0001035704-01-500433.txt : 20011031 0001035704-01-500433.hdr.sgml : 20011031 ACCESSION NUMBER: 0001035704-01-500433 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011029 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARI L CO INC CENTRAL INDEX KEY: 0000917173 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 060678347 STATE OF INCORPORATION: CO FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23866 FILM NUMBER: 1769088 BUSINESS ADDRESS: STREET 1: 4895 PEORIA STREET CITY: DENVER STATE: CO ZIP: 80239 BUSINESS PHONE: 3033711560 MAIL ADDRESS: STREET 1: 11101 EAST 51ST AVENUE CITY: DENVER STATE: CO ZIP: 80239 10-Q 1 d91249e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File No. 0-23866 September 30, 2001 VARI-L COMPANY, INC. (Exact name of Registrant as specified in its charter.) Colorado 06-0679347 ------------------------ ------------------------------- (State of Incorporation) (I.R.S. Employer identification No.) 4895 Peoria Street Denver, Colorado 80239 ---------------------- (Address of principal executive offices) (303) 371-1560 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of each of the issuer's classes of common stock, as of September 30, 2001:
Class of Securities Outstanding Securities ------------------- ---------------------- $0.01 par value 7,128,123 shares Common shares
VARI-L COMPANY, INC. September 30, 2001 Index Part I. Financial Information Item 1. Financial Statements: Balance Sheets, September 30, 2001 (unaudited) and June 30, 2001 2 Statements of Operations, three months ended September 30, 2001 and 2000 (unaudited) 3 Statements of Stockholders' Equity, three months ended September 30, 2001 (unaudited) and year ended June 30, 2001 4 Statements of Cash Flows, three months ended September 30, 2001 and 2000 (unaudited) 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 Part II. Other Information Item 1. Legal Proceedings 16 Item 2. Changes in Securities 19 Item 3. Defaults upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19
1 VARI-L COMPANY, INC. Balance Sheets (in thousands of dollars)
SEPTEMBER 30, JUNE 30, ASSETS 2001 2001 ------------- ---------- (unaudited) Current assets: Cash and cash equivalents $ 1,683 2,013 Trade accounts receivable, less allowance for doubtful accounts of $212 and $279, respectively 4,276 5,942 Inventories 3,119 3,640 Prepaid expenses and other current assets 697 645 ------------- ---------- Total current assets 9,775 12,240 ------------- ---------- Property and equipment: Machinery and equipment 11,714 11,616 Furniture and fixtures 839 822 Leasehold improvements 1,499 1,500 ------------- ---------- 14,052 13,938 Less accumulated depreciation and amortization 6,822 6,362 ------------- ---------- Net property and equipment 7,230 7,576 Intangible and other assets, net of accumulated amortization of $121 and $109, respectively 637 638 ------------- ---------- Total assets $ 17,642 20,454 ============= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 1,261 1,669 Accrued compensation 1,004 1,286 Other accrued expenses 422 428 Notes payable and current installments of long-term obligations 756 1,764 ------------- ---------- Total current liabilities 3,443 5,147 Long-term obligations 1,272 1,321 Other liabilities 157 157 ------------- ---------- Total liabilities 4,872 6,625 ------------- ---------- Stockholders' equity: Common stock, $.01 par value, 50,000,000 shares authorized; 7,128,123 and 7,107,161 shares issued and outstanding, respectively 71 71 Additional paid-in capital 36,877 36,829 Unamortized stock compensation cost (66) (79) Accumulated deficit (24,112) (22,992) ------------- ---------- Total stockholders' equity 12,770 13,829 ------------- ---------- Commitments and contingencies Total liabilities and stockholders' equity $ 17,642 20,454 ============= ==========
See accompanying notes to financial statements. 2 VARI-L COMPANY, INC. Statements of Operations (in thousands of dollars, except share and per share data)
THREE MONTHS THREE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 ------------- ------------- (unaudited) (unaudited) Net sales $ 5,676 11,495 Cost of goods sold 3,530 6,138 ------------- ------------- Gross profit 2,146 5,357 ------------- ------------- Operating expenses: Selling 654 1,067 General and administrative 1,879 1,578 Research and development 607 1,514 Expenses relating to accounting restatements and the related shareholder litigation 85 1,248 ------------- ------------- Total operating expenses 3,225 5,407 ------------- ------------- Operating loss (1,079) (50) Other income (expense): Interest income 18 158 Interest expense (50) (329) Other, net (9) 20 ------------- ------------- Total other income (expense) (41) (151) ------------- ------------- Net loss $ (1,120) (201) ============= ============= Loss per share, basic and diluted $ (0.16) (0.03) ============= ============= Weighted average shares outstanding, basic and diluted 7,123,456 7,070,702 ============= =============
See accompanying notes to financial statements. 3 VARI-L COMPANY, INC. Statements of Stockholders' Equity (in thousands of dollars)
UNAMORTIZED COMMON STOCK ADDITIONAL STOCK TOTAL ------------------- PAID-IN COMPENSATION ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL COST DEFICIT EQUITY ---------- ------ ---------- ------------ ----------- ------------- Balance, June 30, 2000 7,070,423 71 40,525 (4,318) (21,593) 14,685 Common stock issued under employee stock purchase plan 35,388 -- 45 -- -- 45 Common stock issued under stock award plan 1,350 -- 11 -- -- 11 Stock options forfeited -- -- (219) 219 -- -- Amortization of stock compensation cost -- -- -- 487 -- 487 Reversal of stock compensation due to reformation -- -- (3,533) 3,533 -- -- Net loss -- -- -- -- (1,399) (1,399) ---------- ------ ---------- ------------ ----------- ------------- Balance, June 30, 2001 7,107,161 $ 71 36,829 (79) (22,992) 13,829 Common stock issued under employee stock purchase plan (unaudited) 20,412 -- 48 -- -- 48 Common stock issued under stock award plan (unaudited) 550 -- -- -- -- -- Amortization of stock compensation cost (unaudited) -- -- -- 13 -- 13 Net loss (unaudited) -- -- -- -- (1,120) (1,120) ---------- ------ ---------- ------------ ----------- ------------- Balance September 30, 2001 (unaudited) 7,128,123 $ 71 36,877 (66) (24,112) 12,770 ========== ====== ========== ============ =========== =============
See accompanying notes to financial statements. 4 VARI-L COMPANY, INC. Statement of Cash Flows (in thousands of dollars)
