other products was $6.5 million for the year ended June 30, 2001, a 18.2% increase from the $5.5 million for the twelve months ended June 30, 2000. Gross Profit Gross profit for the year ended June 30, 2001 increased 49.6% to $19.6 million or 47.3% of sales, compared with $13.1 million, or 42.8% of sales for the twelve months ended June 30, 2000. Included in cost of goods sold for the year ended June 30, 2001 is a charge of $1.4 million for obsolete and excess inventory, compared to $516,000 for the twelve months ended June 30, 2000. The higher gross profit margin in the 2001 period was due to improved production yields and the absorption of manufacturing overhead over a larger volume of sales, the benefit from the end-of-life production run and contract modification, partially offset by inventory shrinkage and scrap and the above noted provision. Operating Expenses Included in operating expenses are charges for non-cash stock compensation. The charges for stock compensation principally relate to amortization of deferred stock compensation attributable to stock options granted at less than the market price of the common stock on the date of the grant. Of the $487,000 total amount of stock compensation recorded for the year ended June 30, 2001, $409,000 relates to options granted in December 1999. In December 2000, these options were reformed to $34.50 per share, the market price of the common stock on the date of the original grant. As a result, the remaining unamortized stock compensation cost associated with these option grants was reversed in December 2000. -14- 15 The following table summarizes stock compensation expense included in each category of operating expenses:
Fiscal Year Twelve Months Ended Ended June 30, June 30, 2001 2000 ------------ ------------ (in thousands of dollars) Selling: Non-cash stock compensation $ 78 88 Other selling expenses 4,367 3,548 ------------ ------------ Total selling expenses $ 4,445 3,636 ============ ============ General and administrative: Non-cash stock compensation $ 180 204 Other general and administrative expenses 9,042 4,232 ------------ ------------ Total general and administrative expenses $ 9,222 4,436 ============ ============ Research and development: Non-cash stock compensation $ 229 259 Other research and development expenses 4,057 5,387 ------------ ------------ Total research and development expenses $ 4,286 5,646 ============ ============
Selling Expenses Selling expenses for the year ended June 30, 2001 increased 22.2% to $4.4 million or 10.6% of net sales, compared with $3.6 million or 11.8% of net sales for the twelve months ended June 30, 2000. Excluding non-cash stock compensation, selling expenses for the year ended June 30, 2001 increased 25.7% to $4.4 million or 10.6% of net sales compared with $3.5 million or 11.4% of net sales for the twelve months ended June 30, 2000. The increase in selling expenses was primarily attributable to higher commissions paid to manufacturers' representatives due to higher net sales. General and Administrative Expenses General and administrative expenses for the year ended June 30, 2001 increased 109.1% to $9.2 million or 22.2% of net sales, compared with $4.4 million or 14.4% of net sales for the twelve months ended June 30, 2000. Excluding non-cash stock compensation, general and administrative expenses for the year ended June 30, 2001 increased 114.3% to $9.0 million or 21.7% of net sales compared with $4.2 million or 13.7% of net sales for the twelve months ended June 30, 2000. The increase was primarily attributable to higher amounts paid to independent contractors for interim management and accounting services, stay bonuses paid to employees, higher insurance premiums, increased audit and legal fees, and severance costs associated with the retirement benefits accrued for the planned retirement of our Chief Scientific Officer. -15- 16 Research and Development Expenses Research and development expenses for the year ended June 30, 2001 decreased 23.2% to $4.3 million or 10.4% of net sales, compared with $5.6 million or 18.3% of net sales for the twelve months ended June 30, 2000. Excluding non-cash compensation, research and development expenses for the year ended June 30, 2001 decreased 24.1% to $4.1 million or 9.9% of net sales, compared with $5.4 million or 17.6% of net sales for the twelve months ended June 30, 2000. The decrease was primarily attributable to the temporary transfer of research and development personnel to assist in manufacturing cost reduction efforts. Expenses Relating to Accounting Restatements and the Related Shareholder Litigation Expenses relating to the accounting restatements and the related shareholder litigation for the year ended June 30, 2001, were $2.4 million compared with $469,000 for the twelve months ended June 30, 2000. 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 cost of counsel. Total Other Income (Expense) Interest income decreased 9.6% to $416,000 for the year ended June 30, 2001 compared with $460,000 for the twelve months ended June 30, 2000. The decrease was attributable to lower average cash balances available in the year for investing. Interest expense and other, net increased 21.1% to $1.1 million for the year ended June 30, 2001 compared with $908,000 for the twelve months ended June 30, 2000. The increase was primarily attributable to interest and fees associated with forbearance agreements and higher interest rates on our former credit facility. Net Loss and Loss Per Share The net loss for the year ended June 30, 2001 was $1.4 million, or $0.20 per share, compared with a net loss of $1.6 million, or $0.25 per share, in the comparable period in 2000. Excluding the impact of stock compensation (which is a non-cash charge to earnings) and expenses relating to accounting restatements and related shareholder litigation (which management believes are not indicative of continuing operating expenses), net income for the year ended June 30, 2001 would have been $1.5 million, or $0.21 per share, compared with a loss of $558,000, or $0.09 per share, in the 2000 period. Results of Operations for the Six Months Ended June 30, 2000 Compared with the Six Months Ended June 30, 1999 Net Sales Net sales for the six months ended June 30, 2000 increased 59.3% to $17.2 million compared with $10.8 million for the six months ended June 30, 1999. This improvement primarily reflects increased demand for commercial signal source products. Net sales from commercial signal source products was $14.6 million in the six months ended June 30, 2000, a 78.0% increase from the $8.2 million in the six months -16- 17 ended June 30, 1999. Net sales from all other products was $2.6 million in the six months ended June 30, 2000, with no change from the $2.6 million in the six months ended June 30, 1999. Gross Profit Gross profit for the six months ended June 30, 2000 increased 30.8% to $6.8 million or 39.5% of sales, compared with $5.2 million or 48.1% of sales for the six months ended June 30, 1999. Included in cost of goods sold for the six months ended June 30, 2000 is a charge of $444,000 for obsolete and excess inventory, which was not required for the six months ended June 30, 1999. The lower gross profit margin in the 2000 period principally reflected a higher ratio of material costs to sales, due in part to our decision to pay higher costs in return for expedited delivery of raw materials, as well as the above noted provision. Operating Expenses Included in operating expenses are charges for non-cash stock compensation. The charges for stock compensation principally relate to amortization of deferred stock compensation attributable to stock options granted at less than the market price of the common stock on the date of the grant. Of the $493,000 total amount of stock compensation recorded in the six months ended June 30, 2000, $462,000 relates to options granted in December 1999. In December 2000, these options were reformed to $34.50 per share, the market price of the common stock on the date of the original grant. As a result, the remaining unamortized stock compensation cost associated with these option grants was reversed. The following table summarizes stock compensation expense included in each category of operating expenses:
Six Months Ended ----------------------------- June 30, June 30, 2000 1999 ------------ ------------ (in thousands of dollars) Selling: Non-cash stock compensation $ 80 8 Other selling expenses 1,868 1,470 ------------ ------------ Total selling expenses $ 1,948 1,478 ============ ============ General and administrative: Non-cash stock compensation $ 183 20 Other general and administrative expenses 2,257 1,635 ------------ ------------ Total general and administrative expenses $ 2,440 1,655 ============ ============ Research and development: Non-cash stock compensation $ 230 26 Other research and development expenses 2,773 2,183 ------------ ------------ Total research and development expenses $ 3,003 2,209 ============ ============
-17- 18 Selling Expenses Selling expenses for the six months ended June 30, 2000 increased 26.7% to $1.9 million or 11.0% of net sales, compared with $1.5 million or 13.9% of net sales for the six months ended June 30, 1999. Excluding non-cash stock compensation, selling expenses for the six months ended June 30, 2000 increased 26.7% to $1.9 million or 11.0% of net sales compared with $1.5 million or 13.9% of net sales for the six months ended June 30, 1999. The increase in selling expenses was primarily attributable to higher commissions paid to manufacturers' representatives, increased travel in support of higher sales, as well as an increase in stock compensation expense. General and Administrative Expenses General and administrative expenses for the six months ended June 30, 2000 increased 41.2% to $2.4 million or 14.0% of net sales, compared with $1.7 million or 15.7% of net sales for the six months ended June 30, 1999. Excluding non-cash stock compensation, general and administrative expenses for the six months ended June 30, 2000 increased 43.8% to $2.3 million or 13.4% of net sales compared with $1.6 million or 14.8% of net sales for the six months ended June 30, 1999. The increase was primarily attributable to higher salaries, bonuses and employee benefits paid to employees and higher expenses for investor relations, increased depreciation expense for additional capital equipment placed in service, as well as an increase in stock compensation expense. Research and Development Expenses Research and development expenses for the six months ended June 30, 2000 increased 36.4% to $3.0 million or 17.4% of net sales, compared with $2.2 million or 20.4% of net sales for the six months ended June 30, 1999. Excluding non-cash stock compensation, research and development expenses for the six months ended June 30, 2000 increased 27.3% to $2.8 million or 16.3% of net sales, compared with $2.2 million or 20.4% of net sales for the six months ended June 30, 1999. The increase was primarily attributable to higher salaries and benefits for current employees and for new employees, bonuses paid to employees, an increase in materials utilized on research and development projects, higher expenses for repair, maintenance and calibration of engineering equipment, higher travel expense for engineering management, as well as an increase in stock compensation expense. Expenses Relating to Accounting Restatements and the Related Shareholder Litigation Expenses relating to the accounting restatements and the related shareholder litigation for the six months ended June 30, 2000, were $469,000. 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 cost of counsel. Total Other Income (Expense) Interest income increased 169.2% to $315,000 for the six months period ended June 30, 2000 compared with $117,000 for the six months ended June 30, 1999. The increase was attributable to higher interest earnings on substantially larger cash balances available for investing. Interest expense and other, net decreased slightly to $481,000 for the six months ended June 30, 2000 compared with $484,000 for the six months ended June 30, 1999. -18- 19 Net Loss and Loss Per Share The net loss for the six months ended June 30, 2000 was $1.2 million, or $0.17 per share, compared with a loss of $518,000, or $0.09 per share, in the comparable period in 1999. Excluding the impact of stock compensation (which is a non-cash charge to earnings) and expenses relating to accounting restatements and related shareholder litigation (which management believes are not indicative of continuing operating expenses), net loss for the six months ended June 30, 2000 would have been $217,000, or $0.03 per share, compared with a net loss of $464,000, or $0.08 per share, in the 1999 period. Results of Operations for the Year Ended December 31, 1999 Net sales for the year ended December 31, 1999 were $24.2 million. Gross profit for the year ended December 31, 1999 was $11.4 million or 47.1% of net sales. Selling, general and administrative, and research and development expenses for the year ended December 31, 1999 were $3.2 million, $3.7 million and $4.9 million respectively. As a percentage of net sales, selling, general and administrative, and research and development expenses were 13.2%, 15.3% and 20.2% respectively. Total other income (expense), consisting principally of interest expense, net of interest income, was $649,000 for the year ended December 31, 1999. The net loss and loss per share for the year ended December 31, 1999 was $917,000 and $0.16, respectively. Liquidity and Capital Resources As of June 30, 2001, working capital was $7.1 million including cash and cash equivalents of $2.0 million. Operations generated $1.8 million of cash primarily attributable to the net loss, adjusted for non-cash charges, of $902,000. In fiscal 2001, we focused on reducing inventory levels and increasing inventory turns. Using the cash we generated from inventory reductions, we focused on bringing accounts payable with our vendors into compliance with their credit terms. Capital expenditures for the fiscal year ended June 30, 2001 were $2.0 million. We focused capital expenditures on new production and test equipment to increase our manufacturing capacity of commercial signal source products. Throughout the fiscal year ended June 30, 2001, we made significant reductions in our credit facilities. Through June 28, 2001, concurrent with the execution of three forbearance agreements, we had reduced the notes payable to Bank One from $11.5 million to $6.7 million. 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 and borrowed a total of $3.0 million from Wells Fargo Business Credit, Inc. As of June 30, 2001, our outstanding balances were $1.5 million of term debt and $1.5 million of revolving debt. The Credit Facility provides for a $6.0 million secured revolving line of credit ("Revolving Loan"), a secured term loan of up to $2.5 million ("Term Loan"), and a $1.5 million secured capital expenditures loan ("Capital Expenditures Loan"). In September 2001, this facility was amended to establish revised financial covenants for the fiscal years ending June 30, 2002 and June 30, 2001. 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 require us to maintain certain financial ratios. -19- 20 The Revolving Loan matures on June 28, 2004 and has interest payable in monthly installments at prime rates plus 0.5%. The interest rate at June 30, 2001 approximated 7.25%. We are required to pay an unused credit line fee of 0.25% per annum on the average daily unused amount. The unused line fee is payable monthly in arrears. At June 30, 2001, we had additional borrowing availability of $3.9 million under our Revolving Loan, calculated using a formula based on our inventories and accounts receivable aged less than 90 days. The Term Loan and Capital Expenditures Loan mature on June 28, 2004 and have principal and interest payable in monthly installments at prime rates plus 1% amortized over seven and five years, respectively. The interest rate at June 30, 2001 approximated 7.75%. We are required to pay a minimum interest charge on the Credit Facility of $30,000 per calendar quarter. We believe that anticipated cash flows from operations and available funds and borrowings under the Wells Fargo Business Credit, Inc. facility will be adequate to fund our currently planned working capital and capital expenditure requirements at least through June 30, 2002. Forward Looking Statements Some of the statements we make in this report are "forward-looking statements" as that term is used in the Private Securities Litigation Reform Act of 1995. In most cases, when we use words like "believe," "expect," "estimate," "anticipate," "project," or "plan" to describe something which has not yet occurred, we are making a forward-looking statement. Forward-looking statements we make are based on a number of assumptions by us about the future, usually based on current conditions or on the broader expectations of others. These assumptions may or may not prove to be correct and, as a result, our own forward-looking statements may also be inaccurate. On the other hand, based on what we know today and what we expect in the future, we believe that the forward-looking statements we make in this report are reasonable. 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. -20- 21 Effect of Recently Issued Accounting Standards Intangible assets consist of patents and trademarks, which are being amortized on a straight-line basis over an estimated useful life of 10 years. In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No.142, Accounting for Goodwill and Intangible Assets. SFAS No. 142 provides that an intangible asset may be amortized over its respective estimated useful life to its estimated residual value in proportion to the economic benefits consumed. The method of amortization should be systematic and rational but need not necessarily be the straight-line method. Amortization is not required for intangible assets which are determined to have an indefinite useful life. Useful lives of amortizable intangible assets are required to be re-evaluated each reporting period. We do not anticipate a material impact on our financial condition or results of operations as a result of implementing this standard. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. In August, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets. Adoption of SFAS No. 143 may result in increases in liabilities, assets, and expense recognition in financial statements. We do not anticipate a material impact on our financial condition or results of operations as a result of implementing this standard. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. ITEM 8. FINANCIAL STATEMENTS. The financial statements begin on page F-1. Financial statements prior to January 1, 1999 cannot be prepared without unreasonable effort and expense. The financial statements for periods prior to June 30, 2000 have not been audited. We have been informed by our independent auditors that they could not express unqualified audit opinions for periods prior to June 30, 2000, based on their determination that the internal controls over inventory accounting and management systems prior to June 30, 2000 were not sufficiently reliable to enable them to audit the inventory quantities, and that they are unable to apply alternative auditing procedures to the inventory balances for periods prior to June 30, 2000. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Incorporated by reference is the information contained in Item 4 of our prior Forms 8-K filed on July 12, 2000, July 20, 2000 and September 15, 2000, respectively. -21- 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Board of Directors Sarah L. Booher - Director. Ms. Booher, age 59, was elected a Director on January 18, 1994. She has been a managing partner of Good Earth Farm, a horse breeding farm, since 1992. Ms. Booher was the Executive Director of the Park Ridge Foundation, a nonprofit health care foundation located in Rochester, New York, from February 15, 1988 until September 1, 1996. She remained as a consultant to the Foundation until August 30, 1997. After September 1, 1996, she became Vice President of PMA Associates of Genesee Valley, Inc., a nonprofit strategic planning corporation in Livonia, New York, where she remains as a consultant and Secretary/Treasurer. She has also been a fund raising consultant for the Cordelia A. Greene Library in Castile, New York, and the Hope Hall School of Rochester, New York since 1998. During 1996 and 1997, Ms. Booher served as President of the Genesee Valley New York Chapter of the National Society of Fundraising Executives, a nonprofit organization, where she also served on the Board of Directors from 1986 to 1997. She received a BA degree from the University of Colorado in 1964. Ms. Booher is the sister of Joseph H. Kiser, an Executive Officer of the Company. David A. Lisowski - Director. Mr. Lisowski, age 48, was elected a Director on June 26, 1996. Mr. Lisowski is the President and a Director of The Denver Wholesale Florist Company, a national wholesale florist, for which he has been the General Manager and Chief Executive Officer since 1993. He was employed by Central Bank of Denver, N.A., a commercial bank in Colorado, and various affiliated banks from 1972 to 1992. His employment with Central Bank included serving as Senior Vice President of Commercial Lending in Southern Colorado as well as various other positions. Mr. Lisowski attended Metropolitan State College where he received a BS degree in Finance in 1988. Anthony B. Petrelli - Acting Chairman of the Board and Director. Mr. Petrelli, age 48, was elected a Director on October 17, 1997 and became Acting Chairman of the Board of Directors on July 3, 2001. Mr. Petrelli has served as Senior Vice President of Investment Banking Services at Neidiger, Tucker, Bruner, Inc., an investment banking firm and registered broker-dealer in Denver, Colorado, since May of 1987. He formerly served as a Director of Guardian Acceptance Corp., a consumer finance company in Denver, Colorado, for which he served as President from September 1996 until December 1997. Mr. Petrelli received a BS degree in Business in 1974 and an MBA in 1979 from the University of Colorado. Gil J. Van Lunsen - Director. Mr. Van Lunsen, age 59, was elected as a Director effective June 1, 2001. He recently retired from KPMG following 32 years of service. Nine years after joining KPMG in 1968 as an assistant accountant, he became partner and subsequently was promoted to partner in charge of national accounting and audit training. In 1994, he was appointed managing partner of the Tulsa, Oklahoma office, a position he held until his retirement in 2000. Mr. Van Lunsen was recently appointed chairman of the audit committee of Hillcrest Healthcare Systems, a Tulsa, Oklahoma-based hospital system. He is also a member of the Ethics Compliance Committee of Tyson Foods. He received his BSBA in accounting and finance from the University of Denver in 1968 and is a Certified Public Accountant. -22- 23 Executive Officers and Key Employees Charles R. Bland - President and Chief Executive Officer. Mr. Bland, age 53, joined us on May 7, 2001 as our President and Chief Executive Officer. From June 1, 2000 until he joined us, he served as the President of Growzone, Inc., a software company focused on the horticultural industry, and from June 1999 until June 2000, he was the President of AmericasDoctors.com, an Internet health care content site. From 1998 to 1999, Mr. Bland was the Chief Operating Officer at Quark Incorporated, provider of shrink wrap and client server software for the publishing industry. For the previous 24 years, Mr. Bland worked in positions of increasing responsibility with Owens Corning Fiberglass, a world leader in high performance glass composites and building materials, with his final assignment being President, Africa/Latin American Operations. Mr. Bland received his B.S., Accounting and Finance, from Ohio State University and his MBA from the Sloan School, Massachusetts Institute of Technology. Richard P. Dutkiewicz - Vice President of Finance, Chief Financial Officer and Assistant Secretary. Mr. Dutkiewicz, age 46, joined us on January 22, 2001 as our Vice President of Finance, Chief Financial Officer and Assistant Secretary. From 1995 to 2001, Mr. Dutkiewicz was Vice President - Finance, Chief Financial Officer, Secretary and Treasurer of Coleman Natural Products, Inc., located in Denver, Colorado, a leading supplier of branded natural beef in the United States. Mr. Dutkiewicz' previous experience includes senior financial management positions at Tetrad Corporation, MicroLithics Corporation and various divisions of United Technologies Corporation. Mr. Dutkiewicz was an Audit Manager at KPMG LLP. Mr. Dutkiewicz also serves on the Board of Directors of CareerLab.com. He received his BBA degree from Loyola University of Chicago in 1977. He is a member of the American Institute of Certified Public Accountants and Financial Executives International. Joseph H. Kiser - Chief Scientific Officer. Mr. Kiser, age 64, currently serves as Chief Scientific Officer and Secretary. He has worked for us since 1954 in various capacities including President, C.E.O. and Vice President of Engineering. In 1992, Mr. Kiser stepped down from his position as President in order to concentrate his efforts on engineering and new product development. Mr. Kiser, whose father was our founder, has been involved with the design and development of mixers, transformers, couplers, VCO's and subassemblies. Mr. Kiser has assembled a strong cross functional team of electrical, mechanical and process engineers which led to the creation of the rapidly expanding commercial signal source product line. Mr. Kiser currently holds five U. S. patents. Mr. Kiser earned a BSEE degree from Cooper Union in 1967. Mr. Kiser is the brother of Sarah L. Booher, a member of our Board of Directors. Mr. Kiser plans to retire on December 31, 2001. Timothy M. Micun - Vice President, Sales and Marketing. Mr. Micun, age 35, has been our Vice President of Sales and Marketing since March 2001. Mr. Micun joined us in May of 2000, as our Director of Sales - Strategic Accounts. Mr. Micun previously served as a Strategic Accounts Manager for an electronic components manufacturer from October 1995 through April 2000 and as a Buyer of electronic components for Motorola from December 1991 to October 1995. Prior to a career in electronics, Mr. Micun served as an officer aboard the USS Ponce (LPD-15). Mr. Micun earned a BS degree in Business Administration from Northern Illinois University. Daniel J. Wilmot - Vice President of Advanced Technology. Mr. Wilmot, age 36, joined us in August 1992. He served as Product Development PLL Design Engineer and Director of Advanced Product/Development Engineer in 1993 before he was appointed Vice President of Engineering in November 1993. Prior to joining us, Mr. Wilmot was an RF Lead Engineer with Rockwell International where he worked in management, design, development, cost management and containment for PLLs and VCOs among other hybrid RF devices. Before Rockwell International, he worked at Interstate -23- 24 Electronics Corp. in Anaheim, California as a Radio subsystem designer for GPS applications. Mr. Wilmot received his BSEE from University of California at Santa Barbara in June 1986 and an MSEE from the California State University at Fullerton in December 1991. Mr. Wilmot also completed the AEA/Stanford Executive Institute for Management of High-Technology Companies at Stanford University, California in August 1999. Matthew D. Pope - Vice President of Business Development. Mr. Pope, age 36, became our Vice President of Business Development in April 2001. He previously served as our Vice President of Commercial Engineering and Operations in January of 1998 and, then, as our Vice President of Commercial Advanced Product Development since October of 1999. Mr. Pope first joined us in March of 1994, as our Director of Advanced Product Development. He served as our acting Vice President of Operations from August 2000 through March 2001. He has been involved in the development of our Commercial VCO and PLL products. Before joining us, Mr. Pope was a Staff Engineer with TRW Inc., where he worked in design, development, and management for X-band receivers, downconverters, oscillators, monolithic microwave receivers, fast hop synthesizers, and MMIC design. Mr. Pope earned a BSEE from Rensselaer Polytechnic Institute in 1987 and an MSEE from the University of Southern California in 1988. He is currently pursuing an MBA at George Washington University. Janice E. Hyland - Vice President of Quality Assurance and Ethics Compliance Officer. Ms. Hyland, age 55, became our Vice President of Quality Assurance in January 1998. As such, she is responsible for the Corporate Quality Departments. Ms. Hyland has been our employee since 1986 in various capacities including the Director of Quality, Quality Manager, Program Manager and Inside Sales Manager. She has over 32 years experience in Space Level/Military programs as Quality Management, Program Management and Contract Administrator/Negotiator for Military contracts. Ms. Hyland has attended courses in Quality Assurance, Quality Engineering and Program Management at the University of Irvine, California. She was certified as our Facility Security Officer through the Department of Defense in June 1993. Ms. Hyland also completed the AEA/STANFORD Executive Institute Management of High-Technology Companies at Stanford University, California, August 1997. Russell M. Crouch - Vice President of Commercial Engineering. Mr. Crouch, age 41, became our Vice President of Commercial Engineering in January of 2000. He originally joined us in April of 1998 as the Director of Engineering, Hybrid Products, and he was Director of Engineering, Commercial Signal Sources prior to his promotion. Prior to joining us, Mr. Crouch was employed by TRW, Inc. from August 1983 to March 1998, where he was responsible for new product development. Mr. Crouch earned a BSEE from Georgia Institute of Technology in 1983 and an MSEE from the University of Southern California in 1992. Larry M. Romero - Vice President of Process Engineering. Mr. Romero, age 39, became Vice President of Process Engineering in January 2000. He first joined us in August 1995 as Senior Process Engineer for the Commercial Signal Sources Division. Prior to his promotion, Mr. Romero held positions including General Operations Manager and Director of Process Engineering. Mr. Romero earned his BS degree in Electrical Engineering Technology from the University of Southern Colorado in 1986. Mr. Romero completed the AEA/Stanford Executive Institute for Management of High - Technology Companies at Stanford University, California in August 1999. Ernest C. Hafersat - Vice President of Manufacturing. Mr. Hafersat, age 51, became our Vice President of Manufacturing in March 2001. Prior to joining us, he served in various management capacities, including Senior Director of Engineering at Maxtor Corporation, a disk storage manufacturer, since 1994. Mr. Hafersat also served as the acting Vice President and General Manager/Senior Director -24- 25 of Operations, Engineering and Materials at Read-Rite Corporation, a manufacturer of magnetic recording components for the hard drive industry located in Malaysia and the Philippines from January 1998 to December 1999. His previous assignments included positions as Senior Manager of Engineering with Exabyte Corporation, a manufacturer of tape storage products; Director of Manufacturing with Optotech Inc., an optical disk storage product manufacturer; Director of Manufacturing for Kennedy Corporation, a manufacturer of tape storage products; and Manager of Manufacturing/Industrial/Cost Engineering with IBM-MCA Joint Venture (Discovision), a videodisk and technology transfer manufacturing. Mr. Hafersat completed his BSIE degree at Kentucky Christian University in 1970. Our Executive Officers are elected by the Board of Directors at the first meeting after each annual meeting of Shareholders and hold office until the next such meeting of Directors or their earlier resignation or removal. There is no arrangement or understanding between any such Director or Executive Officer and any other person or persons pursuant to which he or she was or is to be selected as a Director or Executive Officer nor is there any family relationship between or among any of our Directors or Executive Officers, except that Joseph H. Kiser and Sarah L. Booher are siblings. -25- 26 ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table summarizes the compensation for the years ended June 30, 2001, six months ended June 30, 2000 and year ended December 31, 1999 of our Chief Executive Officer and our Executive Officers whose salary and bonus exceeded $100,000:
Long-Term Compensation ------------------------- Annual Compensation Awards ------------------------------------------------------- ------------------------- Other Securities Annual Restricted Underlying Name and Compen- Stock Options/ Principal Position Year Salary($) Bonus($) sation($) Award(s)($) SARs(#) ------------------ ---- --------- -------- --------- ------------ ---------- Joseph H. Kiser 2001 286,786 25,010 16,631(1) -0- -0- Chief Scientific Officer 2000* 154,875 100,000 101,605(2) -0- -0- And Secretary 1999 295,000 75,000 152,505(3) 37,501(19) 100,000 Charles R. Bland 2001 31,250 -0- 1,538(5) -0- 85,000 President and 2000 -0- -0- -0- -0- -0- CEO(4) 1999 -0- -0- -0- -0- -0- G. Peter Pappas 2001 -0- -0- -0- -0- -0- Former President 2000 -0- -0- -0- -0- -0- And CEO(6) 1999 -0- -0- -0- -0- -0- David G. Sherman 2001 7,013 -0- 33,847(7) -0- -0- Former President 2000* 102,375 100,000 138,484(8) -0- -0- And CEO (6) 1999 195,000 75,000 150,214(9) 37,501(19) 100,000 Richard P. Dutkiewicz 2001 63,462 10,000(10) 3,754(11) -0- 20,000 Vice President of 2000 -0- -0- -0- -0- -0- Finance and CFO 1999 -0- -0- -0- -0- -0- Timothy M. Micun 2001 99,352 47,884 4,177(12) -0- 30,000 Vice President of 2000* 13,385 -0- -0- -0- -0- Sales and Marketing 1999 -0- -0- -0- -0- -0- Derek L. Bailey 2001 98,491 43,867 80,623(13) -0- -0- Former Vice President 2000* 67,500 55,000 44,000(14) -0- -0- Of Sales & Marketing 1999 125,000 74,239 12,694(15) -0- 50,000 Daniel J. Wilmot 2001 133,846 51,168 10,390(16) -0- -0- Vice President of 2000* 62,500 35,000 30,974(17) -0- -0- Advanced Technology 1999 125,000 54,937 12,698(18) -0- 22,500
* The data presented is for the six months ended June 30, 2000. (1) Includes automobile benefit of $11,750. (2) Includes tax reimbursement of $84,501, automobile benefit of $5,875, insurance of $9,229 and an IRA contribution of $2,000. -26- 27 (3) Includes tax reimbursement of $107,202, automobile benefit of $11,750, insurance of $17,421, accrued vacation earned but not taken of $11,342, tax preparation fees of $2,790 and an IRA contribution of $2,000. (4) Mr. Bland joined us on May 7, 2001. (5) Includes automobile benefit of $1,538. (6) Mr. Pappas is employed by BBK Ltd., which firm was hired by us in August 2000 to provide interim services until a new President and Chief Executive Officer was hired after the resignation of David G. Sherman. He left us in May of 2001 after Mr. Bland joined us. See "Certain Relationships and Related Transactions." (7) Includes severance payments of $30,000. (8) Includes tax reimbursement of $84,501, accrued vacation earned but not taken of $30,000 (at termination), automobile benefit of $2,938, insurance of $9,700, legal services of $9,345, and an IRA contribution of $2,000. (9) Includes tax reimbursement of $104,117, automobile benefit of $4,700, insurance of $17,897, accrued vacation earned but not taken of $21,500, and an IRA contribution of $2,000. (10) Includes sign-on bonus of $10,000. (11) Includes automobile benefit of $2,692. (12) Includes automobile benefit of $3,077. (13) Includes severance payments of $41,556, accrued vacation earned but not taken of $26,430, and an automobile benefit of $11,250. Mr. Bailey resigned from the Company on February 15, 2001. (14) Includes tax reimbursement of $36,007, automobile benefit of $5,625, insurance of $368, and an IRA contribution of $2,000. (15) Includes tax reimbursement of $719, automobile benefit of $9,266, insurance of $709, and an IRA contribution of $2,000. (16) Includes automobile benefit of $8,990. (17) Includes tax reimbursement of $24,301, automobile benefit of $4,375, insurance of $298, and an IRA contribution of $2,000. (18) Includes tax reimbursement of $719, automobile benefit of $8,600, miscellaneous of $778, insurance of $601, and an IRA contribution of $2,000. (19) Includes 6,250 shares valued at $37,501 earned in 1998, but not issued until 1999. These shares were subsequently sold by the holders. See "Employee Agreements." None of the named Executive Officers received additional perquisites or other personal benefits the aggregate amount of which was the lesser of either $50,000 or 10% of the total of annual salary and bonus reported for such persons. -27- 28 OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table sets forth the information concerning individual grants of stock options and appreciation rights during the last fiscal year to each of the named Executive Officers:
Number Potential Realizable Value Of % of Total at Securities Options Assumed Annual Rates of Underlying Granted Exercise or Stock Price Appreciation Options to Employees Base Price Expiration For Option Term Name Granted in Fiscal Year ($/share) Date 5%($)(1) 10%($)(2) ---------------------------- -------------- ----------------- ------------- ------------- --------------- ------------- Joseph H. Kiser -0- N/A N/A N/A N/A N/A Charles R. Bland 85,000(3) 48% $2.00 5-7-11 $276,912 $440,936 G. Peter Pappas -0- N/A N/A N/A N/A N/A David G. Sherman -0- N/A N/A N/A N/A N/A Richard P. Dutkiewicz 20,000(3) 11% $3.50 1-31-11 $114,023 $181,562 Timothy M. Micun 30,000(3) 17% $2.50 3-19-11 $122,167 $194,531 Derek L. Bailey -0- N/A N/A N/A N/A N/A Daniel J. Wilmot -0- N/A N/A N/A N/A N/A
(1) This column represents the potential realizable value of each grant of options, based on the assumption that the market price of shares of Common Stock underlying the options will appreciate in value from the date of the grant to the end of the option term at the annual rate of five percent. (2) This column represents the potential realizable value of each grant of options, based on the assumption that the market price of shares of Common Stock underlying the options will appreciate in value from the date of the grant to the end of the option term at the annual rate of ten percent. (3) Of this grant, all options were incentive stock options. -28- 29 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES The following table sets forth information concerning each exercise of stock options during the last fiscal year by each of our Executive Officers and the fiscal year end value of unexercised options:
Number of Securities Underlying Value of Unexercised Unexercised In-the- Options/SARs at Money Shares Acquired on Value Realized Fiscal Year- Options/SARs at Name Exercise(#) ($) End(#) Fiscal Year-End($)(1) ---- ------------------ -------------- --------------- --------------------- Exercisable/ Exercisable/ Unexercisable Unexercisable Joseph H. Kiser -0- N/A 225,000/25,000 $0/$0 Charles R. Bland -0- N/A 0/85,000 $0/$85,000 G. Peter Pappas -0- N/A -0- N/A David G. Sherman -0- N/A 155,347/3,794 $0/$0 Richard P. Dutkiewicz -0- N/A 0/20,000 $0/$0 Timothy M. Micun -0- N/A 2,000/28,000 $1,000/$14,000 Derek L. Bailey -0- N/A 65,732/73,581 $0/$0 Daniel J. Wilmot -0- N/A 111,869/34,081 $20,343/$0
(1) Based on the fair market value of the Common Stock on June 29, 2001 of $3.00, the closing price as quoted on the Pink Sheets LLC. Directors' Compensation We currently have an arrangement whereby each outside Director receives $1,000 per day for attendance in person at any meeting of more than an hour of the Board of Directors or a committee thereof or a meeting with management or other Directors for Company business or affairs, including meetings held by telephone. We reimburse outside Directors for their expenses in attending meetings of the Board of Directors and its committees. We grant stock and stock options to the members of our audit and compensation committees in two ways: o 500 stock options for attending, either by telephone or in person, a meeting of the Board of Directors or a committee meeting that lasts at least one hour; and o 50 shares each month for being a member of a committee. These fully vested nonqualified stock grants and stock options are priced at the closing market price on the day of grant. -29- 30 Employment Agreements with Executive Officers In April of 1998, we executed a new employment agreement with Joseph H. Kiser for an initial term of four years commencing June 1, 1997. On each June 1 beginning in 1998, the agreement provides that it is automatically extended for an additional year unless notice is given by us or Mr. Kiser of non-extension more than sixty (60) days before May 31 of such year. Because no such notice was given in 2001, his agreement currently expires in 2005. Pursuant to the agreement, the minimum base salary for Mr. Kiser is $295,000. The agreement also provides for quarterly and/or year-end bonuses payable in cash or shares of our Common stock which are to be set each year by our Compensation Committee on the basis of merit and our financial success and progress in the prior fiscal year. In addition, the agreement provided for a bonus of 25,000 shares of our Common stock, 50% of which, or 12,500 shares, was granted upon execution of the agreement, 25% or 6,250 shares, was vested on March 12, 1999 and the remaining 25%, or 6,250 shares, did not vest. All unvested options previously granted to Mr. Kiser will fully vest in the event of a change of control or an involuntary termination. The agreement further provides for severance pay, in the event of involuntary termination of employment by us, equal to the greater of Mr. Kiser's annual base salary multiplied by the remaining term of the agreement or 2.99 times Mr. Kiser's average annual compensation over the last five years. In the case of a voluntary retirement from employment or mandatory retirement from employment pursuant to a retirement plan to which Mr. Kiser was subject prior to a change in control, he would be entitled to 50% of his annual base salary as severance pay. In the event of voluntary termination or retirement, we agree to engage Mr. Kiser as a consultant to us for a period of up to five years, for which he will be paid a fee equal to 50% of his annual base salary on the date of termination of employment. For each year or part thereof that Mr. Kiser provides consulting services to us, he will receive a retirement benefit equal to 25% of his annual base salary at the time of his voluntary termination for a period of time equal to the period that he provides consulting services. Mr. Kiser has agreed that, for a period of one year after termination or expiration of his employment agreement or the period covered by any consulting arrangement, he will not, directly or indirectly, compete with us. David G. Sherman, our former President and Chief Executive Officer, previously had an agreement that was substantially identical to Mr. Kiser's, except that his minimum annual base salary was $195,000. Effective August 1, 2000, Mr. Sherman entered into a Termination and Consulting Agreement with us. In that agreement, Mr. Sherman waived all rights he had under his employment agreement to post-termination compensation and benefits, and we agreed to engage Mr. Sherman as a consultant for the period August 1, 2000 through July 31, 2001. In that capacity, Mr. Sherman was entitled to compensation at the rate of $195,000 per year and other standard employee benefits. The agreement includes a non-compete and non-solicitation agreement for three years. In September 2000, we suspended payments to Mr. Sherman. See "Certain Relationships and Related Transactions." Employment Agreements with Other Executive Officers In January 1997, we entered into employment agreements with Daniel J. Wilmot and Derek L. Bailey for a term of three years. In January 1999, Mr. Wilmot's agreement was amended to provide that it automatically extends for an additional year on each succeeding December 31 unless notice of non-extension is given by us or Mr. Wilmot more than thirty days before that date. In October 2000, we entered into a new employment agreement with Mr. Bailey. The agreement was effective for one year -30- 31 expiring October 2001 with automatic renewals unless he was terminated under the terms of the agreement. Mr. Bailey left in February 2001, but remains a consultant under his agreement. In January 2001, we entered into an employment agreement with Richard P. Dutkiewicz to become our Chief Financial Officer and Vice President of Finance. That agreement is effective for two years, expiring January 2003 with automatic renewals unless terminated under the terms of the agreement. In February 2001, we entered into an employment agreement with Timothy M. Micun to be promoted to our Vice President of Sales and Marketing. That agreement is effective for two years, expiring March 2003 with automatic renewals unless terminated under the terms of the agreement. In May 2001, we entered into an employment agreement with Charles R. Bland to become our President and Chief Executive Officer. His agreement is effective for two years, expiring May 2003 with automatic renewals unless terminated under the terms of the agreement. The minimum base salaries under these agreements range from $90,000 to $235,000. The agreements also provide for year-end bonuses as determined at the beginning of each of our fiscal years by the Board of Directors based on merit and our financial success and progress. The agreements provide for severance pay equal to the then annual base salary for periods ranging from six months to one year in the event of involuntary termination. The officers have agreed that, for a period of one year after termination of employment, they will not, directly or indirectly, compete with us. In September 2000, we entered into Stay Bonus Agreements with certain of our officers, including Messrs. Wilmot, Micun and Bailey. These agreements provide that these officers will be paid bonuses at the end of each quarter through August 31, 2001 if they remain in our employ. The Stay Bonuses for Messrs. Wilmot, Micun and Bailey totaled approximately $22,000 per quarter. Mr. Bailey's Stay Bonus Agreement was terminated when he left us in February 2001. COMPENSATION COMMITTEE INTERLOCKS We have a Compensation Committee which, in fiscal 2001, was comprised of Messrs. Lisowski and Petrelli. Neither director is or was in the past one of our officers or employees. No interlocking relationship exists between the Board of Directors or the Compensation Committee and the board of directors or compensation committee of any other company, nor has such an interlocking relationship existed in the past. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act requires our Executive Officers and directors, and persons who own more than ten percent of our Common stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the exchange on which the Common Stock is listed for trading. Those persons are required by regulations promulgated under the Securities Exchange Act to furnish us with copies of all reports filed pursuant to Section 16(a). Two of our former Executive Officers, G. Peter Pappas and William C. Andrews, failed to make a timely filing of their ownership reports required by Section 16(a) with the Securities and Exchange Commission. They failed to file timely reports on Form 3 relating to their appointment as our Executive Officers on August 3, 2000. The reports were filed on November 29, 2000. -31- 32 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the number and percentage of shares of our Common stock owned beneficially, as of August 31, 2001, by any person who is known to us to be the beneficial owner of 5% or more of such Common Stock, and, in addition, by each of our Directors and Executive Officers, and by all of our Directors and Executive Officers as a group. Information as to beneficial ownership is based upon statements furnished to us by such persons. For purposes of this disclosure, the amount of our Common stock beneficially owned is the aggregate number of shares of the Common Stock outstanding on such date plus an amount equal to the aggregate amount of Common Stock which could be issued upon the exercise of stock options within 60 days of such date by each individual, irrespective of exercise price.
Amount and Nature of Beneficial Percent Name of Beneficial Owner Ownership of Class ------------------------ ----------------- -------- Sarah L. Booher(1) 71,383 1% 4492 South Livonia Road Livonia, New York 14487 David A. Lisowski(2) 39,600 <1% 4800 Dahlia Denver, Colorado 80216 Anthony B. Petrelli(3) 33,900 <1% 1675 Larimer St., #300 Denver, Colorado 80202 Gil J. Van Lunsen(4) 1,650 <1% 171 Crazy Horse Drive Durango, CO 81301 Charles R. Bland 2,000 <1% 4895 Peoria Street Denver, Colorado 80239 Richard P. Dutkiewicz 1,000 <1% 4895 Peoria Street Denver, Colorado 80239 Joseph H. Kiser(5) 684,583 8.5% 4895 Peoria Street Denver, Colorado 80239 Daniel J. Wilmot(6) 111,869 1.5% 4895 Peoria Street Denver, Colorado 80239
-32- 33 Timothy M. Micun(7) 2,648 <1% 4895 Peoria Street Denver, Colorado 80239 All Directors and Executive 883,593 11.7% Officers as a Group(8) (9 Persons)
---------- (1) Includes 11,920 shares held by Ms. Booher pursuant to trust arrangements. Also includes options to purchase 40,000 shares. Does not include an additional 3,230 shares held by her husband, Robert Booher, for which shares she has disclaimed beneficial ownership. (2) Includes options to purchase 36,500 shares. (3) Includes options to purchase 32,000 shares. (4) Includes options to purchase 1,500 shares. (5) Includes 197,863 shares beneficially owned by Mr. Kiser as the result of certain trust arrangements. Also includes options to purchase 225,000 shares. (6) Consists of options to purchase 111,869 shares. (7) Includes options to purchase 2,000 shares. (8) Includes options to purchase 448,869 shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We lease certain of our corporate office and manufacturing facilities under long-term operating leases from our Chief Scientific Officer and from a partnership in which he is a partner. The leases expire in 2002 to 2005 and contain provisions which would permit us to extend the terms of the leases. Total rent expense associated with these leases for the year ended June 30, 2001 was $130,000 for Building 2 and $39,000 for Building 3. In August 1998, the lease for Building 2 was amended to extend the lease period and the monthly rental was increased from $4,000 to $10,801 beginning November 1, 1998. The lease for Building 3 was renewed for five years and, because of an increase in the amount of warehouse space by an additional 3,036 square feet, the monthly rental was increased from $1,200 to $2,159 per month. At the time, we believed that these increases were no greater than would have been paid in an arms-length transaction and that the rent levels were substantially similar to leases of similar terms on commercial properties in the same area. We now believe that, based on current conditions in the greater metropolitan Denver, Colorado real estate market, the rent we are paying for these two buildings may be higher than current market rates. Under our Articles of Incorporation, Bylaws and applicable Colorado corporate law, we have certain obligations to indemnify our officers and directors for expenses they incur in connection with the defense of litigation brought against them on account of actions taken by them in those capacities. In accordance with those obligations, we and certain of our current and former officers (the "Officers") have entered into agreements (the "Undertakings") relating to the advancement of legal fees and other expenses incurred in connection with the SEC Investigation and the ongoing shareholder litigation (the "Claims"). Pursuant to the Undertakings, the Officers have agreed to repay any amounts advanced by us in connection with the Claims, in the event (a) a determination is made by a committee of the Board of Directors, composed entirely of outside directors, that the Officer engaged in conduct which disqualifies the Officer from indemnification by us under applicable law, or (b) an express finding is made by a court of law or tribunal with jurisdiction that the Officer is not entitled to indemnification under applicable law (either (a) or (b) is referred to hereinafter as an "Adverse Determination"). -33- 34 In consideration of our advancement of legal fees and expenses, including the payment of retainers in many cases, the Officers agreed to fully cooperate with us in connection with our own internal investigation and in the defense of any Claims. In the Undertakings, the Officers affirmed that, in the course of providing services to us, they had at all times conducted themselves in good faith and that their conduct had always been in our best interests. In the absence of an Adverse Determination, we have agreed in the Undertakings to pay reasonable legal fees and expenses incurred by the Officers in connection with the Claims. In the event of an Adverse Determination, no further advances are to be made and the affected Officer would be required to repay prior advances. As of June 30, 2001, amounts invoiced to us for legal fees and expenses, including retainers, totaled approximately $40,000 for Sarah Hume, $141,000 for David G. Sherman, $70,000 for Derek L. Bailey, $169,000 for Joseph H. Kiser and $125,000 for Jon L. Clark. During Mr. Sherman's tenure as President and Chief Executive Officer, he traveled extensively on our behalf, visiting suppliers and customers and recruiting sales and other personnel. Mr. Sherman received cash advances from us to pay for some of his expenses on these trips. Our Audit Committee determined that Mr. Sherman failed to adequately document the business purpose for which he had utilized some of the amounts advanced. The Audit Committee then asked Mr. Sherman to provide further information as to the business purpose of his use of the cash advances and for documentation of that use. In response, Mr. Sherman provided additional information and documentation to the Audit Committee. The Audit Committee is currently reviewing, with the assistance of an independent expert retained by counsel for us, the material submitted by Mr. Sherman to determine what amount, if any, he will be required to reimburse us on account of these advances. While the Audit Committee's investigation is pending, we suspended payment of the consulting fees payable to Mr. Sherman pursuant to his Termination and Consulting Agreement with us and suspended further advances to him for the legal fees and expenses he has incurred in connection with the Claims. Prior to her resignation as our Controller in May of 2000, Sarah Hume made approximately $8,000 in unauthorized charges on one of our credit cards for travel expenses for members of her church. While she has signed a promissory note to repay us, we have not received any payments on that note to date, and Ms. Hume has not fully cooperated with the Audit Committee's internal investigation. Accordingly, the Audit Committee suspended further advances to her for the legal fees and expenses she has incurred in connection with the Claims. In August of 2000, we entered into an agreement with BBK, Ltd., a management consulting firm headquartered in Southfield, Michigan. As a result of the agreement, G. Peter Pappas, a principal of BBK, was appointed as our President and CEO while our Board of Directors conducted a search for a new permanent President and CEO. After Charles R. Bland joined us as our President and CEO in May of 2001, Mr. Pappas left the Company. In addition, William C. Andrews, also of BBK, was appointed our interim chief financial officer in August of 2000. Richard P. Dutkiewicz joined us as our new Vice President of Finance and CFO in January of 2001, and Mr. Andrews left us in February of 2001. During the period from August through May of 2001, we paid $1.4 million to BBK. Of that total, $582,000 was paid for the services of Mr. Pappas, $353,000 was paid for the services of Mr. Andrews, and $471,000 was paid for the services of other BBK personnel and related expenses. Messrs. Pappas and Andrews may share in the benefit from any payments we made to BBK through their compensatory arrangements with BBK. -34- 35 Pursuant to an agreement dated December 31, 1991, between us and certain of our current and former officers, we guaranteed a series of promissory notes payable by such officers, including Messrs. Sherman and Kiser, to a former officer in connection with her separation from us. Two of those notes, as subsequently amended, remain outstanding. The principal of Mr. Sherman's note is $57,000 and Mr. Kiser's is $37,000. Both notes mature on March 1, 2003. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Exhibit No. Description ----------- ----------- 3.1a Restated Articles of Incorporation, as Amended, filed as Exhibit 4.1 to the Form S-8 Registration Statement (No. 33-88666) and incorporated herein by reference. 3.1b Articles of Amendment to the Articles of Incorporation filed as Exhibit 3.1b to the Form 10-KSB for the year ended December 31, 1996 and incorporated herein by reference. 3.2 Amended and Restated Bylaws adopted on November 4, 1992 filed as Exhibit 3.2 to the Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference. 4.1 Specimen Certificate for $.01 par value Common Stock filed as Exhibit 4.3 to the Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference. 4.2 Rights Agreement with American Securities Transfer, Inc. dated March 15, 1996 filed as Exhibit 4.2 to the Form 8-A/A Registration Statement (No. 0-23866) and incorporated herein by reference. 4.3 Specimen Certificate for Right to Purchase $.01 par value Common Stock filed as Exhibit 4.3 to the Form 8-A/A Registration Statement (No. 0-23866) and incorporated herein by reference. 4.4 Securities Purchase Agreement with the Purchasers dated March 4, 1997 filed as Exhibit 4.5 to the Form S-3 Registration Statement (No. 333-25173) and incorporated herein by reference. 4.5 Form of Convertible Subordinated Debenture issued to the Purchasers under the Securities Purchase Agreement dated March 4, 1997 filed as Exhibit 4.6 to the Form S-3 Registration Statement (No. 333-25173) and incorporated herein by reference. 4.6 Form of Warrant to Purchase Common Stock issued to the Purchasers under the Securities Purchase Agreement dated March 4, 1997 filed as Exhibit 4.7 to the Form S-3 Registration Statement (No. 333-25173) and incorporated herein by reference.