THREE MONTHS THREE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 ------------- ------------- (unaudited) (unaudited) Net loss $ (1,120) (201) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation of property and equipment 489 406 Loss on disposal of assets 12 -- Amortization of intangible assets 8 7 Common stock issued under profit sharing and stock award plans -- 8 Amortization of stock compensation 13 211 Changes in operating assets and liabilities: Trade accounts receivable, net 1,666 (1,835) Inventories, net 521 166 Prepaid expenses and other current assets (52) (423) Trade accounts payable (408) (1,289) Accrued compensation (282) 344 Other accrued expenses and liabilities (6) 59 ------------- ------------- Total adjustments 1,961 (2,346) ------------- ------------- Cash provided by (used in) operating activities 841 (2,547) ------------- ------------- Cash flows from investing activities: Purchases of property and equipment (175) (281) Proceeds from sale of equipment 20 -- Increase (decrease) in other assets (11) (8) ------------- ------------- Cash used in investing activities (166) (289) ------------- ------------- Cash flows from financing activities: Increase (decrease) in bank overdraft -- 486 Proceeds from notes payable 1,211 -- Payments of notes payable (2,199) (1,600) Proceeds from long-term obligations -- -- Payments of long-term obligations (69) (16) Amortization of debt issue costs 4 -- Proceeds from stock options exercised -- -- Proceeds from common stock issued under stock purchase plan 48 -- ------------- ------------- Cash provided by (used in) financing activities (1,005) (1,130) ------------- ------------- Increase (decrease) in cash and cash equivalents (330) (3,966) Cash and cash equivalents at beginning of period 2,013 11,030 ------------- ------------- Cash and cash equivalents at end of period $ 1,683 7,064 ============= ============= Supplemental disclosure of cash flow information: Cash paid for interest $ 40 477 ============= ============= Cash paid for income taxes $ -- -- ============= =============
See accompanying notes to financial statements. 5 VARI-L COMPANY, INC. Notes to Financial Statements Three months ended September 30, 2001 and 2000 (1) BASIS OF PRESENTATION The accompanying financial statements of the Company have been prepared without audit (except for the balance sheet information as of June 30, 2001, which is derived from the Company's audited financial statements). Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the period ended June 30, 2001. In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations for the periods presented. Interim results of operations for the three months ended September 30, 2001 are not necessarily indicative of operating results that can be expected for the full year. (2) INVENTORIES Inventories, net of allowances for excess and obsolete items, consist of the following:
SEPTEMBER 30, JUNE 30, 2001 2001 ------------- ------------ (in thousands of dollars) Finished goods $ 414 463 Work-in-process 483 623 Raw materials 2,222 2,554 ------------- ------------ $ 3,119 3,640 ============= ============
(3) NOTES PAYABLE AND LONG-TERM OBLIGATIONS Notes payable and long-term obligations consist of the following:
SEPTEMBER 30, JUNE 30, 2001 2001 ------------- ------------ (in thousands of dollars) Notes payable under Revolving Credit Facility: Revolving loan $ 493 1,481 Term Loan 1,464 1,500 Promissory notes 1 21 Capital lease obligations 70 83 ------------- ------------ 2,028 3,085 Less current installments 756 1,764 ------------- ------------ Long-term obligations $ 1,272 1,321 ============= ============
On June 28, 2001, the Company entered into a credit agreement with Wells Fargo Business Credit, Inc (the "Credit Facility"). The Credit Facility provides for a $6.0 million secured revolving line of 6 VARI-L COMPANY, INC. Notes to Financial Statements Three months ended September 30, 2001 and 2000 credit ("Revolving Loan"), up to a $2.5 million secured term loan ("Term Loan"), and a $1.5 million secured capital expenditures loan ("Capital Expenditures Loan") (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. 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 September 30, 2001 was 6.5%. 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 September 30, 2001, the Company had additional borrowing availability of $2.0 million 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 September 30, 2001 was 7.0%. 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 consisted of a $20.0 million 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. (4) INCOME TAXES For the three months ended September 30, 2001 and 2000, the Company recorded no provision for federal or state income taxes since a valuation allowance was provided for the income tax benefit of the net operating losses incurred during those periods. (5) EXPENSES OF ACCOUNTING RESTATEMENTS, SHAREHOLDER LITIGATION AND RELATED MATTERS As discussed in note 6, in early 2000, management of the Company commenced efforts to restate its previously issued financial statements after being notified by the Securities and Exchange Commission (the Commission) that the Commission was investigating its accounting and reporting practices. Certain costs incurred in conjunction with these efforts have been separately classified on the Company's statements of operations as "expenses relating to accounting restatements and the related shareholder litigation." Expenses included in this classification include the cost of external 7 VARI-L COMPANY, INC. Notes to Financial Statements Three months ended September 30, 2001 and 2000 counsel for services provided in connection with shareholder lawsuits and the Commission's investigation of the Company, the cost of certain consultants and temporary labor hired to assist in the accounting restatements, and reimbursements to current and former employees of the Company for their legal fees and expenses. The accounting restatements were completed in February 2001, however the Company continues to incur costs related to shareholder litigation. (6) LITIGATION, COMMITMENTS AND CONTINGENCIES SECURITIES AND EXCHANGE COMMISSION INVESTIGATION In September 2001, the Company agreed to a settlement with the Securities and Exchange Commission under which the Company, without admitting or denying that it violated any laws, consented to the entry of an injunction prohibiting future violations by the Company of certain periodic reporting, record keeping, internal controls, proxy solicitation and antifraud provisions of the Securities Exchange Act of 1934. The proposed settlement would not require the Company to pay any civil penalties or money damages. The settlement has been submitted to the federal district court in Denver for its approval, which the Company considers to be likely. The Commission's complaint also named certain of the Company's current and former officers as defendants, some of whom have also settled with the Commission. PRIVATE SECURITIES CLASS ACTION A number of private shareholder class actions alleging violations of federal securities laws were filed against the Company and certain of its former officers in the United States District Court for the District of Colorado beginning in June 2000. On August 30, 2000, all of these class actions were consolidated into a single action, and the Company's obligation to respond to the complaints was deferred until such time as the lead plaintiff for the purported class files an amended complaint. On October 9, 2001, the plaintiff filed a consolidated amended class action complaint alleging violations of the general antifraud provision of the Exchange Act, Section 10(b), and Rule 10b-5 promulgated thereunder, and vicarious liability of the individual defendants for any violations by the Company as "controlling persons" under Section 20(a) of the Exchange Act. The complaint seeks compensatory damages in an unspecified amount, attorneys' fees and costs of suit, and any other relief the court deems just and proper. While there can be no assurance that it will be successful in its defense of this lawsuit, the Company believes that it has valid defenses to the claims alleged against it and intends to vigorously defend itself. Although the Company previously engaged in preliminary 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, irrespective of the outcome with respect to the Company, the individual defendants may have claims against the Company for advancement or indemnification of their attorneys fees and other costs of defense, which claims may be material. 8 VARI-L COMPANY, INC. Notes to Financial Statements Three months ended September 30, 2001 and 2000 SHAREHOLDER DERIVATIVE SUIT On August 4, 2000, a shareholder derivative action was filed, purportedly on behalf of the Company, in Colorado state court in Denver against the same officers named in the class action as well as the members of the Company's board of directors at the time. The Company was named in that action as a nominal defendant. The derivative complaint alleged many of the same facts as in the class actions in federal court, claiming that those facts demonstrate that the individual defendants 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. On September 24, 2001, the plaintiff from the dismissed action filed an amended complaint seeking to reinstate that case, claiming that the requirements for a prior demand on the Company's shareholders and its board of directors could not be met or would be futile. The Company has filed a motion to dismiss on various grounds, including the failure to make the required demands, the failure to commence a new action rather than trying to revive the dismissed case, and the availability of new management and a new independent Board member to evaluate the merits, and the timing, of any claims to be brought by the Company against the individual defendants. DECLARATORY JUDGMENT ACTION BY EXCESS INSURER On June 5, 2001, Agricultural Excess and Surplus Insurance Company ("AESIC"), which had issued to the Company a $2.5 million excess directors and officers liability insurance policy for the period of time covered by the shareholder and class action litigation referenced above, filed suit in federal 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 the insurer. The Company is also seeking coverage from Reliance Insurance Company ("Reliance"), the issuer of the $5 million primary directors and officers liability insurance policy in effect at the same time as the AESIC policy. Since May 29, 2001, Reliance has been operating under the supervision of the Pennsylvania Insurance Commissioner pursuant to an Order of Rehabilitation entered by the Commonwealth Court of Pennsylvania against Reliance. On October 3, 2001, the court entered an order of liquidation of Reliance. Reliance did not inform the Company whether it intended to dispute coverage under its policy before the order of liquidation was entered. As a result, Reliance's defenses to the Company's claim, if any, will be considered as part of the liquidation process, when the Company files the required notice of claim with the court. There can be no assurance that the liquidator will not dispute Reliance's obligation to provide coverage to the Company or its officers and directors or that there will be sufficient financial resources to satisfy the Company's claim. Any 9 VARI-L COMPANY, INC. Notes to Financial Statements Three months ended September 30, 2001 and 2000 such failure could have an adverse effect on the Company's future financial results, ability to resolve the litigation pending against the Company and its officers and directors, and on the Company's liability for indemnification of those officers and directors. As of the date hereof, the Company is unable to reasonably estimate the possible loss, if any, associated with any of these matters. OTHER The Company is a party to other legal proceedings and claims in the ordinary course of its business. The Company believes that the outcome of these other matters will not have a material adverse affect on its financial condition, results of operations or liquidity. 10 VARI-L COMPANY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations for the Three Months Ended September 30, 2001 Compared to the Three Months Ended September 30, 2000 Net Sales Net sales for the three months ended September 30, 2001 decreased 50.4% to $5.7 million compared with $11.5 million for the three months ended September 30, 2000. This decline is primarily due to a decrease in demand for commercial signal source products consistent with an overall slowdown in the wireless telecommunications industry. Revenue from commercial signal source products was $4.3 million for the three months ended September 30, 2001, a 54.3% decrease from $9.4 million for the three months ended September 30, 2000. Revenue from all other products was $1.4 million for the three months ended September 30, 2001, a 7.7% increase from $1.3 million for the three months ended September 30, 2000. Also included in the three months ended September 30, 2000, was a significant end of life production run generating net sales of $809,000. Gross Profit Gross profit for the three months ended September 30, 2001 decreased 61.1% to $2.1 million, or 36.8% of net sales, compared with $5.4 million, or 47.0% of net sales, for the three months ended September 30, 2000. Included in cost of goods sold for the three months ended September 30, 2001 is a charge of $56,000 for an adjustment to inventory carrying costs. Included in cost of goods sold for the three months ended September 30, 2000 is a charge of $546,000 for excess and obsolete inventory. The lower gross profit margin in the 2001 period is primarily attributable to fixed manufacturing overhead incurred on a reduced volume of sales. 