-35- 36 10.1 Executive Employment Agreement with Joseph H. Kiser, dated effective June 1, 1997, filed as Exhibit 10.1 to the Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.2 Executive Employment Agreement with David G. Sherman, dated effective June 1, 1997, filed as Exhibit 10.2 to the Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.3 Amended and Restated Tandem Stock Option and Stock Appreciation Rights Plan, effective as of December 27, 2000 10.4 Equipment Lease Agreement dated May 26, 1993 with Rossi Hardesty Financial Inc. filed as Exhibit 10.14 to the Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference. 10.5 Lease Agreement dated January 1, 1987 with J.C. Enterprises for the facility located at 5165 Peoria Street, Denver, Colorado, as amended on December 6, 1990 and March 23, 1993, filed as Exhibit 10.15 to the Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference. 10.6 Amended Lease Agreement dated July 1, 1992 with Bello-1 Partnership for the facility located at 11101 East 51st Avenue, Denver, Colorado, filed as Exhibit 10.16 to the Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference. 10.7 Settlement Agreement with Joseph H. Kiser, David G. Sherman, Alwin E. Branson and Carolyn Y. Kiser dated January 31, 1992, as amended March 23, 1993, filed as Exhibit 10.18 to the Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference. 10.8 Profit Sharing Plan and Trust Agreement, as amended and restated effective April 19, 1994 filed as Exhibit 10.16 to the Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10.9 Assignment of Amended Lease Agreement dated July 1, 1992 with Bello-1 Partnership from Bello-1 Partnership to Kenneth L. Bettenhausen and Jean M. Bettenhausen dated May 26, 1994 for the facility located at 11101 East 51st Avenue, Denver, Colorado filed as Exhibit 10.18 to the Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10.10 Stock Grant Plan effective as of June 19, 1998 filed as Exhibit 10.8 to the Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.11 Lease Agreement dated July 14, 1995 with Joseph H. and Nora L. Kiser, as amended September 1, 1995, for the facility located at 15556 East 17th Avenue, Denver, Colorado filed as Exhibit 10.21 to the Form 10-KSB for the year ended December 31, 1995 and incorporated herein by reference.
-36- 37 10.12 Lease Agreement dated March 12, 1997 with Five K Investments for the facility located at 4895 Peoria Street, Denver, Colorado filed as Exhibit 10 to the Form 10-QSB for the quarter ended September 30, 1997 and incorporated herein by reference. 10.13 Second Amendment to Lease Agreement dated July 14, 1995 with Joseph H. Kiser and Nora L. Kiser for the facility located at 15556 East 17th Avenue, Denver, Colorado, as amended September 31, 1995 and July 31, 1998 filed as Exhibit 10.5 to the Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.14 Third Amendment to Lease Agreement dated January 1, 1987 with J.C. Enterprises for the facility located at 5165 Peoria Street, Denver, Colorado, as amended December 6, 1990, March 23, 1993, and October 30, 1998 filed as Exhibit 10.6 to the Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.15 Employment Agreement with Daniel J. Wilmot dated January 1, 1998 filed as Exhibit 10.9 to the Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.16 Employment Agreement with Derek L. Bailey dated October 1, 2000 filed as Exhibit 10.2 to the Form 10-Q for the quarter ended December 31, 2000 and incorporated herein by reference. 10.17 Employment Agreement with Jon L. Clark dated January 1, 1998 filed as Exhibit 10.11 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.18 Employee Stock Purchase Plan effective as of June 30, 2001. 10.19 Revolving Loan Agreement, Revolving Note and General Security Agreement with Bank One, Colorado, N.A. dated March 24, 2000 filed as Exhibit 10 to the Form 10-Q for the quarter ended March 31, 2000 and incorporated herein by reference. 10.20 Termination and Consulting Agreement with David G. Sherman dated August 1, 2000 filed as Exhibit 10.1 to the Form 8-K dated August 1, 2000 and incorporated herein by reference. 10.21 Engagement Letter with BBK, Ltd. dated August 2, 2000 filed as Exhibit 10.1 to the Form 8-K dated August 2, 2000 and incorporated herein by reference. 10.22 Deferral and Waiver Agreement with Bank One, Colorado N.A. dated September 28, 2000 filed as Exhibit 10.1 to the Form 8-K dated September 29, 2000 and incorporated herein by reference. 10.23 Deferral and Waiver Agreement with Bank One, Colorado N.A. dated December 15, 2000 filed as Exhibit 10.1 to the Form 8-K dated December 15, 2000 and incorporated herein by reference.
-37- 38 10.24 Deferral and Waiver Agreement with Bank One, Colorado N.A. dated March 31, 2001 filed as Exhibit 10.1 to the Form 8-K dated April 4, 2001 and incorporated herein by reference. 10.25 Employment Agreement with Richard P. Dutkiewicz dated January 22, 2001 filed as Exhibit 10.1 to the Form 10-Q dated March 31, 2001 and incorporated herein by reference. 10.26 Employment Agreement with Timothy M. Micun dated March 2, 2001 10.27 Employment Agreement with Charles R. Bland dated May 7, 2001 10.28 Credit and Security Agreement with Wells Fargo Business Credit, Inc. dated June 28, 2001 filed as Exhibit 99.2 to the Form 8-K dated June 28, 2001 and incorporated herein by reference. 10.29 Patent and Trademark Security Agreement with Wells Fargo Business Credit, Inc. dated June 28, 2001 filed as Exhibit 99.3 to the Form 8-K dated June 28, 2001 and incorporated herein by reference. 23 Consent of KPMG LLP
Financial Statement Schedule Schedule II, Valuation and Qualifying Accounts, year ended June 30, 2001, six months ended June 30, 2000 (Unaudited) and year ended December 31, 1999 (Unaudited) Reports on Form 8-K A report on Form 8-K dated June 29, 2001 under Item 5 was filed with the Commission on July 10, 2001. A report on Form 8-K dated July 12, 2001 under Item 5 was filed with the Commission on August 2, 2001. No financial statements were filed with either of the foregoing reports. -38- 39 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VARI-L COMPANY, INC. By: /s/ Charles R. Bland -------------------------------- Charles R. Bland, President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Charles R. Bland Date: September 26, 2001 -------------------------------------------- Charles R. Bland, President and Chief Executive Officer, Principal Executive Officer /s/ Richard P. Dutkiewicz Date: September 26, 2001 -------------------------------------------- Richard P. Dutkiewicz, Vice President of Finance and Chief Financial Officer, Principal Financial and Accounting Officer /s/ Sarah L. Booher Date: September 26, 2001 -------------------------------------------- Sarah L. Booher, Director /s/ David A. Lisowski Date: September 26, 2001 -------------------------------------------- David A. Lisowski, Director /s/ Anthony B. Petrelli Date: September 26, 2001 -------------------------------------------- Anthony B. Petrelli, Director /s/ Gil J. Van Lunsen Date: September 26, 2001 -------------------------------------------- Gil J. Van Lunsen, Director
-39- 40 VARI-L COMPANY, INC. Financial Statements June 30, 2001 and 2000 (With Independent Auditors' Report Thereon) 41 VARI-L COMPANY, INC. Financial Statements June 30, 2001 Index Financial Statements: Independent Auditors' Report F-1 Balance Sheets, June 30, 2001 and June 30, 2000 F-2 Statements of Operations, for the year ended June 30, 2001, six months ended June 30, 2000 (unaudited) and year ended December 31, 1999 (unaudited) F-3 Statements of Stockholders' Equity, for the year ended June 30, 2001, six months ended June 30, 2000 (unaudited) and year ended December 31, 1999 (unaudited) F-4 Statements of Cash Flows, for the year ended June 30, 2001, six months ended June 30, 2000 (unaudited) and year ended December 31, 1999 (unaudited) F-5 Notes to Financial Statements F-6 Schedule: Schedule II - Valuation and Qualifying Accounts for the year ended June 30, 2001, the six months ended June 30, 2000 (unaudited) and the year ended December 31, 1999 (unaudited) F-26
42 INDEPENDENT AUDITORS' REPORT To the Board of Directors Vari-L Company, Inc.: We have audited the accompanying balance sheets of Vari-L Company, Inc. as of June 30, 2001 and 2000 and the related statements of operations, stockholders' equity and cash flows for the year ended June 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vari-L Company, Inc. as of June 30, 2001 and 2000, and the results of its operations and cash flows for the year ended June 30, 2001, in conformity with accounting principles generally accepted in the United States of America. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information included in Schedule II--Valuation and Qualifying Accounts as of and for the year ended June 30, 2001 is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. The accompanying statements of operations, stockholders' equity, and cash flows for the six months ended June 30, 2000 and for the year ended December 31, 1999 and the supplementary information included in related Schedule II--Valuation and Qualifying Accounts as of and for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 were not audited by us and, accordingly, we do not express an opinion on them. Denver, Colorado August 31, 2001, except for notes 3 and 12 as to which the date is September 17, 2001 F-1 43 VARI-L COMPANY, INC. Balance Sheets (in thousands of dollars)
JUNE 30, JUNE 30, ASSETS 2001 2000 ------------ ------------ Current assets: Cash and cash equivalents $ 2,013 11,030 Trade accounts receivable, less allowance for doubtful accounts of $279 and $175, respectively (note 3) 5,942 5,881 Inventories (notes 2 and 3) 3,640 7,435 Prepaid expenses and other current assets 645 190 ------------ ------------ Total current assets 12,240 24,536 ------------ ------------ Property and equipment (note 3): Machinery and equipment 11,616 9,845 Furniture and fixtures 822 721 Leasehold improvements 1,500 1,539 ------------ ------------ 13,938 12,105 Less accumulated depreciation and amortization 6,362 4,767 ------------ ------------ Net property and equipment 7,576 7,338 Intangible and other assets, net of accumulated amortization 638 697 ------------ ------------ Total assets $ 20,454 32,571 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft $ -- 321 Trade accounts payable 1,669 4,182 Accrued compensation 1,286 1,500 Other accrued expenses 428 225 Notes payable and current installments of long-term obligations (note 3) 1,764 11,566 ------------ ------------ Total current liabilities 5,147 17,794 Long-term obligations (note 3) 1,321 92 Other liabilities (note 7) 157 -- ------------ ------------ Total liabilities 6,625 17,886 ------------ ------------ Stockholders' equity (note 5): Common stock, $.01 par value, 50,000,000 shares authorized; 7,107,161 and 7,070,423 shares issued and outstanding, respectively 71 71 Additional paid-in capital 36,829 40,525 Unamortized stock compensation cost (79) (4,318) Accumulated deficit (22,992) (21,593) ------------ ------------ Total stockholders' equity 13,829 14,685 ------------ ------------ Commitments and contingencies (notes 3, 6, 7, 8 and 12) Total liabilities and stockholders' equity $ 20,454 32,571 ============ ============
See accompanying notes to financial statements. F-2 44 VARI-L COMPANY, INC. Statements of Operations (in thousands of dollars, except share and per share data)
YEAR ENDED SIX MONTHS YEAR ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31, 2001 2000 1999 ------------ -------------- ------------ (unaudited) (unaudited) Net sales $ 41,377 17,158 24,212 Cost of goods sold 21,747 10,311 12,811 ------------ ------------ ------------ Gross profit 19,630 6,847 11,401 ------------ ------------ ------------ Operating expenses: Selling 4,445 1,948 3,166 General and administrative 9,222 2,440 3,651 Research and development 4,286 3,003 4,852 Expenses relating to accounting restatements and the related shareholder litigation (note 11) 2,387 469 -- ------------ ------------ ------------ Total operating expenses 20,340 7,860 11,669 ------------ ------------ ------------ Operating loss (710) (1,013) (268) Other income (expense): Interest income 416 315 262 Interest expense (1,062) (453) (879) Other, net (43) (28) (32) ------------ ------------ ------------ Total other income (expense) (689) (166) (649) ------------ ------------ ------------ Net loss $ (1,399) (1,179) (917) ============ ============ ============ Loss per share, basic and diluted $ (0.20) (0.17) (0.16) ============ ============ ============ Weighted average shares outstanding, basic and diluted 7,083,866 7,042,247 5,680,287 ============ ============ ============
See accompanying notes to financial statements. F-3 45 VARI-L COMPANY, INC. Statements of Stockholders' Equity Year ended June 30, 2001, six months ended June 30, 2000 (unaudited) and year ended December 31, 1999 (unaudited) (in thousands of dollars)
COMMON STOCK ADDITIONAL ------------------------------ PAID-IN SHARES AMOUNT CAPITAL ------------ ------------ ------------ Balance, January 1, 1999 (unaudited) 5,464,134 $ 55 23,129 Warrants exercised (unaudited) 665,000 7 6,311 Stock options exercised (unaudited) 788,193 8 5,319 Common stock issued under employee stock purchase plan (unaudited) 12,773 -- 82 Common stock issued to profit sharing plan (unaudited) 12,851 -- 101 Common stock issued under stock award plan (unaudited) 14,300 -- 92 Common stock repurchased and retired (unaudited) (11,768) -- (89) Stock options granted as compensation (unaudited) -- -- 5,536 Stock options forfeited (unaudited) -- -- (32) Amortization of stock compensation cost (unaudited) -- -- -- Net loss (unaudited) -- -- -- ------------ ------------ ------------ Balance, December 31, 1999 (unaudited) 6,945,483 70 40,449 Stock options exercised (unaudited) 116,569 1 931 Common stock issued under employee stock purchase plan (unaudited) 7,471 -- 50 Common stock issued under stock award plan (unaudited) 900 -- 17 Stock options forfeited (unaudited) -- -- (922) Amortization of stock compensation cost (unaudited) -- -- -- Net loss (unaudited) -- -- -- ------------ ------------ ------------ Balance, June 30, 2000 7,070,423 71 40,525 Common stock issued under employee stock purchase plan 35,388 -- 45 Common stock issued under stock award plan 1,350 -- 11 Stock options forfeited -- -- (219) Amortization of stock compensation cost -- -- -- Reversal of stock compensation due to reformation (note 5) -- -- (3,533) Net loss -- -- -- ------------ ------------ ------------ Balance June 30, 2001 7,107,161 $ 71 36,829 ============ ============ ============ UNAMORTIZED STOCK TOTAL COMPENSATION ACCUMULATED STOCKHOLDERS' COST DEFICIT EQUITY ------------ ------------ ------------ Balance, January 1, 1999 (unaudited) (341) (19,497) 3,346 Warrants exercised (unaudited) -- -- 6,318 Stock options exercised (unaudited) -- -- 5,327 Common stock issued under employee stock purchase plan (unaudited) -- -- 82 Common stock issued to profit sharing plan (unaudited) -- -- 101 Common stock issued under stock award plan (unaudited) -- -- 92 Common stock repurchased and retired (unaudited) -- -- (89) Stock options granted as compensation (unaudited) (5,536) -- -- Stock options forfeited (unaudited) 32 -- -- Amortization of stock compensation cost (unaudited) 112 -- 112 Net loss (unaudited) -- (917) (917) ------------ ------------ ------------ Balance, December 31, 1999 (unaudited) (5,733) (20,414) 14,372 Stock options exercised (unaudited) -- -- 932 Common stock issued under employee stock purchase plan (unaudited) -- -- 50 Common stock issued under stock award plan (unaudited) -- -- 17 Stock options forfeited (unaudited) 922 -- -- Amortization of stock compensation cost (unaudited) 493 -- 493 Net loss (unaudited) -- (1,179) (1,179) ------------ ------------ ------------ Balance, June 30, 2000 (4,318) (21,593) 14,685 Common stock issued under employee stock purchase plan -- -- 45 Common stock issued under stock award plan -- -- 11 Stock options forfeited 219 -- -- Amortization of stock compensation cost 487 -- 487 Reversal of stock compensation due to reformation (note 5) 3,533 -- -- Net loss -- (1,399) (1,399) ------------ ------------ ------------ Balance June 30, 2001 (79) (22,992) 13,829 ============ ============ ============
See accompanying notes to financial statements. F-4 46 VARI-L COMPANY, INC. Statement of Cash Flows (in thousands of dollars)
YEAR ENDED SIX MONTHS YEAR ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31, 2001 2000 1999 ------------ -------------- ------------ (unaudited) (unaudited) Net loss $ (1,399) (1,179) (917) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation of property and equipment 1,724 719 1,270 Loss on disposal of assets 47 -- -- Amortization of intangible assets 32 13 17 Common stock issued under profit sharing and stock award plans 11 17 193 Amortization of stock compensation 487 493 112 Changes in operating assets and liabilities: Trade accounts receivable, net (61) (1,805) (592) Inventories, net 3,795 (2,970) (1,043) Prepaid expenses and other current assets (454) (168) (2) Trade accounts payable (2,513) 1,797 (247) Accrued compensation (214) (665) 331 Other accrued expenses and liabilities 360 169 (237) ------------ ------------ ------------ Total adjustments 3,214 (2,400) (198) ------------ ------------ ------------ Cash provided by (used in) operating activities 1,815 (3,579) (1,115) ------------ ------------ ------------ Cash flows from investing activities: Purchases of property and equipment (2,034) (1,699) (1,939) Proceeds from sale of equipment 25 -- -- Increase (decrease) in other assets 27 (85) (56) ------------ ------------ ------------ Cash used in investing activities (1,982) (1,784) (1,995) ------------ ------------ ------------ Cash flows from financing activities: Increase (decrease) in bank overdraft (321) 321 -- Proceeds from notes payable 1,480 11,500 3,043 Payments of notes payable (11,500) (11,107) (3,357) Proceeds from long-term obligations 1,500 -- 41 Payments of long-term obligations (54) (24) (49) Proceeds from warrants exercised -- -- 6,318 Proceeds from stock options exercised -- 932 5,327 Proceeds from common stock issued under stock purchase plan 45 50 82 Common stock repurchased -- -- (89) ------------ ------------ ------------ Cash provided by (used in) financing activities (8,850) 1,672 11,316 ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents (9,017) (3,691) 8,206 Cash and cash equivalents at beginning of period 11,030 14,721 6,515 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 2,013 11,030 14,721 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid for interest $ 1,217 315 933 ============ ============ ============ Cash paid for income taxes $ -- -- -- ============ ============ ============
See accompanying notes to financial statements. F-5 47 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) DESCRIPTION OF BUSINESS Vari-L Company, Inc. (the Company) was founded in 1953 and is a manufacturer of electronic components. The Company designs, manufactures, and markets radio frequency and microwave signal processing components and other electronic devices used in the communications industry. The Company operates as a single business segment, and its products are sold to original equipment manufacturers of communication equipment who market their products in both commercial and military markets in the United States and internationally. (b) CHANGE IN FISCAL YEAR END The Company's Board of Directors approved a change in the Company's year end to June 30, effective in 2000. (c) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Significant assumptions inherent in the preparation of the accompanying financial statements include the provision for doubtful accounts, the provision for excess and obsolete inventories, the allowance for product warranties and returns, the estimated useful life of property and equipment and the estimated useful life of patents. Actual results could differ from those estimates. (d) CASH EQUIVALENTS Cash equivalents at June 30, 2001 and 2000 consist of U.S. government securities money market funds. The Company considers all highly liquid debt instruments with maturities of three months or less at the date of purchase to be cash equivalents. (e) INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. A provision is recorded to reduce excess and obsolete inventories to their estimated net realizable value. The provision for excess and obsolete inventory included in cost of goods sold was $1,362,000 for the year ended June 30, 2001, $444,000 for the six months ended June 30, 2000 and $62,000 for the year ended December 31, 1999. (f) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Plant and equipment under capital leases are recorded initially at the present value of the minimum lease payments. Depreciation and F-6 48 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) amortization of property and equipment is computed using the straight-line method over estimated useful lives of the respective assets, which range from 3 to 10 years. Included in property and equipment are assets under capital leases of $165,000 and $126,000 at June 30, 2001 and 2000, respectively. Accumulated amortization of assets under capital leases was $85,000 and $35,000 at June 30, 2001 and 2000, respectively. Amortization of assets under capital leases is included in depreciation expense. During the year ended June 30, 2001, six months ended June 30, 2000 and year ended December 31, 1999, equipment was acquired under capital lease financing transactions in the amounts of $35,000, $34,000 and $78,000 respectively. (g) OTHER ASSETS Intangible assets, consisting of patents and trademarks, are recorded at cost and are included in other assets. Intangible assets of $368,000 and $312,000, net of accumulated amortization of $109,000 and $77,000 at June 30, 2001 and 2000, respectively, are being amortized on a straight-line basis over an estimated useful life of 10 years. (h) STOCK COMPENSATION PLANS The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its fixed award stock options. As such, compensation expense is recorded only if the current market price of the underlying common stock exceeds the exercise price of the option on the date of grant. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. (i) INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance for the portion of such assets for which it is more likely than not the amount will not be realized. Deferred tax assets and F-7 49 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) liabilities are classified as current or noncurrent based on the classification of the underlying asset or liability giving rise to the temporary difference or the expected date of utilization of the carryforwards. (j) EARNINGS PER SHARE The Company computes earnings (loss) per share in accordance with the requirements of Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS 128 requires the disclosure of "basic" earnings per share and "diluted" earnings per share. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding increased for potentially dilutive common shares outstanding. The effect of potentially dilutive common shares represented by stock options outstanding (see note 5) was anti-dilutive for the year ended June 30, 2001, six months ended June 30, 2000 and the year ended December 31, 1999. (k) RESEARCH AND DEVELOPMENT AND ADVERTISING COSTS Research and development and advertising costs are expensed when incurred. Research and development expense for the year ended June 30, 2001, six months ended June 30, 2000 and the year ended December 31, 1999 totaled $4,286,000, $3,003,000 and $4,852,000, respectively. This amount is comprised of product development expenses of $2,252,000, $1,046,000 and $1,606,000, respectively, which are the design costs associated with customized products for customers and research expenses of $2,034,000, $1,957,000 and $3,246,000, respectively, which are costs associated with the development of new product lines. Advertising costs were $230,000, $164,000 and $325,000 for the year ended June 30, 2001, six months ended June 30, 2000 and for the year ended December 31, 1999, respectively. (l) LONG-LIVED ASSETS The Company reviews long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (m) REVENUE RECOGNITION Revenues are recognized at the time of shipment. Provisions are made for sales discounts and allowances at the time product sales are recognized. F-8 50 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) (n) PRODUCT WARRANTIES AND RETURNS Product warranties and returns are provided for in the period the products are sold. The Company provides a one-year warranty on most of its products. As the majority of its products are built to customer specifications, the Company generally does not accept product returns. Historically, warranty expense and product returns have been insignificant. (o) UNAUDITED FINANCIAL INFORMATION The accompanying financial statements of the Company for the six months ended June 30, 2000 and for the year ended December 31, 1999 have been prepared without audit. 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. (2) INVENTORIES Inventories, net of allowances for excess and obsolete items, consist of the following:
JUNE 30, JUNE 30, 2001 2000 ---------- ---------- (in thousands of dollars) Finished goods $ 463 364 Work-in-process 623 1,227 Raw materials 2,554 5,844 ---------- ---------- $ 3,640 7,435 ========== ==========
F-9 51 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) (3) NOTES PAYABLE AND LONG-TERM OBLIGATIONS Notes payable and long-term obligations consist of the following:
JUNE 30, JUNE 30, 2001 2000 -------- -------- (in thousands of dollars) Notes payable under new Credit Facility(a): Revolving loan $ 1,481 -- Term loan 1,500 -- Notes payable under former credit facility(a) -- 11,500 Promissory notes(b) 21 67 Capital lease obligations(c) 83 91 ------- ------- 3,085 11,658 Less current installments 1,764 11,566 ------- ------- Long-term obligations $ 1,321 92 ======= =======
Future maturities of notes payable and long-term obligations as of June 30, 2001 are as follows:
Year ending June 30: (in thousands of dollars) 2002 $ 1,764 2003 246 2004 1,075 ------------ $ 3,085 ============
(a) BANK CREDIT FACILITIES On June 28, 2001, the Company entered into a credit agreement with Wells Fargo Business Credit, Inc. The Credit Facility provides for a $6,000,000 secured revolving line of credit ("Revolving Loan"), a $2,500,000 secured term loan ("Term Loan"), and $1,500,000 secured capital expenditures loan ("Capital Expenditures Loan") (collectively "the Credit Facility"). In September 2001, the Credit Facility was amended to establish revised financial covenants for the fiscal years ending June 30, 2002 and June 30, 2001. F-10 52 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) 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. The Revolving Loan matures on June 28, 2004 and has interest payable in monthly installments at the prime rate plus 0.5%. The interest rate at June 30, 2001 was approximately 7.25%. The Company is required to pay an unused credit line fee of 0.25% per annum on the average daily unused amount. The unused line fee is payable monthly in arrears. At June 30, 2001, the Company had additional borrowing availability of $3,868,000 under its Revolving loan, calculated using a formula based on inventories and accounts receivable aged less than 90 days. The Term Loan and Capital Expenditures Loan mature on June 28, 2004 and have principal and interest payable in monthly installments at the prime rate plus 1% amortized over seven and five years, respectively. The interest rate on the loans outstanding at June 30, 2001 approximated 7.75%. The Company is required to pay a minimum interest charge on the Credit Facility of $30,000 per calendar quarter. Proceeds from the Credit Facility were used to repay the amount outstanding under the former credit facility, which included a $20,000,000 revolving line of credit. The former credit facility provided for interest based on the prime rate plus a margin (9.5% at June 30, 2000). The former credit facility was secured by receivables, inventory, property and equipment. The loans under the former credit facility were classified as current at June 30, 2000 because the Company determined that it was in default of certain provisions of the related loan agreement on that date. Debt issuance costs are being amortized over the straight-line method over the term of the Revolving Loan. No amortization expense related to issuance costs for the Credit Facility has been recorded for the year ended June 30, 2001. (b) PROMISSORY NOTES The Company has financed the purchase of vehicles with promissory notes bearing interest at rates ranging from 7.75% to 8.5%. Monthly principal and interest payments totaling $2,651 are required. The notes mature on various dates, ranging from November 2001 to April 2003. F-11 53 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) (c) LEASES The Company is obligated under various capital leases for certain machinery and equipment that expire at various dates during the next three years. The Company also has noncancelable operating leases primarily for corporate office and manufacturing facilities. Rent expense was $835,000 for the year ended June 30, 2001, $389,000 for the six months ended June 30, 2000 and $786,000 for the year ended December 31, 1999. The Company leases certain corporate office and manufacturing facilities under long-term operating leases from the Company's Chief Scientific Officer and from a partnership in which he is a partner. The leases expire in 2002 through 2005 and contain options to extend the terms of the leases. Total rent expense associated with these leases was $169,000 for the year ended June 30, 2001, $84,000 for the six months ended June 30, 2000, and $169,000 for the year ended December 31, 1999. Future minimum capital lease payments and future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 30, 2001 are as follows:
CAPITAL OPERATING LEASES LEASES --------- --------- (in thousands of dollars) Year ending June 30, 2002 $ 59 832 2003 27 702 2004 4 627 2005 -- 624 2006 -- 538 Thereafter -- 3,544 --------- --------- Total minimum lease payments 90 $ 6,867 ========= Less amount representing interest 7 --------- Present value of net minimum capital lease payments 83 Less current installments of obligations under capital leases 53 --------- Obligations under capital leases, excluding current installments $ 30 =========
F-12 54 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) (4) INCOME TAXES For the year ended June 30, 2001, six months ended June 30, 2000, and for the year ended December 31, 1999, the Company recorded no provision for federal or state income taxes since a valuation allowance was provided for the income tax benefit of the net operating losses incurred during those periods. Income tax benefit attributable to net loss differed from the amounts computed by applying the U.S. federal income tax rate of 35% to pretax loss as a result of the following:
YEAR ENDED SIX MONTHS YEAR ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31, 2001 2000 1999 ---------- -------------- ------------ (in thousands of dollars) Income tax benefit at federal statutory tax rate $ (490) (413) (321) State income taxes, net of federal tax effect (43) (36) (28) Officers' life insurance 53 18 33 Non-deductible meals and entertainment expenses 11 2 4 Other 5 (15) 45 Increase in valuation allowance for net deferred tax assets 464 444 267 ---------- ---------- ---------- Actual income tax expense (benefit) $ -- -- -- ========== ========== ==========
F-13 55 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) Significant components of deferred tax balances were as follows:
JUNE 30, JUNE 30, 2001 2000 -------- -------- (in thousands of dollars) Deferred tax assets: Allowance for doubtful accounts recognized for financial reporting purposes $ 106 67 Inventory reserve recognized for financial reporting purposes 923 1,012 Intangible assets, due to differences in amortization methods 16 12 Other accounts and reserves accrued for financial reporting purposes 412 27 Stock compensation expense recognized for financial reporting purposes 373 539 Net operating loss carryforwards 11,067 10,675 -------- -------- 12,897 12,332 Less valuation allowance (12,534) (12,070) -------- -------- Total deferred tax assets $ 363 262 ======== ======== Deferred tax liabilities: Property and equipment, due to differences in depreciation methods $ (363) (262) -------- -------- Total deferred tax liabilities (363) (262) -------- -------- Net deferred tax assets (liabilities) $ -- -- ======== ========
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment. Based upon management's projections of future taxable income and future taxable income generated from the reversal of deferred tax liabilities over the periods in which the deferred tax assets are deductible, management does not believe that it is more likely than not that the Company will realize the benefits of these deductible differences. Accordingly, a valuation allowance equal to the balance of net deferred tax assets has been recognized as of June 30, 2001, June 30, 2000 and December 31, 1999. The increase in the valuation allowance for net deferred tax assets was $464,000 for the year ended June 30, 2001 and $1,125,000 for the six months ended June 30, 2000, including $0 and $681,000 attributable to deductions for stock options exercised in excess of the compensation recorded for financial reporting purposes, respectively. F-14 56 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) The Company has net operating loss carryforwards for federal income tax purposes of approximately $29,053,000 at June 30, 2001, expiring through 2020. A portion of the net operating loss carryforwards relate to excess stock option deductions for tax purposes. The valuation allowance at June 30, 2001 includes approximately $2,568,000 attributable to excess stock option deductions. If realized, the benefit will be recorded as an increase in additional paid-in capital. (5) STOCK COMPENSATION PLANS The Company has three stock-based compensation plans. The Company applies the intrinsic value method in accounting for its stock compensation plans. For the year ended June 30, 2001, six months ended June 30, 2000 and the year ended December 31, 1999, the Company recognized employee stock compensation expense under these plans of $532,000, $510,000 and $305,000 respectively. Had compensation cost been determined on the basis of fair value, net loss and loss per share would have been increased to the following pro forma amounts:
YEAR ENDED SIX MONTHS ENDED YEAR ENDED JUNE 30, JUNE 30, DECEMBER 31, 2001 2000 1999 ---------------- ---------------- ---------------- (in thousands of dollars) Net loss: As Reported $ (1,399) (1,179) (917) Pro Forma $ (3,837) (2,235) (2,364) Loss Per Share: As Reported $ (0.20) (0.17) (0.16) Pro Forma $ (0.54) (0.32) (0.42)
(a) STOCK OPTION PLAN The Company has a stock option plan which provides for the grant of incentive stock options, nonqualified stock options and stock appreciation rights to officers, directors or employees of, as well as advisers and consultants to, the Company. The Company has reserved 3,624,000 shares of its common stock for issuance upon exercise of options and rights granted under the plan. In March 2000, the stock option plan was amended to increase the number of shares reserved under the plan from 3,270,000 to 3,624,000. Typically, rights and options have been granted which vest over three to five years, become fully vested upon a change in control of the Company, and expire 10 years from the date of issuance. Certain options granted to senior management were vested upon issuance or over a shorter vesting period. The exercise price was equal to the market value of the Company's common stock on the grant date or the average of the market value over a stated period of time prior to the grant date. F-15 57 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) For stock options granted at an exercise price less than the market value of the common stock at the date of grant, stock compensation cost is recorded based on the difference between the market value of the common stock at the date of grant and the exercise price of the option. For options that are vested on the date of grant, the related stock compensation cost is expensed immediately. Unamortized employee stock compensation cost is recorded as a separate component of stockholders' equity and amortized to expense over the vesting period of the related options. The plan provides that each non-executive member of the Board of Directors receive options to purchase 500 shares of common stock for attending each meeting of the Board of Directors, a committee of the Board, or a meeting with management of the Company or other directors for Company business or affairs. Following is a summary of stock option activity during the year ended December 31, 1999, the six months ended June 30, 2000 and the year ended June 30, 2001:
WEIGHTED NUMBER OF AVERAGE OPTIONS EXERCISE PRICE -------------- -------------- Outstanding at January 1, 1999 1,758,620 $ 7.91 Granted: At less than market price 355,397 18.62 At market price 20,000 10.00 At greater than market price 209,500 6.63 Exercised (788,193) 6.76 Forfeited (28,001) 7.81 -------------- Outstanding at December 31, 1999 1,527,323 10.73 Granted at market price 32,000 16.35 Exercised (116,569) 7.99 Forfeited (115,169) 13.75 -------------- Outstanding at June 30, 2000 1,327,585 10.84 Granted at market price 224,500 2.68 Exercised -- -- Forfeited (32,535) 19.62 -------------- Outstanding at June 30, 2001 1,519,550 12.30 ============== Options exercisable at December 31, 1999 551,542 8.52 ============== Options exercisable at June 30, 2000 667,062 8.90 ============== Options exercisable at June 30, 2001 956,569 9.95 ==============
F-16 58 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) Following is a summary of the status of stock options outstanding at June 30, 2001:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS ------------------------------------------------- -------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE EXERCISE CONTRACTUAL EXERCISE EXERCISE PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE --------------- ------------- ------------- ------------- ------------- ------------- $ 0.00 - 3.45 202,750 8.9 $ 2.21 48,750 $ 2.35 3.46 - 6.90 177,501 8.0 5.97 107,500 6.14 6.91 - 10.35 830,877 6.0 8.77 706,240 8.83 10.36 - 13.80 20,500 7.7 11.89 20,500 11.89 13.81 - 17.25 11,500 8.3 15.53 11,500 15.53 17.26 - 24.15 1,500 8.8 18.56 1,500 18.56 24.16 - 27.60 3,000 8.6 26.75 3,000 26.75 27.61 - 31.05 2,000 8.6 28.50 2,000 28.50 31.06 - 34.50 269,922 8.5 34.50 55,579 34.50 ------------- ------------- 1,519,550 7.1 $ 12.30 956,569 $ 9.95 ============= =============
In December 2000, the Company's Compensation Committee reformed the terms of stock options to purchase 350,397 shares which had been granted by the Committee on December 27, 1999 to change the option exercise price from a 60-day average price of $18.76 to $34.50, the market price of the Company's common stock on the date of grant. After the reformation, the Company informed the holders of the affected options of the change. All of the option holders expressly acknowledged and accepted the change in the option exercise price. As a result of the change, the Company recorded an adjustment in December 2000 of $3,533,000 to reverse unamortized compensation cost relating to these options. Compensation cost for the SFAS 123 pro forma amounts disclosed above was estimated using the Black-Scholes option-pricing model with the following assumptions for the year ended June 30, 2001: no expected dividend yield, volatility of 212%, risk free interest rate of 5.7% and an expected life of 6.3 years. Assumptions for the six months ended June 30, 2000 were: no expected dividend yield, volatility of 72%, risk free interest rate of 5.7% and an expected life of 5.8 years. Assumptions for the year ended December 31, 1999 were: no expected dividend yield, volatility of 72%, risk free interest rate of 4.9% and an expected life of 5.3 years. The weighted average fair value of options granted at market price during the year ended June 30, 2001 was $2.66, the six months ended June 30, 2000 was $10.95 and during the year ended December 31, 1999 was $6.06. During the year ended December 31, 1999, the weighted average fair value of options granted at less than market price was $25.90 and the weighted average fair value of options granted at greater than market price was $3.91. F-17 59 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) (b) EMPLOYEE STOCK PURCHASE PLAN In 1995, the Company adopted an employee stock purchase plan. Eligible employees may designate up to ten percent of their earnings, through payroll deductions, to purchase shares of the Company's common stock. The purchase price is equal to 85 percent of the fair market value of the common stock on specified dates. A total of 800,000 common shares have been reserved for issuance under the plan, and the maximum number of shares to be issued in any annual period is 200,000. The plan is considered non-compensatory under APB No. 25, and therefore no expense was reported in the Company's statements of operations. The plan is considered compensatory under SFAS No. 123,and therefore, compensation cost for the SFAS No. 123 pro forma amounts disclosed above was estimated using the Black-Scholes option-pricing model with the following assumptions for the year ended June 30, 2001: no expected dividend yield, volatility of 212%, risk free interest rate of 5.7% and an expected life of 1.0 year. Assumptions for the six months ended June 30, 2000 were: no expected dividend yield, volatility of 72%, risk free interest rate of 5.3% and an expected life of 1.0 year. Assumptions for the year ended December 31, 1999 were: no expected dividend yield, volatility of 72%, risk free interest rate of 4.3% and an expected life of 1.0 year. The weighted-average fair value of stock purchase rights granted during the year ended June 30, 2001 was $1.11, six months ended June 30, 2000 was $0.38 and during the year ended December 31, 1999 was $1.99. (c) STOCK AWARD PLAN In 1996, the Company adopted a stock award plan under which shares of common stock can be awarded to the Company's officers, directors, employees, consultants, and advisors. The Company reserved 100,000 shares of its common stock for issuance under the stock award plan. Stock compensation cost is recognized based on the market value of the common stock on the date of the award. During the year ended December 31, 1999, 12,500 shares of common stock were issued to two officers as compensation for their performance in 1998. The fair market value of the shares issued in 1999 of $75,000 was recorded as compensation expense in 1998. The plan includes a provision for automatic awards of 50 shares per month to non-management members of the Company's Board of Directors who serve on the Company's audit or compensation committees. During the year ended June 30, 2001, 1,350 shares with a fair market value of $45,000 were issued under this plan. During the six months ended June 30, 2000, 900 shares with a fair market value of $17,000 were issued under this provision of the plan. During the year ended December 31, 1999, 1,800 shares with a fair market value of $17,000 were issued under this provision of the plan. (6) PROFIT SHARING AND RETIREMENT PLANS During 1990, the Company adopted a qualified profit sharing plan for its employees. Annual contributions to the plan, which may be in the form of cash or shares of the Company's common stock, are determined by the Board of Directors in its sole discretion. During the year ended June 30, F-18 60 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) 2001, the Company made no contributions to the Plan. During the six months ended June 30, 2000, the Company contributed $14,000 in cash to the Plan and during the year ended December 31, 1999, the Company contributed 12,851 shares of common stock valued at $101,000 to the Plan. During 1998, the Company adopted a 401(k) plan to which employees may contribute up to 15 percent of their pay. The Company may make discretionary matching contributions to the plan. No matching contributions were made during the year ended June 30, 2001, six months ended June 30, 2000 or during the year ended December 31, 1999. (7) EMPLOYMENT AGREEMENTS Effective June 1, 1997, the Company entered into four-year employment agreements with two officers which provide for minimum annual base salaries during the officers' employment with the Company, and severance pay in the event of termination. In the case of involuntary termination by the Company, severance payments are equal to the greater of the officer's annual base salary multiplied by the remaining term of the agreement or 2.99 times the officer's average annual compensation over the last five years. In the case of voluntary termination or retirement, the senior officer will be entitled to (i) one-half of his annual base salary as severance pay, (ii) be engaged as a consultant for a period of up to five years for which he is paid a fee equal to 50 percent of his annual base salary upon termination of employment, and (iii) an annual retirement benefit equal to 25 percent of his annual base salary payable during the period he provides consulting services to the Company. All unvested stock awards and options and stock appreciation rights previously granted to the officers will fully vest in the event of a change of control of the Company or an involuntary termination. In addition, the officers have agreed they will not compete against the Company for a period of one year after termination or expiration of their respective employment agreements, or the period covered by any consulting arrangement or retirement benefit, whichever is greater. Effective August 1, 2000, one of the officers entered into a Termination and Consulting Agreement, the terms of which supersede his employment agreement. The Company agreed to engage the officer as a consultant for the period from August 1, 2000 through July 31, 2001. Under this agreement, the consultant was to receive compensation of $195,000 along with certain other benefits. The officer is not currently being paid this compensation by the Company. In September 2000, the Company also entered into stay bonus agreements with a number of key personnel. The agreements provide for bonuses to be paid quarterly through August 31, 2001. The maximum amount payable under these agreements totals approximately $500,000. The Company is also a party to employment agreements with five other officers which provide for minimum base salaries ranging from $125,000 to $235,000 for terms of two to three years. The agreements provide for severance pay based on their annual salary for periods ranging from six months to one year in the event of involuntary termination. F-19 61 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) (8) RELATED PARTY TRANSACTIONS As described in note 3, the Company leases certain facilities from the Company's Chief Scientific Officer and a partnership in which he is a partner. The Company is contingently liable for guarantees of indebtedness owed by former and current senior officers of the Company to a former officer. The maximum amount of this contingent liability at June 30, 2001 was approximately $94,000. (9) FINANCIAL INSTRUMENTS At June 30, 2001 and 2000, the Company had approximately $610,000 and $11,029,000 respectively, invested in a U.S. government securities money market fund. The money market fund invests in United States government securities and is not otherwise federally insured. Disclosures of fair value information about certain financial instruments is presented in accordance with the requirements of Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturities of these instruments. The carrying amounts of the Company's notes payable and long-term obligations at June 30, 2001 and 2000 approximate their fair values since the instruments carry a variable rate of interest or a rate that approximates current rates. (10) SIGNIFICANT CUSTOMERS The Company's products are sold to original equipment manufacturers of communications equipment, either in commercial or military markets. During the year ended June 30, 2001, the Company's three largest customers accounted for approximately 25.0%, 14.6%, and 12.7%, respectively, of total net sales. Accounts receivable at June 30, 2001 for these three customers were $1,803,000, $225,000 and $1,060,000 respectively. During the six months ended June 30, 2000, the Company's three largest customers accounted for approximately 20.4%, 14.3% and 13.5%, respectively, of total net sales. Accounts receivable at June 30, 2000 for these three customers were $678,000, $1,451,000 and $602,000 respectively. During the year ended December 31, 1999, the Company's two largest customers accounted for approximately 21.6% and 14.8%, respectively, of total net sales. Accounts receivable at December 31, 1999 for these two customers were $114,000 and $1,399,000, respectively. The Company performs credit evaluations of its customers but generally does not require collateral. Receivables due from foreign customers are generally insured by a private indemnity company; otherwise, letters of credit are required of foreign customers. F-20 62 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) The Company produces and sells electronic components in four product lines. Sales for each of the product lines for the year ended June 30, 2001, six months ended June 30, 2000 and for the year ended December 31, 1999 were as follows:
SIX MONTHS YEAR ENDED ENDED YEAR ENDED JUNE 30, JUNE 30, DECEMBER 31, 2001 2000 1999 ---------- ---------- ------------ (in thousands of dollars) Commercial Signal Source Components $ 34,898 14,608 18,658 Hi-Rel Signal Source Components 2,809 1,238 2,324 Military Signal Processing Components 1,318 668 1,629 Radio Frequency Passive Components 2,352 644 1,601 ---------- ---------- ---------- $ 41,377 17,158 24,212 ========== ========== ==========
The Company attributes sales to foreign customers based on the country to which the products are shipped. During the year ended June 30, 2001, six months ended June 30, 2000, and the year ended December 31, 1999, the Company made sales to customers located in foreign countries as follows:
SIX MONTHS YEAR ENDED ENDED YEAR ENDED JUNE 30, JUNE 30, DECEMBER 31, 2001 2000 1999 ---------- ---------- ------------ (in thousands of dollars) England $ 5,393 3,938 6,121 Finland 4,110 1,297 1,698 Italy 4,788 1,142 399 Germany 4,731 1,142 461 Canada 1,540 567 722 Sweden 1,527 481 1,432 Other 4,325 1,126 1,987 ---------- ---------- ---------- $ 26,414 9,693 12,820 ========== ========== ==========
(11) EXPENSES OF ACCOUNTING RESTATEMENTS AND RELATED MATTERS As discussed in note 12, 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 on the Company's statements of operations as "expenses relating to accounting restatements and the F-21 63 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) related shareholder litigation". Expenses included in this classification include the cost of external counsel for services provided in connection with shareholder lawsuits and the Commission's investigation of the Company, the cost of certain consultants and temporary labor hired to assist in the accounting restatements, and reimbursements to current and former employees of the Company for their legal fees and expenses. (12) LITIGATION, COMMITMENTS AND CONTINGENCIES In December of 1999, the Company learned that the U.S. Securities and Exchange Commission (the "Commission") was conducting an investigation to determine whether there were violations of the federal securities laws by the Company or any of its officers, directors, or employees. The Commission's investigation was focused primarily on the Company's prior financial reporting and its accounting practices and procedures. In September 2001, the Commission and the Company agreed to a settlement under which the Company, without admitting or denying that it violated any laws, will consent to the entry of an injunction prohibiting future violations by the Company of certain of the reporting, proxy and antifraud provisions of the Securities Exchange Act of 1934. The proposed settlement would not require the Company to pay any civil penalties or money damages. The settlement is subject to court approval. The Company's settlement with the Commission will not resolve or affect actions or proceedings by the Commission against any current or former officers of the Company arising out of the same investigation. A number of private shareholder class actions alleging violations of federal securities laws were filed against the Company in the U.S. District Court for the District of Colorado beginning in June 2000. On August 30, 2000, all of these class actions were consolidated into a single action, Rasner v. Vari-L Company, Inc., et. al., Civ. No. 00-S-1181, U.S.D.C., D. Colo. Lead counsel for the plaintiff class members have been appointed, but pursuant to the court's order, the Company's obligation to respond to the complaints has been deferred until such time as the lead plaintiff files an amended complaint. As of September 17, 2001, an amended complaint has not yet been filed. The various class action complaints were filed on behalf of persons who purchased shares of the Company's stock between 1997 and sometime in 2000 (the "Class Period"). All of the complaints name the Company; David G. Sherman, the Company's former President and Chief Executive Officer; Joseph H. Kiser, the Company's Chief Scientific Officer and former Chairman; and Jon L. Clark, the Company's former Chief Financial Officer, as defendants. Some of the complaints also name Derek L. Bailey, the Company's former Executive Vice President of Sales and Marketing, as an additional defendant. The various complaints allege that the Company's financial statements for the years 1997, 1998 and 1999 did not conform to generally accepted accounting principles and were materially false and misleading. The complaints allege violations of Section 10(b) of the Securities Exchange Act of 1934; and seek to impose "control person" liability on the individual defendants F-22 64 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) pursuant to Section 20(a) of the Exchange Act. The complaints generally seek compensatory damages in an unspecified amount, attorneys' fees and costs of suit, equitable and injunctive relief as permitted by law, including the imposition of a constructive trust on the assets of the individual defendants, and any other relief the court deems just and proper. Although the Company has had settlement discussions with the class representatives, there can be no assurance that a settlement acceptable to the Company can be reached or that any settlement reached will not have a material adverse effect on the Company. In addition, the individual defendants in the class action may have claims against the Company for indemnification of their cost of defense, which claims may be material. On August 4, 2000, a shareholder derivative action was filed purportedly on behalf of the Company in Colorado state court in Denver. The Company was named in that action as a nominal defendant. A shareholder derivative action is a state law action in which shareholders assert claims against third parties on behalf of the corporation. The derivative complaint alleges some of the same facts as were asserted in the class actions in federal court and claims that those facts demonstrate that the officers named in the class actions, as well as the Company's directors, breached their fiduciary duties to the Company and the shareholders in connection with the Company's erroneous reporting of its financial results. On April 3, 2001, the Colorado District Court dismissed the derivative action, without prejudice, based on the plaintiff's admitted failure to make demand upon the other shareholders to bring the claims before filing suit. Since the dismissal, counsel for the derivative plaintiff has requested access to the Company's shareholder list, presumably to make the previously omitted demand on shareholders in preparation for refiling the action, but no such action has been filed. 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 U.S. District Court in Denver asking the court to find that it is not obligated to provide coverage, or in the alternative, seeking permission to rescind its policy. The Company is reviewing the claim and intends to take all steps necessary to ensure that the coverage to which it is entitled, and for which it has paid, remains in force. The Company has had preliminary discussions with AESIC, but there can be no assurance that a mutually acceptable resolution can be reached with AESIC. The Company is also seeking coverage from Reliance Insurance Company, the issuer of the $5 million primary directors and officers liability insurance policy in effect at the same time as the AESIC policy. Reliance Insurance has not yet informed the Company whether it intends to dispute coverage under its policy as AESIC has done. Reliance Insurance is currently operating under the supervision of the Pennsylvania Insurance Commission pursuant to an Order of Rehabilitation against the insurer. In addition, the parent corporation of Reliance Insurance, Reliance Holdings, is currently in bankruptcy reorganization. The Pennsylvania Insurance Commissioner has indicated that, in general, policy benefits of Reliance Insurance policyholders will continue to be paid in accordance with the terms of the policies. There can be no assurance, however, that Reliance Insurance will not dispute its obligation to provide coverage to the Company or its officers and F-23 65 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) directors or that, even if it does not contest such coverage, that it will have the financial resources to satisfy its obligations to the Company and its other insureds. Any such failure by Reliance Insurance could have an adverse effect on the Company's ability to settle the class action litigation and on the Company's liability for indemnification of its officers and directors. As of September 17, 2001, the Company is unable to reasonably estimate the possible loss associated with these matters. 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. F-24 66 VARI-L COMPANY, INC. Notes to Financial Statements June 30, 2001 and June 30, 2000 (Information for the six months ended June 30, 2000 and as of and for the year ended December 31, 1999 is unaudited) (13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the unaudited quarterly financial information:
Quarters Ended ------------------------------------------------------------------------ September 30, December 31, March 31, June 30, 2000 2000 2001 2001 -------------- -------------- -------------- -------------- (in thousands of dollars, except per share amounts) Net sales $ 11,495 10,894 10,000 8,988 ============== ============== ============== ============== Gross profit 5,357 5,189 5,561 3,523 ============== ============== ============== ============== Operating income (loss) (50) 220 215 (1,095) ============== ============== ============== ============== Net income (loss) (201) (10) 43 (1,231) ============== ============== ============== ============== Basic and diluted earnings per share (0.03) * 0.01 (0.17) ============== ============== ============== ==============
Quarters Ended ------------------------------------------------------------------------ September 30, December 31, March 31, June 30, 1999 1999 2000 2000 -------------- -------------- -------------- -------------- (in thousands of dollars, except per share amounts) Net sales $ 6,526 6,914 7,747 9,410 ============== ============== ============== ============== Gross profit 3,073 3,136 3,348 3,500 ============== ============== ============== ============== Operating income (loss) 195 (313) (96) (916) ============== ============== ============== ============== Net income (loss) 42 (442) (191) (987) ============== ============== ============== ============== Basic and diluted earnings per share 0.01 (0.07) (0.03) (0.14) ============== ============== ============== ==============
* Loss per share is less than $.01 F-25 67 VARI-L COMPANY, INC. Schedule II - Valuation and Qualifying Accounts (in thousands of dollars)
BALANCE AT BALANCE AT BEGINNING END DESCRIPTION OF PERIOD ADDITIONS(a) DEDUCTIONS(b) OF PERIOD -------------------------------------------- -------------- -------------- -------------- -------------- Year ended June 30, 2001: Allowance for doubtful accounts $ 175 155 (51) 279 Allowance for excess and obsolete inventories 2,659 1,362 (1,598) 2,423 Reserve for product warranties and returns 42 31 (42) 31 -------------- -------------- -------------- -------------- Total $ 2,876 1,548 (1,691) 2,733 ============== ============== ============== ============== Six months ended June 30, 2000 (unaudited): Allowance for doubtful accounts $ 208 78 (111) 175 Allowance for excess and obsolete inventories 2,215 444 -- 2,659 Reserve for product warranties and returns 7 35 -- 42 -------------- -------------- -------------- -------------- Total $ 2,430 557 (111) 2,876 ============== ============== ============== ============== Year ended December 31, 1999 (unaudited): Allowance for doubtful accounts $ 86 216 (94) 208 Allowance for excess and obsolete inventories 2,172 62 (19) 2,215 Reserve for product warranties and returns -- 7 -- 7 -------------- -------------- -------------- -------------- Total $ 2,258 285 (113) 2,430 ============== ============== ============== ==============
Notes: (a) Amounts charged to costs and expenses. (b) Bad debt write-offs and charges to reserves. See accompanying auditor's report F-26 68 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- 3.1a Restated Articles of Incorporation, as Amended, filed as Exhibit 4.1 to the Form S-8 Registration Statement (No. 33-88666) and incorporated herein by reference. 3.1b Articles of Amendment to the Articles of Incorporation filed as Exhibit 3.1b to the Form 10-KSB for the year ended December 31, 1996 and incorporated herein by reference. 3.2 Amended and Restated Bylaws adopted on November 4, 1992 filed as Exhibit 3.2 to the Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference. 4.1 Specimen Certificate for $.01 par value Common Stock filed as Exhibit 4.3 to the Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference. 4.2 Rights Agreement with American Securities Transfer, Inc. dated March 15, 1996 filed as Exhibit 4.2 to the Form 8-A/A Registration Statement (No. 0-23866) and incorporated herein by reference. 4.3 Specimen Certificate for Right to Purchase $.01 par value Common Stock filed as Exhibit 4.3 to the Form 8-A/A Registration Statement (No. 0-23866) and incorporated herein by reference. 4.4 Securities Purchase Agreement with the Purchasers dated March 4, 1997 filed as Exhibit 4.5 to the Form S-3 Registration Statement (No. 333-25173) and incorporated herein by reference. 4.5 Form of Convertible Subordinated Debenture issued to the Purchasers under the Securities Purchase Agreement dated March 4, 1997 filed as Exhibit 4.6 to the Form S-3 Registration Statement (No. 333-25173) and incorporated herein by reference. 4.6 Form of Warrant to Purchase Common Stock issued to the Purchasers under the Securities Purchase Agreement dated March 4, 1997 filed as Exhibit 4.7 to the Form S-3 Registration Statement (No. 333-25173) and incorporated herein by reference. 10.1 Executive Employment Agreement with Joseph H. Kiser, dated effective June 1, 1997, filed as Exhibit 10.1 to the Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.2 Executive Employment Agreement with David G. Sherman, dated effective June 1, 1997, filed as Exhibit 10.2 to the Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.3 Amended and Restated Tandem Stock Option and Stock Appreciation Rights Plan, effective as of December 27, 2000 10.4 Equipment Lease Agreement dated May 26, 1993 with Rossi Hardesty Financial Inc. filed as Exhibit 10.14 to the Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference. 10.5 Lease Agreement dated January 1, 1987 with J.C. Enterprises for the facility located at 5165 Peoria Street, Denver, Colorado, as amended on December 6, 1990 and March 23, 1993, filed as Exhibit 10.15 to the Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference. 10.6 Amended Lease Agreement dated July 1, 1992 with Bello-1 Partnership for the facility located at 11101 East 51st Avenue, Denver, Colorado, filed as Exhibit 10.16 to the Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference. 10.7 Settlement Agreement with Joseph H. Kiser, David G. Sherman, Alwin E. Branson and Carolyn Y. Kiser dated January 31, 1992, as amended March 23, 1993, filed as Exhibit 10.18 to the Form SB-2 Registration Statement (No. 33-74704-D) and incorporated herein by reference. 10.8 Profit Sharing Plan and Trust Agreement, as amended and restated effective April 19, 1994 filed as Exhibit 10.16 to the Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10.9 Assignment of Amended Lease Agreement dated July 1, 1992 with Bello-1 Partnership from Bello-1 Partnership to Kenneth L. Bettenhausen and Jean M. Bettenhausen dated May 26, 1994 for the facility located at 11101 East 51st Avenue, Denver, Colorado filed as Exhibit 10.18 to the Form 10-KSB for the year ended December 31, 1994 and incorporated herein by reference. 10.10 Stock Grant Plan effective as of June 19, 1998 filed as Exhibit 10.8 to the Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.11 Lease Agreement dated July 14, 1995 with Joseph H. and Nora L. Kiser, as amended September 1, 1995, for the facility located at 15556 East 17th Avenue, Denver, Colorado filed as Exhibit 10.21 to the Form 10-KSB for the year ended December 31, 1995 and incorporated herein by reference. 10.12 Lease Agreement dated March 12, 1997 with Five K Investments for the facility located at 4895 Peoria Street, Denver, Colorado filed as Exhibit 10 to the Form 10-QSB for the quarter ended September 30, 1997 and incorporated herein by reference. 10.13 Second Amendment to Lease Agreement dated July 14, 1995 with Joseph H. Kiser and Nora L. Kiser for the facility located at 15556 East 17th Avenue, Denver, Colorado, as amended September 31, 1995 and July 31, 1998 filed as Exhibit 10.5 to the Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.14 Third Amendment to Lease Agreement dated January 1, 1987 with J.C. Enterprises for the facility located at 5165 Peoria Street, Denver, Colorado, as amended December 6, 1990, March 23, 1993, and October 30, 1998 filed as Exhibit 10.6 to the Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.15 Employment Agreement with Daniel J. Wilmot dated January 1, 1998 filed as Exhibit 10.9 to the Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.16 Employment Agreement with Derek L. Bailey dated October 1, 2000 filed as Exhibit 10.2 to the Form 10-Q for the quarter ended December 31, 2000 and incorporated herein by reference. 10.17 Employment Agreement with Jon L. Clark dated January 1, 1998 filed as Exhibit 10.11 to the Registrant's Form 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference. 10.18 Employee Stock Purchase Plan effective as of June 30, 2001. 10.19 Revolving Loan Agreement, Revolving Note and General Security Agreement with Bank One, Colorado, N.A. dated March 24, 2000 filed as Exhibit 10 to the Form 10-Q for the quarter ended March 31, 2000 and incorporated herein by reference. 10.20 Termination and Consulting Agreement with David G. Sherman dated August 1, 2000 filed as Exhibit 10.1 to the Form 8-K dated August 1, 2000 and incorporated herein by reference. 10.21 Engagement Letter with BBK, Ltd. dated August 2, 2000 filed as Exhibit 10.1 to the Form 8-K dated August 2, 2000 and incorporated herein by reference. 10.22 Deferral and Waiver Agreement with Bank One, Colorado N.A. dated September 28, 2000 filed as Exhibit 10.1 to the Form 8-K dated September 29, 2000 and incorporated herein by reference. 10.23 Deferral and Waiver Agreement with Bank One, Colorado N.A. dated December 15, 2000 filed as Exhibit 10.1 to the Form 8-K dated December 15, 2000 and incorporated herein by reference. 10.24 Deferral and Waiver Agreement with Bank One, Colorado N.A. dated March 31, 2001 filed as Exhibit 10.1 to the Form 8-K dated April 4, 2001 and incorporated herein by reference. 10.25 Employment Agreement with Richard P. Dutkiewicz dated January 22, 2001 filed as Exhibit 10.1 to the Form 10-Q dated March 31, 2001 and incorporated herein by reference. 10.26 Employment Agreement with Timothy M. Micun dated March 2, 2001 10.27 Employment Agreement with Charles R. Bland dated May 7, 2001 10.28 Credit and Security Agreement with Wells Fargo Business Credit, Inc. dated June 28, 2001 filed as Exhibit 99.2 to the Form 8-K dated June 28, 2001 and incorporated herein by reference. 10.29 Patent and Trademark Security Agreement with Wells Fargo Business Credit, Inc. dated June 28, 2001 filed as Exhibit 99.3 to the Form 8-K dated June 28, 2001 and incorporated herein by reference. 23 Consent of KPMG LLP
EX-10.3 3 d90626ex10-3.txt TANDEM STOCK OPTION 1 EXHIBIT 10.3 VARI-L COMPANY, INC. TANDEM STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN 2 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...................................................................................5 7. Capital Adjustments.........................................................................................8 8. Nontransferability..........................................................................................8 9. Amendment, Suspension, or Termination of Plan...............................................................8 10. Effective Date..............................................................................................9 11. Termination Date............................................................................................9 12. Resale of Shares Purchased..................................................................................9 13. Acceleration of Options.....................................................................................9 14. Written Notice Required; Tax Withholding...................................................................10 15. Compliance with Securities Laws............................................................................10 16. Waiver of Vesting Restrictions by Committee................................................................10 17. Reports to Participants....................................................................................10 18. No Employee Contract.......................................................................................10
3 TANDEM STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN AS AMENDED AND RESTATED AS OF DECEMBER 27, 2000 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. 4 (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 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 -2- 5 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 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 -3- 6 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 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 -4- 7 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, on the date of each meeting of the Board of Directors or a committee thereof, each member of the Committee and of the Audit Committee (other than members who are officers or employees of the Company) of such committee 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). (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 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 -5- 8 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 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 -6- 9 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- 10 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 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. -8- 11 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. 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. -9- 12 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 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-10.18 4 d90626ex10-18.txt EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.18 VARI-L COMPANY, INC. EMPLOYEE STOCK PURCHASE PLAN AS OF JUNE 30, 2001 ARTICLE I. - PURPOSE 1.01. PURPOSE. The Vari-L Company, Inc. Employee Stock Purchase Plan is intended to provide a method whereby employees of Vari-L Company, Inc. (hereinafter referred to, unless the context otherwise requires, as the "Company") will have an opportunity to acquire a proprietary interest in the Company through the purchase of shares of the Common Stock of the Company. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. ARTICLE II. - DEFINITIONS 2.01. BASE PAY. "Base Pay" shall mean regular straight-time earnings including payments for overtime, shift premium, bonuses and other special payments, commissions and other marketing incentive payments. 2.02. COMMITTEE. "Committee" shall mean the individuals described in Article XI. 2.03. EMPLOYEE. "Employee" means any person who is customarily employed on a full-time or part-time basis by the Company and is regularly scheduled to work more than 20 hours per week. ARTICLE III. - ELIGIBILITY AND PARTICIPATION 3.01. INITIAL ELIGIBILITY. All individuals employed by the Company shall be eligible to participate in offerings under the Plan. 2 3.02. LEAVE OF ABSENCE. For purposes of participation in the Plan, a person on leave of absence shall be deemed to be an employee for the first 180 days of such leave of absence and such employee's employment shall be deemed to have terminated at the close of business on the 180th day of such leave of absence unless such employee shall have returned to regular full-time or part-time employment (as the case may be) prior to the close of business on such 180th day. Termination by the Company of any employee's leave of absence, other than termination of such leave of absence on return to full-time or part-time employment, shall terminate an employee's employment for all purposes of the Plan and shall terminate such employee's participation in the Plan and right to exercise any option. 3.03. RESTRICTIONS ON PARTICIPATION. Notwithstanding any provisions of the Plan to the contrary, no employee shall be granted an option to participate in the Plan: (a) if, immediately after the grant, such employee would own stock, and/or hold outstanding options to purchase stock, possessing 5% or more of the total combined voting power or value of all classes of stock of the Company (for purposes of this paragraph, the rules of Section 424(d) of the Code shall apply in determining stock ownership of any employee); or (b) which permits the employee's rights to purchase stock under all employee stock purchase plans of the Company to accrue at a rate which exceeds $25,000 in fair market value of the stock for each calendar year. 3.04. COMMENCEMENT OF PARTICIPATION. An eligible employee may become a participant by completing an authorization for a payroll deduction on the form provided by the Company and delivering it to the Company's Vice President of Finance on or before the date set therefor by the Committee, which date shall be prior to the Offering Commencement Date for the Offering (as such terms are defined below). Payroll deductions for a participant shall commence on the applicable Offering Commencement Date when his authorization for a payroll deduction becomes effective and shall end on the Offering Termination Date of the Offering to which such authorization is applicable unless sooner terminated by the participant as provided in Article VIII. 2 3 ARTICLE IV. - OFFERINGS 4.01. ANNUAL OFFERINGS. The Plan was originally implemented by six annual offerings of the Company's Common Stock beginning on the 10th day of March, 1995 and the 1st day of January in each of the years 1996, 1997, 1998, 1999 and 2000, each offering terminating on December 31 of the same year (the "Pre-2001 Offerings"). The Company will make four additional annual offerings of the Company's Common Stock (the "Offerings") beginning on March 16, 2001, July 1, 2001, January 1, 2002, and July 1, 2002. The maximum number of shares issued in the respective years shall be: o From January 1, 1999 to December 31, 1999: 189,216 shares. o From January 1, 2000 to December 31, 2000: 189,216 shares plus unissued shares from the prior Offerings, whether offered or not. o From January 1, 2001 to December 31, 2001: 189,216 shares plus unissued shares from the prior Offerings, whether offered or not. o From January 1, 2002 to December 31, 2002: 189,216 shares plus unissued shares from the prior Offerings, whether offered or not. For the six-month Offerings, the maximum number of shares to be issued shall be one-half (1/2) of the number of shares set forth for the annual period in which the six-month Offering falls, plus, if the Offering is a July 1 to December 31 Offering, unissued shares, whether offered or not, from the immediately preceding six-month Offering. As used in the Plan, "Offering Commencement Date" means January 1 (except for the March 10, 1995 and March 16, 2001 beginning dates) or July 1, as the case may be, on which the particular Offering begins and "Offering Termination Date" means the June 30 or December 31, as the case may be, on which the particular Offering terminates. ARTICLE V. - PAYROLL DEDUCTIONS 5.01. AMOUNT OF DEDUCTION. At the time a participant files his authorization for payroll deduction, he shall elect to have deductions made from his pay on each payday during the time he is a participant in an Offering at the rate of 1, 2, 3, 4, 5, 6, 7, 8, 9 or 10% of his base pay in effect at the Offering Commencement Date of such Offering. In the case of a part-time, hourly employee, such employee's base pay during an Offering shall be determined by multiplying such employee's hourly rate of pay in effect on the Offering Commencement Date by the number of regularly scheduled hours of work for such employee during such Offering. 3 4 5.02. PARTICIPANT'S ACCOUNT. All payroll deductions made for a participant shall be credited to his account under the Plan. A participant may not make any separate cash payment into such account except when on leave of absence and then only as provided in Section 5.04. 5.03. CHANGES IN PAYROLL DEDUCTIONS. A participant may discontinue his participation in the Plan as provided in Article VIII, but no other change can be made during an Offering and, specifically, a participant may not alter the amount of his payroll deductions for that Offering. 5.04. LEAVE OF ABSENCE. If a participant goes on a leave of absence, such participant shall have the right to elect: (a) to withdraw the balance in his or her account pursuant to Section 7.02; (b) to discontinue contributions to the Plan but remain a participant in the Plan, or (c) to remain a participant in the Plan during such leave of absence, authorizing deductions to be made from payments by the Company to the participant during such leave of absence and undertaking to make cash payments to the Plan at the end of each payroll period to the extent that amounts payable by the Company to such participant are insufficient to meet such participant's authorized Plan deductions. ARTICLE VI. - GRANTING OF OPTION 6.01. NUMBER OF OPTION SHARES. On the Commencement Date of each Offering, a participating employee shall be deemed to have been granted an option to purchase a maximum number of shares of the stock of the Company equal to an amount determined as follows: an amount equal to (i) that percentage of the employee's base pay which he has elected to have withheld (but not in any case in excess of 10%) multiplied by (ii) the employee's base pay during the period of the offering (iii) divided by 85% of the market value of the stock of the Company on the applicable Offering Commencement Date. The market value of the Company's stock shall be determined as provided in paragraphs (a) and (b) of Section 6.02 below. An employee's base pay during the period of an offering shall be determined by multiplying, in the case of a one-year offering, his normal weekly rate of pay (as in effect on the last day prior to the Commencement Date of the particular offering) by 52 or the hourly rate by 2,080 or, in the case of a six-month offering, by 26 or 1,040, as the case may be, provided that, in the case of a part-time, hourly employee, the employee's base pay during the period of an offering shall be determined by multiplying such employee's hourly rate by the number of regularly scheduled hours of work for such employee during such Offering. 4 5 6.02. OPTION PRICE. The option price of stock purchased with payroll deductions made during such annual offering for a participant therein shall be the lower of: (a) 85% of the closing price of the stock on the nearest business day prior to the Offering Commencement Date on which trading occurred on the Nasdaq SmallCap Market, the Nasdaq National Market, the OTC Bulletin Board or on any other U.S. or Canadian stock exchange on which the Company's stock are listed for trading; or (b) 85% of the closing price of the stock on the Offering Termination Date or the nearest prior business day on which trading occurred on the Nasdaq SmallCap, the Nasdaq National Market, the OTC Bulletin Board or on any other U.S. or Canadian stock exchange on which the Company's stock are listed for trading. If the Common Stock of the Company is not admitted to trading on any of the aforesaid dates for which closing prices of the stock are to be determined, then reference shall be made to the fair market value of the stock on that date, as determined on such basis as shall be established or specified for the purpose by the Committee. If the Company's stock is traded on more than one exchange or quotation service, the Company's Board of Directors shall designate the exchange or quotation service that will be used for setting the option price. For purposes hereof, The Pink Sheets LLC shall be considered a quotation service which may be used to set the option price. ARTICLE VII. - EXERCISE OF OPTION 7.01. AUTOMATIC EXERCISE. Unless a participant gives written notice to the Company as hereinafter provided, his option for the purchase of stock with payroll deductions made during any offering will be deemed to have been exercised automatically on the Offering Termination Date applicable to such offering, for the purchase of the number of full shares of stock which the accumulated payroll deductions in his account at that time will purchase at the applicable option price (but not in excess of the number of shares for which options have been granted to the employee pursuant to Section 6.01), and any excess in his account at that time will be returned to him. 7.02. WITHDRAWAL OF ACCOUNT. By written notice to the Vice President of Finance of the Company, at any time prior to the Offering Termination Date applicable to any Offering, a participant may elect to withdraw all the accumulated payroll deductions in his account at such time. 7.03. FRACTIONAL SHARES. Fractional shares will not be issued under the Plan and any accumulated payroll deductions which would have been used to purchase fractional shares will be returned to any employee promptly following the termination of an Offering, without interest. 5 6 7.04. TRANSFERABILITY OF OPTION. During a participant's lifetime, options held by such participant shall be exercisable only by that participant. 7.05. DELIVERY OF STOCK. As promptly as practicable after the Offering Termination Date of each Offering, the Company will deliver to each participant, as appropriate, the stock purchased upon exercise of his option. ARTICLE VIII. - WITHDRAWAL 8.01. IN GENERAL. As indicated in Section 7.02, a participant may withdraw payroll deductions credited to his account under the Plan at any time by giving written notice to the Company's Vice President of Finance. All of the participant's payroll deductions credited to his account will be paid to him promptly after receipt of his notice of withdrawal, and no further payroll deductions will be made from his pay during such Offering. The Company may, at its option, treat any attempt to borrow by an employee on the security of his accumulated payroll deductions as an election, under Section 7.02, to withdraw such deductions. 8.02. EFFECT ON SUBSEQUENT PARTICIPATION. A participant's withdrawal from any Offering will not have any effect upon his eligibility to participate in any succeeding Offering or in any similar plan which may hereafter be adopted by the Company; except that participants subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934, as amended, may not elect to participate in a succeeding Offering commencing within six months of a withdrawal by such individual. 8.03. TERMINATION OF EMPLOYMENT. Upon termination of the participant's employment for any reason, including retirement (but excluding death while in the employ of the Company or continuation of a leave of absence for a period beyond 180 days), the payroll deductions credited to his account will be returned to him, or, in the case of his death subsequent to the termination of his employment, to the person or persons entitled thereto under Section 12.01. 