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 $211,000 total amount of stock compensation recorded for the three months ended September 30, 2000, $191,000 relates to options granted in December 1999. In December 2000, these options were re-priced at $34.50 per share, the market price of the common stock at the date of the original grant. As a result, the remaining unamortized stock compensation associated with these option grants was reversed in December 2000. Selling Expenses Selling expenses for the three months ended September 30, 2001 decreased 38.7% to $654,000, or 11.5% of net sales, compared with $1.1 million, or 9.6% of net sales, for the three months ended September 30, 2000. The decrease in selling expenses was primarily attributable to lower commissions paid to manufacturer's representatives over the reduced volume of sales and a decrease in charges for stock compensation. 11 General and Administrative Expenses General and administrative expenses for the three months ended September 30, 2001 increased 19.1% to $1.9 million, or 33.3% of net sales, compared with $1.6 million, or 13.9% of net sales, for the three months ended September 30, 2000. The increase was primarily attributable to higher salaries and wages for new employees hired in 2001, higher amounts paid to independent contractors for information technology consulting services and the timing of audit fees paid in connection with the audit of our financial statements for the year ended June 30, 2001. These increases were partially offset by reduced spending on independent contractors for interim management and accounting services and a decrease in charges for stock compensation. Research and Development Expenses Research and development expenses for the three months ended September 30, 2001 decreased 59.9% to $607,000, or 10.6% of net sales, compared with $1.5 million or 13.0% of net sales, for the three months ended September 30, 2000. The decrease was primarily attributable to lower salaries and benefits from the permanent transfer of personnel to assist in business development efforts, fewer employees engaged in research and development efforts and a decrease in charges for stock compensation. Expenses Relating to Accounting Restatements and the Related Shareholder Litigation Expenses relating to the accounting restatements and the related shareholder litigation for the three months ended September 30, 2001 and 2000, were $85,000 and $1.2 million, respectively. These expenses include the cost of external counsel for services provided in connection with shareholder lawsuits and the Securities and Exchange Commission investigation, the cost of certain consultants and temporary labor hired to assist in the accounting restatements, and reimbursements to current and former employees for their legal fees and expenses. Other Income (Expense) Interest income decreased 88.6% to $18,000 for the three months ended September 30, 2001 compared with $158,000 for the three months ended September 30, 2000. The decrease was attributable to lower average cash balances available in the quarter for investing, along with lower interest rates on invested balances. Interest expense and other, net, decreased 80.9% to $59,000 for the three months ended September 30, 2001 compared with $309,000 for the three months ended September 30, 2000. The decrease was primarily attributable to reduction in the outstanding debt associated with the new credit facility and lower interest rates on the new credit facility. Net Income (Loss) and Income (Loss) Per Share The net loss for the three months ended September 30, 2001 was $1.1 million, or $0.16 per share, compared with a net loss of $201,000, or $0.03 per share, for the three months ended September 30, 2000. Excluding the impact of stock compensation, which is a non-cash charge, and expenses relating to accounting restatements (which management believes are not indicative of continuing operating expenses), net loss for the three months ended September 30, 2001 would have been $1.0 million or $0.14 per share, compared with a net income of $1.3 million, or $0.18 per share (basic and diluted), for the three months ended September 30, 2000. 12 Liquidity and Capital Resources As of September 30, 2001, working capital was $6.3 million, including cash and cash equivalents of $1.7 million. Working capital at June 30, 2001 was $7.1 million, including cash and cash equivalents of $2.0 million. Operations generated $841,000 of cash from the reduction of accounts receivable through collections and lower sales volumes in the quarter. Additionally, we continued our focus on reducing inventory levels and increasing inventory turns. The cash generated from these efforts was partially offset by the net loss, adjusted for non-cash charges, the payment of annual bonuses to employees and reduced accounts payable due to lower costs and expenses from the lower sales volumes. Capital expenditures for the three months ended September 30, 2001 were $175,000. We focused capital expenditures on new production and test equipment to continue increasing our manufacturing capacity. We reduced our notes payable and long-term obligations by $1.0 million as of September 30, 2001 as compared to June 30, 2001. Our new credit facility under Wells Fargo Business Credit, Inc. allows us to borrow and re-pay our obligations based upon our cash flow needs at any time subject to maximum loan amounts as determined by our borrowing base. We are involved in legal proceedings and claims in the ordinary course of our business for which we may be exposed to a certain amount of risk. We are unable to estimate the possible loss, if any, associated with these matters. Credit Facility On June 28, 2001, we entered into a credit agreement with Wells Fargo Business Credit, Inc (the "Credit Facility"). Concurrent with the closing of the Credit Facility, we paid our former lender, Bank One, in full. The Credit Facility provides for a $6.0 million secured revolving line of credit ("Revolving Loan"), a $2.5 million secured term loan ("Term Loan"), and a $1.5 million secured capital expenditures loan ("Capital Expenditures Loan"). In September 2001, the Credit Facility was amended to establish revised financial covenants for the fiscal years ending June 30, 2002 and June 30, 2001. The Credit Facility is secured by substantially all of our accounts receivable, inventories and equipment and is subject to covenants that, among other things, impose limitations on capital expenditures and investments, restrict certain payments and distributions and requires us to maintain certain financial ratios. 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 September 30, 2001 was 6.5%. 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 September 30, 2001, we had additional borrowing availability of $2.0 million under our 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 September 30, 2001 was 7.0%. 13 We are required to pay a minimum interest charge on the Credit Facility of $30,000 per calendar quarter. We believe that anticipated cash flows from operations and borrowings available under the Credit Facility will be adequate to fund our currently planned working capital and capital expenditure requirements at least through June 30, 2002. Forward-Looking Statements Some of the statements we make in this report are "forward-looking statements" as that term is used in the Private Securities Litigation Reform Act of 1995. In most cases, when we use words like "believe," "expect," "estimate," "anticipate," "project," or "plan" to describe something which has not yet occurred, we are making a forward-looking statement. Forward-looking statements we make are based on a number of assumptions by us about the future, usually based on current conditions or on the broader expectations of others. These assumptions may or may not prove to be correct and, as a result, our own forward-looking statements may also be inaccurate. On the other hand, based on what we know today and what we expect in the future, we believe that the forward-looking statements we make in this report are reasonable. The tragic events of September 11, 2001 have created broad uncertainty on the global economy as a whole. We and our customers are still in the process of assessing the impact on the telecommunications industry in general and more specifically, on the wireless infrastructure market. While we believe that our 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 identifying potential new sites. At this time, we are limiting the search to facilities within a six mile radius of our current facilities. 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. 14 Effect of Recently Issued Accounting Standards The Financial Accounting Standards Board recently issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Statement No. 144 supersedes the accounting and reporting provisions of Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, with respect to when certain asset impairment losses must be measured and recorded. Statement No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. We do not anticipate a material impact on our financial condition or results of operations as a result of implementing this standard. Statement No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk, including the effects of adverse changes in interest rates. Our exposure to changes in interest rates results from borrowings with floating interest rates. At the present time, we have no financial instruments in place to manage the impact of changes in interest rates. As of September 30, 2001, we had notes payable outstanding under our Credit Facility of $2.0 million. Of this amount, $1.5 million was outstanding on our Term Loan at an interest rate of 7.0% and $500,000 was outstanding on our Revolving Loan at an interest rate of 6.5%. 15 VARI-L COMPANY, INC. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The following should be read in conjunction with Note 6 to the financial statements. SECURITIES AND EXCHANGE COMMISSION INVESTIGATION In September 2001, the Company agreed to a settlement with the Securities and Exchange Commission under which the Company, without admitting or denying that it violated any laws, consented to the entry of an injunction prohibiting future violations by the Company of certain periodic reporting, record keeping, internal controls, proxy solicitation and antifraud provisions of the Securities Exchange Act of 1934. The proposed settlement would not require the Company to pay any civil penalties or money damages. The settlement has been submitted to the federal district court in Denver for its approval, which the Company considers to be likely. The Commission's complaint also named certain of the Company's current and former officers as defendants, some of whom have also settled with the Commission. Without admitting or denying the allegations in the complaint, Jon L. Clark, the Company's former vice president of finance and chief financial officer, has consented to the entry of an injunction prohibiting future violations of the periodic reporting, record keeping, internal controls, lying to auditors, and antifraud provisions of the federal securities laws. Clark has also agreed to be prohibited from acting as an officer or director of a public company, to pay disgorgement, including prejudgment interest, in the amount of approximately $167,000, and to pay a $50,000 civil penalty. The Commission's complaint also named David G. Sherman, the Company's former president and chief executive officer and a former director, and Sarah H. Hume, the Company's former controller. The Commission's action remains pending against Sherman and Hume. SEC v. Vari-L Company, Inc., David G. Sherman, Jon L. Clark, and Sarah E. Hume, Civ. No. 01-WM-1903, D. Colo. On September 27, 2001, the Commission entered an order pursuant to Rule 102(e) of the Commission's Rules of Practice barring the Company's former auditors, Haugen, Springer & Co., PC, and its two shareholders, Charles K. Springer and Robert S. Haugen, (the "Auditors") from appearing or practicing before the Commission as accountants. The Commission also entered a cease and desist order against Springer for failing to report fraud and for willfully aiding and abetting violations of the antifraud and reporting provisions of the federal securities laws. The Commission found that the Auditors acted recklessly in failing to obtain sufficient competent evidential matter in the area of revenue recognition, capitalized costs, and inventory; demonstrated a lack of due professional care and professional skepticism in the areas of revenue, long-term assets, and inventory; and violated reporting standards. The Commission also found that Springer knew