8.04. TERMINATION OF EMPLOYMENT DUE TO DEATH. Upon termination of the participant's employment because of his death, his beneficiary (as defined in Section 12.01) shall have the right to elect, by written notice given to the Vice President of Finance of the Company prior to the earlier of the Offering Termination Date or the expiration of a period of sixty (60) days commencing with the date of the death of the participant, either: (a) to withdraw all of the payroll deductions credited to the participant's account under the Plan, or 6 7 (b) to exercise the participant's option for the purchase of stock on the Offering Termination Date next following the date of the participant's death for the purchase of the number of full shares of stock which the accumulated payroll deductions in the participant's account at the date of the participant's death will purchase at the applicable option price, and any excess in such account will be returned to said beneficiary, without interest. In the event that no such written notice of election shall be duly received by the President of the Company, the beneficiary shall automatically be deemed to have elected, pursuant to paragraph (b), to exercise the participant's option. 8.05. LEAVE OF ABSENCE. A participant on leave of absence shall, subject to the election made by such participant pursuant to Section 5.04, continue to be a participant in the Plan so long as such participant is on continuous leave of absence. A participant who has been on leave of absence for more than 180 days and who therefore is not an employee for the purpose of the Plan shall not be entitled to participate in any offering commencing after the 180th day of such leave of absence. Notwithstanding any other provisions of the Plan, unless a participant on leave of absence returns to regular full-time or part-time employment with the Company at the earlier of: the termination of such leave of absence or three months from the 180th day of such leave of absence, such participant's participation in the Plan shall terminate on whichever of such dates first occurs. ARTICLE IX. - INTEREST 9.01. PAYMENT OF INTEREST. No interest will be paid or allowed on any money paid into the Plan or credited to the account of any participant employee. 7 8 ARTICLE X. - STOCK 10.01. MAXIMUM SHARES. The maximum number of shares which shall be issued under the Plan, subject to adjustment upon changes in capitalization of the Company as provided in Section 12.04 shall not exceed 800,000 shares for all Offerings. If the total number of shares for which options are exercised on any Offering Termination Date in accordance with Article VI exceeds the maximum number of shares for the applicable Offering, the Company shall make a pro rata allocation of the shares available for delivery and distribution in a nearly uniform manner as it shall be practicable and as it shall determine to be equitable, and the balance of payroll deductions credited to the account of each participant under the Plan shall be returned to him as promptly as possible. 10.02. PARTICIPANT'S INTEREST IN OPTION STOCK. The participant will have no interest in stock covered by his option until such option has been exercised. 10.03. REGISTRATION OF STOCK. Stock to be delivered to a participant under the Plan will be registered in the name of the participant, or, if the participant so directs by written notice to the Vice President of Finance of the Company prior to the Offering Termination Date applicable thereto, in the names of the participant and one such other person as may be designated by the participant, as joint tenants with rights of survivorship or as tenants by the entireties, to the extent permitted by applicable law. 10.04. RESTRICTIONS ON EXERCISE. The Board of Directors may, in its discretion, require as conditions to the exercise of any option that the shares of Common Stock reserved for issuance upon the exercise of the option shall have been duly qualified, upon official notice of issuance, for trading on Nasdaq or other applicable stock exchange or quotation service, and that either: (a) a Registration Statement under the Securities Act of 1933, as amended, with respect to said shares shall be effective, or (b) the participant shall have represented at the time of purchase, in form and substance satisfactory to the Company, that it is the participant's intention to purchase the shares for investment and not for resale or distribution. 8 9 ARTICLE XI. - ADMINISTRATION 11.01. APPOINTMENT OF COMMITTEE. A special committee of the Board of Directors or, failing the appointment of such a committee, the Board of Directors itself (the "Committee") shall administer the Plan. 11.02. AUTHORITY OF COMMITTEE. Subject to the express provisions of the Plan, the Committee shall have plenary authority in its discretion to interpret and construe any and all provisions of the Plan, to adopt rules and regulations for administering the Plan, and to make all other determinations deemed necessary or advisable for administering the Plan. The Committee's determination on the foregoing matters shall be conclusive. 11.03. RULES GOVERNING THE ADMINISTRATION OF THE COMMITTEE. If a special committee is appointed by the Board of Directors, the Board may from time to time appoint members of the Committee in substitution for or in addition to members previously appointed and may fill vacancies, however caused, in the Committee. The Committee may select one of its members as its Chairman and shall hold its meetings at such times and places as it shall deem advisable and may hold telephonic meetings. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. The Committee may correct any defect or omission or reconcile any inconsistency in the Plan, in the manner and to the extent it shall deem desirable. Any decision or determination reduced to writing and signed by a majority of the members of the Committee shall be as fully effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary and shall make such rules and regulations for the conduct of its business as it shall deem advisable. ARTICLE XII. - MISCELLANEOUS 12.01. DESIGNATION OF BENEFICIARY. A participant may file a written designation of a beneficiary who is to receive any stock and/or cash. Such designation of beneficiary may be changed by the participant at any time by written notice to the Company's Vice President of Finance. Upon the death of a participant and upon receipt by the Company of proof of identity and existence at the participant's death of a beneficiary validly designated by him under the Plan, the Company shall deliver such stock and/or cash to such beneficiary. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such stock and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such stock and/or cash to the spouse or to any one or more dependents of the participant as the Company may designate. No beneficiary shall, prior to the death of the participant by whom he has been designated, acquire any interest in the stock or cash credited to the participant under the Plan. 9 10 12.02. TRANSFERABILITY. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive stock under the Plan may be assigned, transferred, pledged, or otherwise disposed of in any way by the participant other than by will or the laws of descent and distribution. Any such attempted assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 7.02. 12.03. USE OF FUNDS. All payroll deductions received or held by the Company under this Plan may be used by the Company for any corporate purpose and the Company shall not be obligated to segregate such payroll deductions. 12.04. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. (a) If, while any options are outstanding, the outstanding shares of Common Stock of the Company have increased, decreased, changed into, or been exchanged for a different number or kind of shares or securities of the Company through reorganization, merger, recapitalization, reclassification, stock split, reverse stock split or similar transaction, appropriate and proportionate adjustments may be made by the Committee in the number and/or kind of shares which are subject to purchase under outstanding options and on the option exercise price or prices applicable to such outstanding options. In addition, in any such event, the number and/or kind of shares which may be offered in the Offerings described in Article IV hereof shall also be proportionately adjusted. No adjustments shall be made for stock dividends. For the purposes of this paragraph, any distribution of shares to shareholders in an amount aggregating 20% or more of the outstanding shares shall be deemed a stock split and any distributions of shares aggregating less than 20% of the outstanding shares shall be deemed a stock dividend. (b) Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon a sale of substantially all of the property or stock of the Company to another corporation, the holder of each option then outstanding under the Plan will thereafter be entitled to receive at the next Offering Termination Date upon the exercise of such option for each share as to which such option shall be exercised, as nearly as reasonably may be determined, the cash, securities and/or property which a holder of one share of the Common stock was entitled to receive upon and at the time of such transaction. The Board of Directors shall take such steps in connection with such transactions as the Board shall deem necessary to assure that the provisions of this Section 12.04 shall thereafter be applicable, as nearly as reasonably may be determined, in relation to the said cash, securities and/or property as to which such holder of such option might thereafter be entitled to receive. 12.05. AMENDMENT AND TERMINATION. The Board of Directors shall have complete power and authority to terminate or amend the Plan; provided, however, that the Board of Directors shall not, without the approval of the stockholders of the Corporation (i) increase the maximum number of shares which may be issued 10 11 under any Offering (except pursuant to Section 12.04); or (ii) amend the requirements as to the class of employees eligible to purchase stock under the Plan. No termination, modification, or amendment of the Plan may, without the consent of an employee then having an option under the Plan to purchase stock, adversely affect the rights of such employee under such option. 12.06. EFFECTIVE DATE. The Plan shall become effective as of March 10, 1995. 12.07. NO EMPLOYMENT RIGHTS. The Plan does not, directly or indirectly, create any right for the benefit of any employee or class of employees to purchase any shares under the Plan, or create in any employee or class of employees any right with respect to continuation of employment by the Company, and it shall not be deemed to interfere in any way with the Company's right to terminate, or otherwise modify, an employee's employment at any time. 12.08. EFFECT OF PLAN. The provisions of the Plan shall, in accordance with its terms, be binding upon, and inure to the benefit of, all successors of each employee participating in the Plan, including, without limitation, such employee's estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such employee. 12.09. GOVERNING LAW. The laws of the State of Colorado will govern all matters relating to this Plan except to the extent it is superseded by the laws of the United States. 11 EX-10.26 5 d90626ex10-26.txt EXECUTIVE EMPLOYMENT AGREEMENT 1 EXHIBIT 10.26 VARI-L COMPANY, INC. EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT, effective March 2, 2001, is made and entered into by and between VARI-L COMPANY, INC. (the "Company") and TIMOTHY MICUN ("Employee"). WHEREAS, the Company wishes to engage Employee as the Company's Vice President-Sales and Marketing to lead the Company's sales and marketing activities as part of the Company's continuing efforts to build shareholder value; and WHEREAS, the Company's Board of Directors, comprised solely of disinterested directors, has determined to provide Employee with this employment agreement, including the severance package and other benefits provided hereby, for the purpose of inducing Employee to accept the Vice President-Sales and Marketing position with the Company and to continue to provide diligent and efficacious services to the Company during his employment. NOW, THEREFORE, for good and valuable consideration, the parties hereto agree as follows: I. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby accepts employment, upon the terms and conditions hereinafter set forth. II. TERM. Subject to the provisions for termination as hereinafter provided, the term of this Agreement is for a period commencing March 2, 2001, and expiring March 1, 2003 (the "Initial Term"). On March 1 of each year, beginning in 2003, the term of this Agreement shall be automatically extended for an additional year without any further action on the part of the Company or Employee unless terminated under the provisions of Section VIII of this Agreement. III. DUTIES. Employee is engaged as Vice President-Sales and Marketing of the Company, to have complete responsibility for and authority over the management and direction of all sales and marketing activities of the Company, including the commercial, military, aerospace and other markets served by the Company, subject only to the direction of the Company's Chief Executive Officer or President and the Board of Directors, for administering those operations of the Company in all respects. IV. EXTENT OF SERVICES. Employee shall faithfully, industriously, and to the best of his ability, experience, and talents, perform all of the duties that may be required of and from him pursuant to this Agreement. Nothing herein shall be construed as preventing Employee from (a) investing his assets in such form or manner as will not require any services on the part of Employee in the operations or the affairs of the companies in which such investments are made or (b) serving as a director, advisor, or consultant; provided, however, that such investments or services may not be in connection with a business which is in competition with the Company (excluding (i) indirect investments through mutual funds or other broad based investment vehicles, (ii) investments in debt instruments, and (iii) investments in less than 5% of the stock of any publicly held business). For purposes hereof, "in competition with the Company" shall be construed consistently with Section VII hereof. 2 V. COMPENSATION AND EMPLOYEE BENEFITS. A. ANNUAL BASE SALARY. For all services rendered by Employee under this Agreement, the Company shall pay Employee an annual base salary of at least $120,000, payable in equal bi-weekly installments. The amount of such base salary shall be determined at the beginning of each fiscal year by the Compensation Committee of the Company's Board of Directors in its sole discretion on the basis of merit and the Company's financial success and progress but in no event shall such base salary be less than the annual base salary indicated in this paragraph. B. BONUS COMPENSATION. Employee may receive bonuses, payable in cash or shares of the Company's stock, as may be determined at the beginning of each fiscal year of the Company by the Board of Directors or the Compensation Committee of the Board of Directors, in its sole discretion, on the basis of: (i) Employee's success in meeting his personal performance goals, as established by the Compensation Committee of the Board of Directors; (ii) Employee's merit, including but not limited to the quality of the services provided by Employee and his industriousness and diligence in performing such services; and (iii) the Company's financial success and progress in the prior fiscal year. It is anticipated that, if Employee is judged to have been successful under the foregoing criteria, his annual bonus would be equal to approximately thirty percent (30%) of his annual base salary for the preceding year. C. VACATION. Employee shall be entitled to accrue three (3) weeks of paid vacation for each year of service provided. After one year of service, that amount will increase to four (4) weeks per year. Any accrued but unused vacation time shall be paid to Employee at or before the termination of his employment, in accordance with Company policy, in addition to any amounts due and payable to Employee under Section VIII hereof. Employee shall be required to take at least two (2) weeks vacation per year, including in at least one case a vacation lasting no less than five (5) consecutive business days. D. EMPLOYEE BENEFITS. Employee shall be entitled to receive all of the rights, benefits, and privileges of an employee and an executive officer under any generally applicable retirement, pension, profit-sharing, insurance, health and hospital, or other employee benefit plans which may be now in effect or hereafter adopted by the Company. It is agreed that, in 2001, Employee will be granted options to purchase 20,000 shares of the Company's common stock under the Company's Tandem Stock Option and Stock Appreciation Rights Plan (the "Plan"), 4,000 options of which shall vest on the first anniversary of the date of grant and 4,000 options of which shall vest on each subsequent anniversary of the date of grant until the option is fully vested, subject to the terms and conditions of the Plan. Employee will also be granted options to purchase 10,000 shares of the Company's common stock under the Plan, 2,000 options of which shall vest upon grant and 2,000 options of which shall vest on each subsequent anniversary of the date of grant until such option is fully vested, subject to the terms and conditions of the Plan. Employee's right to receive grants in subsequent years will be determined on the same basis as other senior executives of the Company considering, in Employee's case, the performance standards set forth in Section V. B above. E. WORKING FACILITIES. Employee shall be furnished with a private office, business tools, and such other facilities and services suitable to Employee's position and adequate for the performance of the duties required by this Agreement. 2 3 F. EXPENSES. Subject to limits which may be imposed by the Chief Executive Officer, President or the Board of Directors, including any committee thereof, Employee is authorized to incur reasonable expenses in connection with his responsibilities in conducting the business of the Company, including expenses for entertainment, travel, and similar items. The Company will reimburse Employee for all such expenses upon the presentation by Employee, from time to time, of an itemized account of such expenditures, including receipts or other adequate documentation, or Employee may pay such expenses with a Company credit card, if a Company credit card is issued to Employee, and Employee shall appropriately document the business purpose of such expenditures. Employee's expenses must be submitted to and approved by the Audit Committee or another officer or employee designated by the Audit Committee to review and approve such expenses. G. AUTOMOBILE ALLOWANCE. The Company shall pay Employee an automobile allowance for the expense of leasing or financing an automobile, as well as for insurance, maintenance, fuel and repairs associated with such automobile. Any automobile for which Employee accepts this allowance must be suitable for the Company's use. Specifically, such automobile must have four doors. The automobile allowance shall be payable in equal bi-weekly installments and shall in no event exceed $10,000.00 per year. If and to the extent that the automobile is not considered by the Company to have been used for business purposes, based upon documentation submitted to the Company at the Company's request, the Company will include the value of the non-business use of the automobile and other reimbursements made in connection therewith on Employee's Form W-2 or 1099 as income for each year such personal benefit is received. H. EDUCATIONAL EXPENSES. Employee shall be entitled to receive reimbursement for educational expenses incurred by him during the term of this Agreement, including tuition and costs, upon approval of the specific educational program by the Compensation Committee of the Board of Directors. Among the factors to be considered by the Compensation Committee in determining whether to approve reimbursement is the relevancy of the educational expense to the Company's business. If reimbursement for a specific course is approved, Employee must achieve a "C" or better in that course and Employee must remain employed by the Company while taking the course and for a specified period of time thereafter as determined by the Compensation Committee upon approval of reimbursement. In the event that Employee obtains a "C" or lower, and/or discontinues employment prior to the time specified by the Compensation Committee for reimbursement, the expenses previously paid to or on behalf of Employee for such education shall be reimbursed to the Company. VI. PROPRIETARY INTERESTS OF COMPANY. Employee and the Company recognize that the Company is in a highly competitive business in a highly technical industry. The parties acknowledge that the success or failure of the Company depends largely on the development and use of certain proprietary and confidential information and trade secrets, including without limitation, information concerning any of the Company's patented components, research and development projects and in patent process components, and personal relationships with present and potential customers, suppliers, contractors, and governmental agencies as well as technology, procedures, systems, and techniques relating to the products developed or distributed by the Company (hereinafter collectively referred to as "CONFIDENTIAL INFORMATION"). Confidential Information is a 3 4 substantial asset of the Company. Confidential Information will be disclosed to Employee in the normal course of operation. Employee acknowledges that Confidential Information is extremely valuable to the Company and must be protected from unauthorized use by the Company's competitors or other persons. Therefore, Employee agrees not to disclose or use, whether for the benefit of Employee or any other person or entity, at any time during or after his employment, any Confidential Information to any person or entity other than the Company or persons authorized by the Company to receive such Confidential Information. Employee recognizes that, during the term of his employment with the Company, he may develop new products, technology, processes, devices, inventions, or methods of production, including but not limited to computer hardware, software or "firmware," and may enhance, improve or perfect existing products, technology, processes, devices, inventions or methods of production (hereinafter collectively referred to as "INVENTIONS"). As partial consideration for the salary and other benefits provided by the Company to Employee, Employee hereby agrees that his entire work product while in the employ of the Company, including any Inventions, is the exclusive property of the Company. Employee also agrees to cooperate fully with the Company and to do whatever acts are reasonably necessary in order to obtain United States or foreign letters patent or copyrights, or both, and to vest the entire right and title thereto in the Company. Employee further agrees that the Company shall have the royalty-free right to use in its business, and to make, use, and sell such Inventions whether or not patentable, regardless of whether they are conceived or made by Employee during the hours which he is employed by the Company or with the use of or assistance of the Company's facilities, materials or personnel. Except as required in his duties to the Company, Employee will not, directly or indirectly, use, disseminate, disclose, lecture upon, or publish articles concerning any Confidential Information without the prior written consent of the Company. Upon termination of his employment with the Company, all documents, records, notebooks, and similar repositories of or containing Confidential Information, including copies thereof, then in Employee's possession, whether prepared by Employee or others, will be left with the Company, and no copies thereof will be retained by Employee. It is agreed that any breach of this section of the Agreement will cause immediate irreparable harm to the Company and monetary damages would be difficult if not impossible to ascertain. Therefore, the parties agree that, upon any breach of any covenant in this Section VI, that the Company may obtain from the district court for the City and County of Denver, Colorado, or any other court of competent jurisdiction, an appropriate restraining order, preliminary injunction or other form of equitable relief with respect thereto. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other available remedies for such breach, including the recovery of damages, costs, and attorney fees. VII. NONCOMPETE AND NONSOLICITATION. During the term of this Agreement and for a period of the greater of (a) one year after termination or expiration of this Agreement or (b) the period during which a Severance Amount or consulting arrangement is being paid to Employee by the Company (the "NONCOMPETE PERIOD"), Employee will not, directly or indirectly, own, manage, operate, control, provide services to, be employed by, participate in, or be connected in any manner with the ownership, management, operation, or control of any business which 4 5 develops, manufactures, distributes or sells the same type of products as the Company, or products which are the functional equivalent of the Company's products or currently planned products, within and to the same market as the Company's market at the time of Employee's proposed activity or, after the termination of this Agreement, at or prior to the time of such termination. Employee certifies that his employment with the Company will not breach a previous employment agreement. Employee agrees not to engage in the unauthorized use of the proprietary assets of others during the term of his employment by the Company. Employee agrees not to enter into any other employment agreement, oral or written, which will run concurrently, in whole or in part, with Employee's employment by the Company, provided, however, that the Company acknowledges and agrees that Employee may, for a period of up to three (3) months after the date of this Agreement, provide consulting services on a part time basis to his former employer in order to assist it in the transition and training of his replacement. It is agreed that any breach of this section of the Agreement will cause immediate irreparable harm to the Company and that monetary damages for such breach would be difficult if not impossible to ascertain. Therefore, the parties agree that upon any breach of the covenants of this section the Company may obtain from the district court for the City and County of Denver, Colorado, or any other court of competent jurisdiction, an appropriate restraining order, preliminary injunction or other form of equitable relief with respect thereto. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other available remedies for such breach, including the recovery of damages, costs, and attorney fees. The foregoing agreement not to compete shall not be held invalid because of the scope of the territory or the actions restricted thereby, or the period of time within which such agreement is operative; but any judgment by a court of competent jurisdiction may define the maximum territory and actions subject to, and restricted by, this paragraph and the period of time during which such agreement is enforceable. Notwithstanding the foregoing, in the event of a Change of Control, as hereinafter defined, not recommended by a majority of the Board of Directors of the Company as constituted prior to the date of such Change of Control, this non-compete agreement shall terminate upon the date of such Change of Control. VIII. TERMINATION OF EMPLOYMENT. A. TERMINATION BY MUTUAL AGREEMENT. The Company and Employee may agree to terminate this Agreement on terms and conditions mutually acceptable to them as of the date of termination. B. DEATH. In the event of Employee's death during the term of this Agreement, including the Consulting Period, if any, the Company shall pay to Employee's estate any unpaid wages or other amounts owing at the time of death and shall pay, in addition to and not as a substitute for the proceeds from any life insurance policies on Employee's life paid for by the Company, an amount equal to the Severance Amount which would have been payable to Employee if there had been a Voluntary Termination on the date of Employee's death and all notice and other requirements for the payment of such Severance Amount had been satisfied. C. DISABILITY. If Employee becomes Disabled during the term of employment, the Company may, at its option, by written notice to Employee or Employee's 5 6 personal representative, terminate the employment. Employee shall thereafter be eligible to receive disability benefits under the Company's standard employee disability insurance policy like any other employee. D. VOLUNTARY OR INVOLUNTARY TERMINATION. Upon a Voluntary or Involuntary Termination as defined herein, Employee shall continue to render his services to the Company, if and to the extent required by the Company, up to the date of such Voluntary or Involuntary Termination as referenced in the written notice of termination submitted to Employee by the Company, or vice versa, and shall be paid (i) the unpaid amount of the then applicable annual base salary up to the date of such Voluntary or Involuntary Termination, (ii) any bonuses which the Company's Board of Directors may determine, in its sole discretion, to be due and payable to Employee, and (iii) the Severance Amount as defined herein. In the event of a Voluntary Termination, as a condition to Employee's receipt of the foregoing payments to Employee, during the time between the submission of a notice of termination by Employee and the effective date of termination set forth in such notice, Employee shall continue to diligently provide the Company with such services as the Company may request. In the event of an Involuntary Termination, all unvested stock options and stock appreciation rights that have previously been granted to Employee will fully vest and remain exercisable for three (3) months after such termination. E. DEFINITIONS. All the terms defined in this Section shall have the meanings given below throughout this Agreement. 1. "CHANGE IN DUTIES, COMPENSATION, OR BENEFITS" shall mean any one or more of the following: a. a significant and detrimental change in the nature or scope of Employee's authority, responsibilities or duties from those currently applicable to him; b. a reduction in Employee's annual base salary from that currently provided to him; c. a diminution in Employee's eligibility to participate in bonus, stock option, incentive award or any other compensation plan which provides opportunities to receive compensation from those currently applicable to him, except for: (i) changes in the eligibility requirements for plans that are applicable to employees generally; (ii) changes in plans that are applicable to all executives and result in a diminution of Employee's benefits under such plan that is fair and proportional as compared to the diminution of benefits for all executives; and (iii) changes that are required by applicable law; d. a material diminution in employee benefits (including but not limited to medical, dental or life insurance and long-term disability plans) and perquisites currently applicable to Employee, except for: (i) changes in the eligibility requirements for benefits that are applicable to employees generally; (ii) changes in benefits and perquisites that are applicable to all executives and result in a diminution of Employee's benefits that is fair and proportional as compared to the diminution for all executives; and (iii) changes that are required by applicable law; 6 7 e. a change in the location of Employee's principal place of employment by the Company (including its subsidiaries) by more than fifty (50) miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or f. a reasonable determination by a majority of those persons comprising the Board of Directors of the Company prior to a Change of Control (even if such determination is made after such Change of Control) that, as a result of a Change of Control and a change in circumstances thereafter significantly affecting his position, Employee is unable to exercise the functions or duties attached to his position immediately prior to the date on which a Change of Control occurs. 2. "CHANGE OF CONTROL" shall be deemed to have occurred if: a. any "person," including a "group" as determined in accordance with Section 13(d)(3) of the Securities Exchange Act of 1934 (the "EXCHANGE ACT"), is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; b. as a result of, or in connection with, any tender offer or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions (a "TRANSACTION"), the persons who were directors of the Company before the Transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company; c. the Company is merged or consolidated with another corporation or entity and, as a result of the merger or consolidation, less than 80% of the outstanding voting securities of the surviving corporation or entity is then owned in the aggregate by the former stockholders of the Company; d. a tender offer or exchange offer is made and consummated for the ownership of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding voting securities; or e. the Company transfers all or substantially all of its assets to another corporation which is not a wholly-owned subsidiary of the Company. 3. "DISABLED" OR "DISABILITY" shall mean mental or physical illness or condition rendering Employee incapable of performing any portion of Employee's normal duties with the Company even after the Company's reasonable accommodation of any such disability in accordance with the Americans with Disabilities Act and the Colorado Nondiscrimination statute. 4. "INVOLUNTARY TERMINATION" shall mean any termination except: a. VOLUNTARY TERMINATION; 7 8 b. termination by mutual agreement; c. termination as a result of death; or d. Employee's voluntary retirement from employment or mandatory retirement from employment pursuant to a retirement plan to which Employee was subject prior to any Change of Control. ("RETIREMENT"). 5. "SEVERANCE AMOUNT" is equal to: a. in the case of an Involuntary Termination not following a Change of Control, one-half of Employee's annual base salary payable ratably over a six (6) month period on the Company's regular payroll dates, in addition to and not as a substitute for compensation payable to Employee on account of post-termination consulting services provided by Employee to the Company, if any, pursuant to Section XI hereof. In the case of a Involuntary Termination following a Change of Control, the Severance Amount shall be an amount equal to seventy five percent (75%) of Employee's then annual base salary, payable in a single lump sum no later than thirty (30) days following such termination. In the event of Voluntary Termination, no Severance Amount shall be payable until Employee has completed one (1) year of service under this Agreement, in which case the Severance Amount will be equal to one (1) month's salary for every year of service completed under this Agreement, up to a maximum of three (3) months, payable ratably on the Company's regular payroll dates. b. In the case of a Voluntary Termination or an Involuntary Termination resulting from Employee's resignation following a Change in Duties, Compensation or Benefits, Employee must give the Company proper notice of such Termination in order to receive the Severance Amount. For purposes hereof, proper notice is defined as written notice received by the Company not less than thirty (30) days prior to the date of termination of employment. c. In the case of an Involuntary Termination by the Company, the Company must give Employee not less than thirty (30) days prior written notice of such termination. d. Notwithstanding any other provision of this Agreement, in the event that Employee is found to have violated the non-compete provisions of Section VII of this Agreement by a court of competent jurisdiction ("BREACH"), all Severance Amounts due and owing under this Agreement shall be terminated upon the effective date of the Breach and Employee shall reimburse the Company for any portion of the Severance Amount previously paid to Employee. 6. "VOLUNTARY TERMINATION" shall mean any termination which results from a resignation by Employee other than a resignation following a Change in Duties, Compensation, or Benefits as defined herein. 7. "VOTING SECURITIES" shall mean any securities which ordinarily possess the power to vote in the election of directors without the occurrence of any pre-condition or contingency other than the passage of time. 8 9 8. "BENEFICIALLY OWNED" shall mean beneficial ownership by Employee, Employee's spouse, or a trust or similar arrangement established by or for the benefit of Employee, Employee's spouse, or Employee's minor children as well as the meaning of such term under Section 13 or Section 16 of the Exchange Act. F. SECTION 280G PAYMENT. In the unlikely event that the Severance Amount payments under this Agreement are determined by an independent accounting firm retained by Employee (but paid for by the Company) to constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended, (the "CODE") and any regulations thereunder, such Severance Amount shall be reduced by the amount necessary to avoid such classification. G. MEDICAL AND DENTAL BENEFITS. If Employee's employment by the Company or any subsidiary or successor of the Company is terminated because of Death, Disability, or Involuntary Termination, then to the extent that Employee or any of Employee's dependents may be covered under the terms of any medical and dental plans of the Company (or any subsidiary) immediately prior to the termination, the Company will provide Employee and those dependents with the same or equivalent coverages until three (3) months after any such termination of employment. The Company may, at its election, procure such coverages apart from, and outside of the terms of, the plans applicable to other employees. The Company's obligation to provide such coverages will be limited by the requirement that Employee and Employee's dependents comply with all of the conditions of the medical or dental plans applicable to employees generally and the Company is under no obligation to obtain special coverages for Employee which would not be covered by the plans applicable to employees generally. In consideration for these benefits, Employee must make contributions equal to those required from time to time from other employees for equivalent coverages under the medical or dental plans. If and to the extent that Employee is eligible to participate in a medical, dental or other health insurance plan of another employer after the termination of his employment by the Company, then the benefit provided by this section shall be eliminated or commensurately diminished. IX. LIFE INSURANCE. A. GROUP LIFE INSURANCE. The Company shall provide Employee with personal life insurance under the Company's group life insurance policy as in effect from time to time which shall be payable to a beneficiary designated by Employee in addition to, and not as a substitute for, any Severance Amount payable under Section VIII.B. above. Employee acknowledges that, while the Company currently maintains group life insurance which provides for a death benefit equal to three (3) times an officer's annual base salary at the time of death as well as an accidental death and dismemberment policy (the AD&D Policy") which also provides for an additional benefit in the same amount as the group life insurance if the cause of death is covered by the AD&D Policy, such coverages may be altered or amended in the future on a Company-wide basis, provided, however, that under no circumstances will such coverages be reduced unless other officers of comparable rank within the Company are correspondingly reduced. B. KEY MAN LIFE INSURANCE. Employee hereby consents to the purchase by the Company, at the Company's option, of one or more "key man" life insurance policies on 9 10 Employee's life naming the Company or its designee as beneficiary (the "Key Man Policies"); provided, however, that the Company shall not be required to obtain such insurance. Employee agrees that he shall take any reasonable actions which may be requested by the Company, and otherwise fully cooperate with the Company, in its efforts to purchase and maintain the Key Man Policies. The Key Man Policies will be owned by the Company and the proceeds made payable to the Company or its designee. If purchased by the Company, the Key Man Policies shall be for the purpose of providing funds necessary to obtain a replacement for Employee and for any other reasonable business purpose as may be determined by the Company in amounts sufficient to accomplish their intended purposes. X. DIRECTORS AND OFFICERS INSURANCE. The Company shall maintain and keep in force directors and officers liability insurance coverage on all directors and officers in such an amount as the Company deems reasonable and necessary under the circumstances but in no event less than $7.5 million of aggregate coverage. XI. POST-TERMINATION CONSULTING. In the event of Employee's Involuntary or Voluntary Termination, Employee agrees to provide services to the Company as a consultant for a period of ninety (90) days following the termination of his employment (the "Consulting Period"), in exchange for cash compensation at the rate of $100 per hour. While the Consulting Period will only begin after termination of employment under this Agreement, if the Company elects to utilize Employee's service as a consultant during the Consulting Period by written notice on or before such termination, Employee shall nevertheless continue to be an "employee" of the Company during the Consulting Period for purposes of the Company's Tandem Stock Option and Stock Appreciation Rights Plan and Stock Bonus Plan, although the scope of Employee's services and responsibilities shall be diminished in such manner and amounts as may be agreed upon by the Company and Employee. Employee shall have the right to decline to provide any consulting services requested by the Company after an Involuntary Termination or Voluntary Termination but such refusal will result in the forfeiture of Employee's right to the Severance Amount hereunder. If Employee does elect to provide consulting services, Employee shall be obligated to provide no more than ten (10) hours of consulting services per week during the Consulting Period, if and to the extent requested by the Company. Employee may determine to cease providing such services to the Company at any time but such a determination, to the extent it is made prior to the completion of the full ninety (90) day Consulting Period, shall proportionately reduce Employee's entitlement to the Severance Amount payable hereunder. XII. NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and delivered in person or sent by registered or certified mail to Employee's residence as indicated in Employee's personnel file at in the Company's records in the case of Employee or to its principal office in the case of the Company. XIII. WAIVER. The waiver of any provision of this Agreement shall not operate or be construed as a waiver of any other provision of this Agreement. No waiver shall be valid unless in writing and executed by the party to be charged therewith. XIV. SEVERABILITY/MODIFICATION. In the event that any clause or provision of this Agreement shall be determined to be invalid, illegal or unenforceable, such clause or provision may be severed or modified to the extent necessary, and, as severed and/or modified, this Agreement shall remain in full force and effect. 10 11 XV. ASSIGNMENT. Except for a transfer by will or by the laws of descent or distribution, Employee's right to receive payments or benefits under this Agreement shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise. In the event of any attempted assignment or transfer contrary to this paragraph, the Company shall have no liability to pay any amount so attempted to be assigned or transferred. Employee acknowledges that the services to be rendered under this Agreement are unique and personal. Accordingly, Employee may not assign such duties or obligations under this Agreement. XVI. SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns (including, without limitation, any company into or with which the Company may merge or consolidate). The Company agrees that it will not effect the sale or other disposition of all or substantially all of its assets unless either (i) the person or entity acquiring the assets or a substantial portion of the assets shall expressly assume by an instrument in writing all duties and obligations of the Company under this Agreement or (ii) the Company shall provide, through the establishment of a separate reserve or otherwise, for the payment in full of all amounts which are or may reasonably be expected to become payable to Employee under this Agreement. XVII. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement concerning the employment arrangement between the parties and shall, as of the effective date hereof, supersede all other such agreements between the parties, provided, however, that nothing in this Agreement shall prevent the Company from granting additional or special compensation or benefits to Employee after the date of execution of this Agreement. This Agreement may not be amended except by an agreement in writing signed by both parties. XVIII. GOVERNING LAW AND JURISDICTION. This Agreement shall be interpreted, construed, and enforced under the laws of the State of Colorado. The courts of the State of Colorado shall have sole jurisdiction and venue over all controversies which may arise with respect to this Agreement. XIX. TIME. In comparing any period of time prescribed or allowed by this Agreement, the day of the act, event or default from which the designated period of time begins to run shall not be included. Time accounting shall begin upon midnight of the following calendar day. All periods of time shall be assumed to be specified in calendar days unless otherwise noted. In the case of fractional days of time, the appropriate equivalent hours can be calculated and accounted for against midnight of the calendar day in which the period of time started. For purposes of calculating the duration of the covenant not to compete the time period of such covenant shall be extended by one day for each day that Employee competes with Company in violation of such covenant. XX. COUNTERPARTS. This Agreement may be signed in one or more counterparts which, taken together, shall constitute a single binding agreement between the parties. Photocopies or telecopies of the parties' original signatures hereto may be relied upon as originals for all purposes. 11 12 IN WITNESS WHEREOF, the parties have executed this Agreement the date and year indicated below. THE COMPANY: VARI-L COMPANY, INC. By: /s/ G. Peter Pappas ---------------------------------------- G. Peter Pappas, Chief Executive Officer EMPLOYEE: /s/ Timothy M. Micun Timothy Micun 12 EX-10.27 6 d90626ex10-27.txt EXECUTIVE EMPLOYMENT AGREEMENT 1 EXHIBIT 10.27 VARI-L COMPANY, INC. EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT, effective May 7, 2001, is made and entered into by and between VARI-L COMPANY, INC. (the "Company") and CHARLES R. BLAND ("Employee"). WHEREAS, the Company and Employee wish to enter into this Agreement to set forth the terms and conditions of employment; and WHEREAS, the Compensation Committee of the Board of Directors, comprised solely of disinterested directors, has determined to provide Employee with this employment agreement, including the severance package and other benefits provided hereby. NOW, THEREFORE, for good and valuable consideration, the parties hereto agree as follows: I. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby accepts employment, upon the terms and conditions hereinafter set forth. II. TERM. Subject to the provisions for termination as hereinafter provided, the term of this Agreement is for a period commencing May 1, 2001, and expiring May 1, 2003 (the "Initial Term"). On May 1 of each year, beginning in 2003, the term of this Agreement shall be automatically extended for an additional year without any further action on the part of the Company or Employee unless the Company or Employee gives written notice more than sixty (60) days before April 30 of any such year of its or his intention not to extend the term of this Agreement. III. DUTIES. Employee is engaged as President and Chief Executive Officer of the Company, to have complete responsibility for and authority over the management of the operations of the Company, including, but not limited to, overall management of the Company's Sales, Marketing, Research, Development and Engineering, Finance, Administration, Manufacturing, Operations, Human Resources and Quality Assurance departments or functions and supervision of the Vice Presidents or other officers or managers assigned to those departments, areas or functions, and to have full authority and responsibility, subject only to the general direction and control of the Board of Directors, for administering those operations of the Company in all respects. His power shall include authority to hire and fire personnel of the Company and to retain consultants when he deems necessary to implement the Company's policies. If Employee is elected or appointed a director of the Company during the term of this Agreement, Employee shall serve in such capacity or capacities without further compensation; but nothing herein shall be construed as requiring the Company, or anyone else, to cause the election or appointment of Employee as a director. IV. EXTENT OF SERVICES. Employee shall faithfully, industriously, and to the best of his ability, experience, and talents, perform all of the duties that may be required of and from him pursuant to this Agreement. Nothing herein shall be construed as preventing Employee from (a) investing his assets in such form or manner as will not require any services on the part of 2 Employee in the operations or the affairs of the companies in which such investments are made or (b) serving as a director, advisor, or consultant; provided, however, that such investments or services may not be in connection with a business which is in competition with the Company (excluding (i) indirect investments through mutual funds or other broad based investment vehicles, (ii) investments in debt instruments, and (iii) investments in less than 5% of the stock of any publicly held business). V. COMPENSATION AND EMPLOYEE BENEFITS. A. Annual Base Salary. For all services rendered by Employee under this Agreement, the Company shall pay Employee an annual base salary of at least $235,000, payable in equal bi-weekly installments. Any increases to the amount of such base salary shall be determined at the beginning of each fiscal year by the Compensation Committee of the Company's Board of Directors in its sole discretion on the basis of merit and the Company's financial success and progress but in no event shall such base salary be less than the annual base salary indicated in this paragraph. B. Stock Options. No later than thirty (30) days after Employee begins employment with the Company, the Compensation Committee of the Board of Directors of the Company shall grant Employee an option to purchase up to 85,000 shares of the Company's common stock pursuant to the Company's Tandem Stock Option and Stock Appreciation Rights Plan, as amended, at an exercise price equal to the fair market value of the Company's common stock as determined by the closing price of the Company's common stock as of the date of grant. Such options shall vest 25% per year beginning one year from the date of grant. Employee shall be eligible for future stock option grants at the same time and based on the same criteria as other executive officers of the Company. C. Bonus Compensation. Employee may receive bonuses, including but not limited to a performance-based bonus payable in cash as determined at the beginning of each fiscal year of the Company by the Compensation Committee of the Board of Directors in its sole discretion. One half of any such bonus award shall be based on the Company's overall financial and operational success and progress in the prior fiscal year and the other half shall be based on the extent to which Employee has achieved certain personal milestones as set by the Compensation Committee. It is anticipated that, if Employee is judged to have been wholly successful under the foregoing criteria, his annual bonus would be equal to approximately forty percent (40%) of his annual base salary for the preceding year. D. Vacation. Employee shall be entitled to accrue four (4) weeks of paid vacation for each year of service provided. Any accrued but unused vacation time shall be paid to Employee at or before the termination of his employment, in accordance with Company policy, in addition to any amounts due and payable to Employee under Section VIII hereof. Employee shall be required to take at least two (2) weeks vacation per year, including in at least one case a vacation lasting no less than five (5) consecutive business days. E. Employee Benefits. Employee shall be entitled to receive all of the rights, benefits, and privileges of an employee and an executive officer under any retirement, -2- 3 pension, profit-sharing, insurance, health and hospital, and other employee benefit plans of general application which may be now in effect or hereafter adopted by the Company. F. Working Facilities. Employee shall be furnished with a private office, stenographic help, and such other facilities and services suitable to Employee's position and adequate for the performance of the duties required by this Agreement. G. Expenses. Subject to limits which may be imposed by the Board of Directors, including any committee thereof, Employee is authorized to incur reasonable expenses in connection with his responsibilities in conducting the business of the Company, including expenses for entertainment, travel, and similar items. The Company will reimburse Employee for all such expenses upon the presentation by Employee, from time to time, of an itemized account of such expenditures, including receipts or other adequate documentation, or Employee may pay such expenses with a Company credit card, if a Company credit card is issued to Employee, and Employee shall appropriately document the business purpose of such expenditures. Employee's expenses must be submitted to and approved by the Audit Committee or another officer or employee designated by the Audit Committee to review and approve such expenses. H. Automobile. Employer will pay Employee an automobile allowance for the expense of leasing or financing an automobile, as well as for insurance, maintenance, fuel and repairs associated with such automobile. Any automobile for which Employee accepts this allowance must be suitable for Employee's use in performing services for the Company. The automobile allowance shall be payable in equal bi-weekly installments and shall in no event exceed $10,000.00 per year. If and to the extent that the automobile is not considered by the Company to have been used for business purposes, based upon documentation submitted to the Company at the Company's request, the Company will include the value of the non-business use of the automobile and other reimbursements made in connection therewith on Employee's Form W-2 or 1099 as income for each year such personal benefit is received. VI. PROPRIETARY INTERESTS OF COMPANY. Employee and the Company recognize that the Company is in a highly competitive business in a highly technical industry. The parties acknowledge that the success or failure of the Company depends largely on the development and use of certain proprietary and confidential information and trade secrets, including without limitation, information concerning any of the Company's patented components, research and development projects and in patent process components, and personal relationships with present and potential customers, suppliers, contractors, and governmental agencies as well as technology, procedures, systems, and techniques relating to the products developed or distributed by the Company (hereinafter collectively referred to as "Confidential Information"). Confidential Information is a substantial asset of the Company. Confidential Information will be disclosed to Employee in the normal course of operation. Employee acknowledges that Confidential Information is extremely valuable to the Company and must be protected from unauthorized use by the Company's competitors or other persons. Therefore, Employee agrees not to disclose or use, whether for the benefit of Employee or any other person or entity, at any time during or after his employment, -3- 4 any Confidential Information to any person or entity other than the Company or persons authorized by the Company to receive such Confidential Information. Employee recognizes that, during the term of his employment with the Company, he may develop new products, technology, processes, devices, inventions, or methods of production, including but not limited to computer hardware, software or "firmware," and may enhance, improve or perfect existing products, technology, processes, devices, inventions or methods of production (hereinafter collectively referred to as "Inventions"). As partial consideration for the salary and other benefits provided by the Company to the Employee, Employee hereby agrees that his entire work product while in the employ of the Company, including any Inventions, is the exclusive property of the Company. Employee also agrees to cooperate fully with the Company and to do whatever acts are reasonably necessary in order to obtain United States or foreign letters patent or copyrights, or both, and to vest the entire right and title thereto in the Company. Employee further agrees that the Company shall have the royalty-free right to use in its business, and to make, use, and sell such Inventions whether or not patentable, regardless of whether they are conceived or made by the Employee during the hours which he is employed by the Company or with the use of or assistance of the Company's facilities, materials or personnel. Except as required in his duties to the Company, Employee will not, directly or indirectly, use, disseminate, disclose, lecture upon, or publish articles concerning any Confidential Information without the prior written consent of the Company. Upon termination of his employment with the Company, all documents, records, notebooks, and similar repositories of or containing Confidential Information, including copies thereof, then in Employee's possession, whether prepared by Employee or others, will be left with the Company, and no copies thereof will be retained by the Employee. It is agreed that any breach of this section of the Agreement will cause immediate irreparable harm to the Company and monetary damages would be difficult if not impossible to ascertain. Therefore, the parties agree that upon any breach of any covenant in this section that the Company may obtain from the district court for the City and County of Denver, Colorado, or any other court of competent jurisdiction, an appropriate restraining order, preliminary injunction or other form of equitable relief with respect thereto. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other available remedies for such breach, including the recovery of damages, costs, and attorney fees. VII. NONCOMPETE AND NONSOLICITATION. During the term of this Agreement and for a period of the greater of (a) one year after termination or expiration of this Agreement or (b) the period during which a Severance Amount, as hereinafter defined, consulting arrangement or retirement benefit is being paid to Employee by the Company (the "Noncompete Period"), the Employee will not, directly or indirectly, own, manage, operate, control, provide services to, be employed by, participate in, or be connected in any manner with the ownership, management, operation, or control of any business which is similar to the type of business conducted by the Company and which conducts such business or sells its products within and to the same market as the Company's market at the time of Employee's activity or, after the termination of this -4- 5 Agreement, at the time of such termination. Employee certifies that his employment with the Company will not breach a previous employment agreement. Employee agrees not to engage in the unauthorized use of the proprietary assets of others during the term of his employment by the Company. Employee agrees not to enter into any other employment agreement, oral or written, which will run concurrently, in whole or in part, with Employee's employment by the Company. Employee agrees not to solicit any other Company employee during the Noncompete Period to leave the employ of the Company or to provide services to another person or business in lieu of providing services to the Company, including but not limited to services to a competitor of the Company, except when such other employee's departure is determined by management of the Company to be in the Company's best interests. It is agreed that any breach of this section of the Agreement will cause immediate irreparable harm to the Company and that monetary damages for such breach would be difficult if not impossible to ascertain. Therefore, the parties agree that upon any breach of the covenants of this section the Company may obtain from the district court for the City and County of Denver, Colorado, or any other court of competent jurisdiction, an appropriate restraining order, preliminary injunction or other form of equitable relief with respect thereto. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other available remedies for such breach, including the recovery of damages, costs, and attorney fees. The foregoing agreement not to compete shall not be held invalid because of the scope of the territory or the actions restricted thereby; but any judgment by a court of competent jurisdiction may define the maximum territory and actions subject to, and restricted by, this paragraph. Notwithstanding the foregoing, in the event of a Change of Control, as hereinafter defined, not recommended by a majority of the Board of Directors of the Company as constituted prior to the date of such Change of Control, this noncompete agreement shall terminate upon the date of such Change of Control. VIII. TERMINATION OF EMPLOYMENT. A. TERMINATION BY MUTUAL AGREEMENT. The Company and Employee may agree to terminate this Agreement on terms and conditions mutually acceptable to them as of the date of termination. B. DEATH. In the event of Employee's death, the Company shall pay to any beneficiary designated by Employee or, if no such beneficiary has been designated, to his estate, an amount equal to the then annual base salary for the greater of (a) one (1) year or (b) the remaining term of this Agreement without additional extensions, together with any bonuses which the Company's Board of Directors shall determine in its sole discretion to be due and payable to Employee. If Employee's beneficiary or estate receives any proceeds from any life insurance policies the premiums of which were being paid for by the Company at the time of Employee's death other than the Group Life Insurance referred to in Section IX.A hereof, then the payments of annual base salary and bonuses shall be reduced by the amount of such proceeds from such life insurance policies. -5- 6 C. DISABILITY. If Employee becomes Disabled during the term of employment or during the Consulting Period, the Company, at its option, may thereafter, upon written notice to Employee or Employee's personal representative, terminate the employment or Consulting Agreement. Employee shall thereafter be eligible to receive disability benefits under the Company's standard employee disability insurance policy like any other employee. D. VOLUNTARY OR INVOLUNTARY TERMINATION. Upon a Voluntary or Involuntary Termination as defined herein, Employee shall continue to render his services to the Company, if and to the extent required by the Company, up to the date of such Voluntary or Involuntary Termination as referenced in the written notice of termination submitted to Employee by the Company, or vice versa, and shall be paid (i) the unpaid amount of the then applicable annual base salary up to the date of such Voluntary or Involuntary Termination, (ii) any bonuses which the Company's Board of Directors may determine, in its sole discretion, to be due and payable to Employee, and (iii) the Severance Amount, if any, as defined herein. In the event of a Voluntary Termination, as a condition to Employee's receipt of the foregoing payments to Employee, during the time between the submission of a notice of termination by Employee and the effective date of termination set forth in such notice, Employee shall continue to diligently provide the Company with such services as the Company may request, if any. In the event of an Involuntary Termination, all unvested stock options and stock appreciation rights that have previously been granted to Employee will fully vest and remain exercisable for a period of time equal to the later of three (3) months after such termination. For purposes hereof, termination of employment shall not be deemed to have occurred until the end of the Consulting Period, as defined below, and any periods of time after termination during which Employee was prohibited from selling the shares underlying his options by the Company's Insider Trading Policy shall be excluded from the calculation of the three (3) month post-termination exercise period. E. DEFINITIONS. All the terms defined in this Section shall have the meanings given below throughout this Agreement. 1. "CHANGE IN DUTIES, COMPENSATION, OR BENEFITS" shall mean any one or more of the following: a. a significant and detrimental change in the nature or scope of Employee's authority, responsibilities or duties from those currently applicable to him; b. a reduction in Employee's annual base salary from that currently provided to him; c. a diminution in Employee's eligibility to participate in a bonus, stock option, incentive award or any other compensation plan which provides Employee an opportunity to receive compensation, except for: (i) changes in the eligibility requirements for plans that are applicable to employees generally; (ii) changes in plans that are applicable to all executives and result in a diminution of Employee's benefits under such plan that is fair and proportional as compared to the diminution of benefits for all executives; and (iii) changes that are required by applicable law; -6- 7 d. a material diminution in employee benefits (including but not limited to medical, dental or life insurance and long-term disability plans) and perquisites currently applicable to Employee, except for: (i) changes in the eligibility requirements for benefits that are applicable to employees generally; (ii) changes in benefits and perquisites that are applicable to all executives and result in a diminution of Employee's benefits that is fair and proportional as compared to the diminution for all executives; and (iii) changes that are required by applicable law; e. a change in the location of Employee's principal place of employment by the Company (including its subsidiaries) by more than twenty-five (25) miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; or f. a reasonable determination by a majority of those persons comprising the Board of Directors of the Company prior to a Change of Control (even if such determination is made after such Change of Control) that, as a result of a Change of Control and a change in circumstances thereafter significantly affecting his position, Employee is unable to exercise the functions or duties attached to his position immediately prior to the date on which a Change of Control occurs. 2. "CHANGE OF CONTROL" shall be deemed to have occurred if: a. any "person," including a "group" as determined in accordance with Section 13(d)(3) of the Securities Exchange Act of 1934 (the "EXCHANGE ACT"), is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; b. as a result of, or in connection with, any tender offer or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions (a "TRANSACTION"), the persons who were directors of the Company before the Transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company; c. the Company is merged or consolidated with another corporation or entity and, as a result of the merger or consolidation, less than 80% of the outstanding voting securities of the surviving corporation or entity is then owned in the aggregate by the former stockholders of the Company; d. a tender offer or exchange offer is made and consummated for the ownership of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding voting securities; or e. the Company transfers all or substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Company. -7- 8 3. DISABLED" OR "DISABILITY" shall mean mental or physical illness or condition rendering Employee incapable of performing any portion of Employee's normal duties with the Company even after the Company's reasonable accommodation of any such disability in accordance with the Americans with Disabilities Act and the Colorado Nondiscrimination statute. 4. "INVOLUNTARY TERMINATION" shall mean any termination except: a. Voluntary Termination; b. termination by mutual agreement; c. termination as a result of death; or d. Employee's voluntary retirement from employment or mandatory retirement from employment pursuant to a retirement plan to which Employee was subject prior to any Change of Control ("RETIREMENT"). 5. "SEVERANCE AMOUNT" is equal to: a. In the case of an Involuntary Termination occurring less than six (6) months after a Change of Control, Severance Amount is equal to the greater of (i) the Employee's annual base salary multiplied by the number of years (including fractional amounts) remaining in the term of this Agreement or (ii) the Employee's average annual compensation from the Company over the last five years (or a shorter period, if Employee has not been employed for five years) times the number of years (including fractional amounts) that Employee has been employed by the Company under this Agreement up to a maximum multiple of 2.99. In the case of an Involuntary Termination not following a Change of Control, the Severance Amount is equal to one (1) year's annual base salary. In the event of a Voluntary Termination, no Severance Amount shall be payable until Employee has completed one (1) year of service under this Agreement, in which case the Severance Amount will be equal to one (1) month's salary for every year of service completed under this Agreement, up to a maximum of three (3) months. In the event of termination resulting from Employee's death, the Severance Amount shall be the amounts set forth in Section VIII.B above. In the event of termination resulting from Retirement, the Severance Amount shall equal to one (1) month's salary for every year of service completed under this Agreement up to a maximum of twelve (12) months. If an Involuntary Termination follows a finding by the Board of Directors or a committee of disinterested members of the Board that Employee engaged in wilful misconduct in the performance of his duties, including but not limited to an intentional act of fraud, embezzlement, self-dealing or misappropriation of Company property, then the Severance Amount will be reduced to six (6) months' annual base salary minus the Company's out of pocket loss, including attorneys fees and other costs, resulting from such wilful misconduct. The Severance Amount shall be payable on the Company's regular bi-weekly payroll dates over the same period of time used to calculate the amount payable hereunder following such Involuntary Termination, provided, however, that for an Involuntary Termination following within six (6) months of a Change of Control, then the -8- 9 Severance Amount shall be payable in a lump sum no later than ten (10) days following the date of termination. b. In the case of a Voluntary Termination or an Involuntary Termination resulting from Employee's resignation following a Change in Duties, Compensation or Benefits, Employee must give the Company proper notice of such Termination in order to receive the Severance Amount. For purposes hereof, proper notice is defined as written notice received by the Company not less than thirty (30) days prior to the date of termination of employment. c. In the case of an Involuntary Termination by the Company, the Company must give Employee not less than thirty (30) days prior written notice of such termination. d. Notwithstanding any other provision of this Agreement, in the event that the Employee is found to have violated the non-compete provisions of Section VII of this Agreement by a court of competent jurisdiction ("BREACH"), all Severance Amounts due and owing under this Agreement shall be terminated upon the effective date of the Breach and the Employee shall reimburse the Company for any portion of the Severance Amount previously paid to Employee. 6. "VOLUNTARY TERMINATION" shall mean any termination which results from a resignation by the Employee other than a resignation following a Change in Duties, Compensation, or Benefits as defined herein. 7. "VOTING SECURITIES" shall mean any securities which ordinarily possess the power to vote in the election of directors without the occurrence of any pre-condition or contingency other than the passage of time. F. Section 280G Payment. In the event that the Severance Amount payments under this Agreement are determined by an independent accounting firm retained by Employee (but paid for by the Company) to constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended, (the "CODE") and any regulations thereunder, the Company agrees to increase the Severance Amount by the amount necessary to put the Employee in the position he would be in if Code Sections 280G and 4999 or any successor provisions to the Code which are designed to limit or restrict such "excess parachute payments" did not exist. G. Medical and Dental Benefits. If Employee's employment by the Company or any subsidiary or successor of the Company is terminated because of Death, Disability, or Involuntary Termination, then to the extent that Employee or any of Employee's dependents may be covered under the terms of any medical and dental plans of the Company (or any subsidiary) immediately prior to the termination, the Company will provide Employee and those dependents with the same or equivalent coverages until three (3) months after any such termination of employment. The Company may, at its election, procure such coverages apart from, and outside of the terms of, the plans applicable to other employees. The Company's obligation to provide -9- 10 such coverages will be limited by the requirement that Employee and Employee's dependents comply with all of the conditions of the medical or dental plans applicable to employees generally and the Company is under no obligation to obtain special coverages for Employee which would not be covered by the plans applicable to employees generally. In consideration for these benefits, Employee must make contributions equal to those required from time to time from other employees for equivalent coverages under the medical or dental plans. If and to the extent that Employee is eligible to participate in a medical, dental or other health insurance plan of another employer after the termination of his employment by the Company, then the benefit provided by this section shall be eliminated or commensurately diminished. apart from, and outside of the terms of, the plans applicable to other employees. IX. LIFE INSURANCE. A. Group Life Insurance. The Company shall provide Employee with personal life insurance under the Company's group life insurance policy as in effect from time to time which shall be payable to a beneficiary designated by Employee in addition to, and not as a substitute for, any Severance Amount payable under Section VIII.B. above. Employee acknowledges that, while the Company currently maintains group life insurance which provides for a death benefit equal to three (3) times an officer's annual base salary at the time of death as well as an accidental death and dismemberment policy (the "AD&D POLICY") which also provides for an additional benefit in the same amount as the group life insurance if the cause of death is covered by the AD&D Policy, such coverages may be altered or amended in the future on a Company-wide basis, provided, however, that under no circumstances will such coverages be reduced unless other officers of comparable rank within the Company are correspondingly reduced. B. Key Man Life Insurance. Employee hereby consents to the purchase by the Company, at the Company's option, of one or more "key man" life insurance policies on Employee's life naming the Company or its designee as beneficiary (the "KEY MAN POLICIES"); provided, however, that the Company shall not be required to obtain such insurance. Employee agrees that he shall take any reasonable actions which may be requested by the Company, and otherwise fully cooperate with the Company, in its efforts to purchase and maintain the Key Man Policies. The Key Man Policies will be owned by the Company and the proceeds made payable to the Company or its designee. If purchased by the Company, the Key Man Policies shall be for the purpose of providing funds necessary to obtain a replacement for Employee and for any other reasonable business purpose as may be determined by the Company in amounts sufficient to accomplish their intended purposes. X. DEFERRED PAYMENTS. In the event that the Company is prohibited from deducting any payment made to Employee as a compensation expense as a result of Code ss. 162(m) or any other provision of the Code and such payment would be deductible by the Company if made in a future tax year, then the Company may defer making the non-deductible portion of that payment until the first day of the tax year in which any portion of that payment becomes deductible, at which time the Company shall pay so much of the deferred payment as is deductible. In the event that any payment obligation of the Company is deferred as a result of this Article X, the -10- 11 Company shall pay interest to the Employee on the deferred portion of the payment at a rate of ten percent (10%) per annum. XI. DIRECTORS AND OFFICERS INSURANCE. The Company shall procure directors and officers liability insurance coverage on all directors and officers in such an amount as the Company deems reasonable and necessary under the circumstances but in no event less than $7.5 million of aggregate coverage. XII. POST-TERMINATION CONSULTING. In the event of Employee's Involuntary or Voluntary Termination, Employee agrees to provide services to the Company as a consultant for a period of ninety (90) days following the termination of his employment (the "CONSULTING PERIOD"), in exchange for cash compensation at the rate of $100 per hour. While the Consulting Period will only begin after termination of employment under this Agreement, Employee shall nevertheless continue to be an "employee" of the Company during the Consulting Period for purposes of the Company's Tandem Stock Option and Stock Appreciation Rights Plan and Stock Bonus Plan, although the scope of Employee's services and responsibilities shall be diminished in such manner and amounts as may be agreed upon by the Company and Employee. Employee shall have the right to decline to provide any consulting services after an Involuntary Termination or Voluntary Termination but such refusal will result in the forfeiture of Employee's right to the Severance Amount hereunder. If Employee does elect to provide consulting services, Employee shall be obligated to provide no more than ten (10) hours of consulting services per week during the Consulting Period, if and to the extent requested by the Company. Employee may determine to cease providing such services to the Company at any time but such a determination, to the extent it is made prior to the completion of the full ninety (90) day Consulting Period, shall proportionately reduce Employee's entitlement to the Severance Amount payable hereunder. XIII. NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and delivered in person or sent by registered or certified mail to Employee's residence in the case of Employee or to its principal office in the case of the Company. XIV. WAIVER. The waiver of any provision of this Agreement shall not operate or be construed as a waiver of any other provision of this Agreement. No waiver shall be valid unless in writing and executed by the party to be charged therewith. XV. SEVERABILITY/MODIFICATION. In the event that any clause or provision of this Agreement shall be determined to be invalid, illegal or unenforceable, such clause or provision may be severed or modified to the extent necessary, and, as severed and/or modified, this Agreement shall remain in full force and effect. XVI. ASSIGNMENT. Except for a transfer by will or by the laws of descent or distribution, Employee's right to receive payments or benefits under this Agreement shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise. In the event of any attempted assignment or transfer contrary to this paragraph, the Company shall have no liability to pay any amount so attempted to be assigned or transferred. Employee -11- 12 acknowledges that the services to be rendered under this Agreement are unique and personal. Accordingly, Employee may not assign such duties or obligations under this Agreement. XVII. SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns (including, without limitation, any company into or with which the Company may merge or consolidate). The Company agrees that it will not effect the sale or other disposition of all or substantially all of its assets unless either (i) the person or entity acquiring the assets or a substantial portion of the assets shall expressly assume by an instrument in writing all duties and obligations of the Company under this Agreement or (ii) the Company shall provide, through the establishment of a separate reserve or otherwise, for the payment in full of all amounts which are or may reasonably be expected to become payable to Employee under this Agreement. XVIII. ENTIRE AGREEMENT. This instrument contains the entire agreement concerning the employment arrangement between the parties and shall, as of the effective date hereof, supersede all other such agreements between the parties, provided, however, that nothing in this Agreement shall prevent the Company from granting additional or special compensation or benefits to Employee after the date of execution of this Agreement. This Agreement may not be amended except by an agreement in writing signed by both parties. XIX. GOVERNING LAW AND JURISDICTION. This Agreement shall be interpreted, construed, and enforced under the laws of the State of Colorado. The courts of the State of Colorado shall have sole jurisdiction and venue over all controversies which may arise with respect to this Agreement. XX. TIME. In comparing any period of time prescribed or allowed by this Agreement, the day of the act, event or default from which the designated period of time begins to run shall not be included. The last day of the period so computed shall be included, unless it is a Sunday or legal holiday, in which event the period runs until the end of the next day which is not a Sunday or legal holiday. For purposes of this paragraph a legal holiday shall mean any day which banks are required to be closed in the State of Colorado. For purposes of calculating the duration of the covenant not to compete the time period of such covenant shall be extended by one day for each day that Employee competes with Company in violation of such covenant. -12- 13 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year indicated above. THE COMPANY: VARI-L COMPANY, INC. By: /s/ G. Peter Pappas ------------------------------- G. Peter Pappas, President and Chief Executive Officer EMPLOYEE: /s/ Charles R. Bland ---------------------------------- Charles R. Bland -13- EX-23 7 d90626ex23.txt CONSENT OF KPMG 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors Vari-L Company, Inc.: We consent to incorporation by reference in the registration statement (No. 33-88666, 33-81045, 333-45137, and 333-81915) on Form S-8 of Vari-L Company, Inc. of our report dated August 31, 2001, except for notes 3 and 12 as to which the date is September 17, 2001, relating to the balance sheets of Vari-L Company, Inc. as of June 30, 2001 and 2000, and the related statements of operations, stockholders' equity and cash flows for the year ended June 30, 2001, and the related Schedule II--Valuation and Qualifying Accounts for the year ended June 30, 2001, which report appears in the June 30, 2001, annual report on Form 10-K of Vari-L Company, Inc. (signed) KPMG LLP Denver, Colorado September 25, 2001