in 1998 that the Company had or may have improperly recognized $1.3 million of revenue in 1997 but failed to inform the Company's audit committee of the false revenue. The order provides that Haugen and Haugen, Springer & Co. may apply for reinstatement after three years, and Springer may apply for reinstatement after ten years. In addition, Springer was ordered to cease and desist from future violations of Sections 10A, 10(b), 16 and 13(a) of the Exchange Act and rules thereunder. The Auditors consented to the entry of the order without admitting or denying its findings. On the same date, the Commission ordered Joseph H. Kiser, the Company's Chief Scientific Officer and former Chairman of the Board, to cease and desist from violations of reporting and proxy provisions and to disgorge $58,000 in previously undisclosed compensation he received from the Company. The Commission found that Kiser knew or should have known that the Company lacked accounting procedures and internal controls to prevent financial fraud and failed to cause such controls to be implemented and to ensure that the Company disclosed the payment to him of the additional $58,000 in compensation. Kiser consented to the entry of the Commission's order without admitting or denying its findings. PRIVATE SECURITIES CLASS ACTION A number of private shareholder class actions alleging violations of federal securities laws were filed against the Company and certain of its former officers in the United States District Court for the District of Colorado beginning in June 2000. On August 30, 2000, all of these class actions were consolidated into a single action, and the Company's obligation to respond to the complaints was deferred until such time as the lead plaintiff for the purported class files an amended complaint. On October 9, 2001, the plaintiff filed a consolidated amended class action complaint alleging violations of the general antifraud provision of the Exchange Act, Section 10(b), and Rule 10b-5 promulgated thereunder, and vicarious liability of the individual defendants for any violations by the Company as "controlling persons" under Section 20(a) of the Exchange Act. The complaint seeks compensatory damages in an unspecified amount, attorneys' fees and costs of suit, and any other relief the court deems just and proper. While there can be no assurance that it will be successful in its defense of this lawsuit, the Company believes that it has valid defenses to the claims alleged against it and intends to vigorously defend itself. Although the Company previously engaged in preliminary 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, irrespective of the outcome with respect to the Company, the individual defendants may have claims against the Company for advancement or indemnification of their attorneys fees and other costs of defense, which claims may be material. SHAREHOLDER DERIVATIVE SUIT On August 4, 2000, a shareholder derivative action was filed, purportedly on behalf of the Company, in Colorado state court in Denver against the same officers named in the class action as well as the members of the Company's board of directors at the time. The Company was named in that action as a nominal defendant. The derivative complaint alleged many of the same facts as in the class actions in federal court, claiming that those facts demonstrate that the individual defendants 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. On September 24, 2001, the plaintiff from the dismissed action filed an amended complaint seeking to reinstate that case, claiming that the requirements for a prior 17 demand on the Company's shareholders and its board of directors could not be met or would be futile. The Company has filed a motion to dismiss on various grounds, including the failure to make the required demands, the failure to commence a new action rather than trying to revive the dismissed case, and the availability of new management and a new independent Board member to evaluate the merits, and the timing, of any claims to be brought by the Company against the individual defendants. DECLARATORY JUDGMENT ACTION BY EXCESS INSURER On June 5, 2001, Agricultural Excess and Surplus Insurance Company ("AESIC"), which had issued to the Company a $2.5 million excess directors and officers liability insurance policy for the period of time covered by the shareholder and class action litigation referenced above, filed suit in federal 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 the insurer. The Company is also seeking coverage from Reliance Insurance Company ("Reliance"), the issuer of the $5 million primary directors and officers liability insurance policy in effect at the same time as the AESIC policy. Since May 29, 2001, Reliance has been operating under the supervision of the Pennsylvania Insurance Commissioner pursuant to an Order of Rehabilitation entered by the Commonwealth Court of Pennsylvania against Reliance. On October 3, 2001, the court entered an order of liquidation of Reliance. Reliance did not inform the Company whether it intended to dispute coverage under its policy before the order of liquidation was entered. As a result, Reliance's defenses to the Company's claim, if any, will be considered as part of the liquidation process, when the Company files the required notice of claim with the court. There can be no assurance that the liquidator will not dispute Reliance's obligation to provide coverage to the Company or its officers and directors or that there will be sufficient financial resources to satisfy the Company's claim. Any such failure could have an adverse effect on the Company's future financial results, ability to resolve the litigation pending against the Company and its officers and directors and on the Company's liability for indemnification of those officers and directors. 18 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10.1 First Amendment to Credit and Security Agreement dated September 17, 2001. (b) Reports on Form 8-K A report on Form 8-K dated June 28, 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. A report on Form 8-K dated September 27, 2001 under Items 5 and 9 was filed with the Commission on September 28, 2001. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VARI-L COMPANY, INC. Date: October 29, 2001 By: /s/ RICHARD P. DUTKIEWICZ ------------------------------ ------------------------------------- Richard P. Dutkiewicz, Vice President of Finance and Chief Financial Officer 20 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.1 First Amendment to Credit and Security Agreement dated September 17, 2001.
EX-10.1 3 d91249ex10-1.txt CREDIT AGREEMENT EXHIBIT 10.1 FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT This Amendment, dated as of September 17, 2001, is made by and between VARI-L COMPANY, INC., a Colorado corporation (the "Borrower"), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"). Recitals The Borrower and the Lender are parties to a Credit and Security Agreement dated as of June 28, 2001 (the "Credit Agreement"). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified. The Borrower has requested that certain amendments be made to the Credit Agreement, which the Lender is willing to make pursuant to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Capitalized terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. In addition, Section 1.1 of the Credit Agreement is amended by adding or amending, as the case may be, the following definitions: "Collateral" means all of the Borrower's Accounts, Receivables, chattel paper, deposit accounts, documents, Equipment, General Intangibles, goods, instruments, Inventory, Investment Property, letter-of-credit rights, letters of credit, all sums on deposit in any Collateral Account, and any items in any Lockbox; together with (i) all substitutions and replacements for and products of any of the foregoing; (ii) in the case of all goods, all accessions; (iii) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any goods; (iv) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such goods; (v) all collateral subject to the lien of any Security Document; (vi) any money, or other assets of the Borrower that now or hereafter come into the possession, custody, or control of the Lender; and (vii) proceeds of any and all of the foregoing. "Current Maturities of Long Term Debt" means for a given period the amount of the Borrower's long-term debt and capitalized leases which became due during the period ending on the designated date. "Debt Service Coverage Ratio" means the ratio of (i) the sum of (A) Funds from Operations and (B) Interest Expense minus (C) Unfinanced Capital Expenditures to (ii) the sum of (A) Current Maturities of Long Term Debt and (B) Interest Expense. "Funds From Operations" means for a given period, the sum of (i) after tax net income from continuing operations, (ii) depreciation and amortization, (iii) deferred income taxes, and (iv) other non-cash items, each as determined for such period in accordance with GAAP. "Interest Expense" means for a given period, the Borrower's total gross interest expense during such period (excluding interest income), and shall in any event include (i) interest expensed (whether or not paid) on all Debt, (ii) the amortization of debt discounts, (iii) the amortization of all fees payable in connection with the incurrence of Debt to the extent included in interest expense, and (iv) the portion of any capitalized lease obligation allocable to interest expense. 2. Section 1.2 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Section 1.2 Other Definitional Terms; Rules of Interpretation. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP. All terms defined in the UCC and not otherwise defined herein have the meanings assigned to them in the UCC. References to Articles, Sections, subsections, Exhibits, Schedules and the like, are to Articles, Sections and subsections of, or Exhibits or Schedules attached to, this Agreement unless otherwise expressly provided. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". Unless the context in which used herein otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or". Defined terms include in the singular number the plural and in the plural number the singular. Reference to any agreement (including the Loan Documents), document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof (and, if applicable, in accordance with the terms hereof and the other Loan Documents), except where otherwise explicitly provided, and reference to any promissory note includes any promissory note which is an extension or renewal thereof or a substitute or replacement therefor. Reference to any law, rule, regulation, order, decree, requirement, policy, guideline, directive or interpretation means as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect on the determination date, including rules and regulations promulgated thereunder." 3. Section 2.11(c) of the Credit Agreement is hereby amended by changing the reference in that paragraph from Section 6.14 to Section 6.15. 4. Section 3.6 of the Credit Agreement is hereby amended by adding the following new sentence before the first sentence of that Section: -2- "The Borrower authorizes the Lender to file from time to time where permitted by law, such financing statements against collateral described as 'all personal property' as the Lender deems necessary or useful to perfect the Security Interest." 5. Section 6.12 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Section 6.12 Minimum Book Net Worth. The Borrower will maintain, during each period described below, its Book Net Worth, determined as at the end of each month, at an amount not less than the amount set forth opposite such period:
PERIOD MINIMUM BOOK NET WORTH The month ending June 30, 2001 $13,800,000 The month ending July 31, 2001 $12,650,000 The month ending August 31, 2001 $12,350,000 The month ending September 30, 2001 $12,045,000 The month ending October 31, 2001 $12,000,000 The month ending November 30, 2001 $11,850,000 The month ending December 31, 2001 $12,160,000 The month ending January 31, 2002 $13,250,000 The month ending February 28, 2002 $14,400,000 The month ending March 31, 2002 $15,445,000 The month ending April 30, 2002 $16,200,000 The month ending May 31, 2002 $16,800,000 The month ending June 30, 2002 and thereafter $17,045,000"
6. Section 6.13 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Section 6.13 Minimum Net Income. The Borrower will achieve during each period described below, Net Income of not less than, or a Net Loss not greater than, the amount set forth opposite such period (number appearing between "()" are negative):
PERIOD MINIMUM NET INCOME The twelve months ending June 30, 2001 ($1,400,000) The three months ending September 30, 2001 ($1,800,000) The six months ending December 31, 2001 ($1,685,000) The nine months ending March 31, 2002 $1,600,000 The twelve months ending June 30, 2002 $3,200,000"
7. Section 6.14 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: -3- "Section 6.14 Minimum Debt Service Coverage Ratio. The Borrower will achieve for twelve-month period ending June 30, 2002, a Debt Service Coverage Ratio of not less than 2.00 to 1.00." 8. The Credit Agreement is hereby amended by adding a new Section 6.15 to read as follows: "Section 6.15 New Covenants. On or before June 30, 2002, the Borrower and the Lender shall agree on new covenant levels for Section 6.12, Section 6.13, Section 6.14 and Section 7.10 for periods after such date. The new covenant levels will be based on the Borrower's projections for such periods and shall be no less stringent than the present levels, but if the Borrower and the Lender do not agree, the Lender may designate the required amounts in its sole discretion and the failure by the Borrower to maintain the designated amounts shall constitute an Event of Default." 9. Section 7.10 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Section 7.10 Capital Expenditures. The Borrower will not incur or contract to incur Unfinanced Capital Expenditures of more than (i) $4,000,000 during its fiscal year ending June 30, 2001; (ii) $750,000 during the period from July 1, 2001 through September 30, 2001; (iii) $1,850,000 during the period from October 1, 2001 through December 31, 2001; (iv) $2,500,000 during the period from January 1, 2002 through March 31, 2002; and (v) $2,800,000 during the period from April 1, 2002 through June 30, 2002." 10. Exhibit D of the Credit Agreement is hereby amended and restated in its entirety and replaced with Exhibit D attached hereto. 11. No Other Changes. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance or letter of credit thereunder. 12. Amendment Fee. The Borrower shall pay the Lender as of the date hereof a fully earned, non-refundable fee in the amount of $15,000 in consideration of the Lender's execution and delivery of this Amendment. 13. Conditions Precedent. This Amendment shall be effective when the Lender shall have received an executed original hereof, together with (i) payment of the fee described in Paragraph 12 and (ii) such other matters as the Lender may require, each in substance and form acceptable to the Lender in its sole discretion. 14. Representations and Warranties. The Borrower hereby represents and warrants to the Lender as follows: -4- (a) The Borrower has all requisite power and authority to execute this Amendment and to perform all of its obligations hereunder, and this Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 15. References. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 16. No Waiver. The execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment. 17. Release. The Borrower hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 18. Costs and Expenses. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses -5- incurred by the Lender in connection with the Loan Documents, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses and the fee required under paragraph 12 hereof. 19. Miscellaneous. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. WELLS FARGO BUSINESS CREDIT, INC. VARI-L COMPANY, INC. By /s/ Timothy P. Ulrich By /s/ Richard P. Dutkiewicz ------------------------------ -------------------------------- Timothy P. Ulrich Richard P. Dutkiewicz Its: Vice President Its: Vice President of Finance and Chief Financial Officer -6- EXHIBIT D TO CREDIT AND SECURITY AGREEMENT COMPLIANCE CERTIFICATE To: Timothy P. Ulrich Wells Fargo Business Credit, Inc. Date: __________________, 200__ Subject: Vari-L Company, Inc. Financial Statements In accordance with our Credit and Security Agreement dated as of June 28, 2001 (the "Credit Agreement"), attached are the financial statements of Vari-L Company, Inc. (the "Borrower") as of and for ________________, 20__ (the "Reporting Date") and the year-to-date period then ended (the "Current Financials"). All terms used in this certificate have the meanings given in the Credit Agreement. I certify that the Current Financials have been prepared in accordance with GAAP, subject to year-end audit adjustments, and fairly present the Borrower's financial condition and the results of its operations as of the date thereof. Events of Default. (Check one): [ ] The undersigned does not have knowledge of the occurrence of a Default or Event of Default under the Credit Agreement. [ ] The undersigned has knowledge of the occurrence of a Default or Event of Default under the Credit Agreement and attached hereto is a statement of the facts with respect to thereto. I hereby certify to the Lender as follows: [ ] The Reporting Date does not mark the end of one of the Borrower's fiscal quarters, hence I am completing only paragraph __ below. [ ] The Reporting Date marks the end of one of the Borrower's fiscal quarters, hence I am completing all paragraphs below except paragraph __. [ ] The Reporting Date marks the end of the Borrower's fiscal year, hence I am completing all paragraphs below. 1. Minimum Book Net Worth. Pursuant to Section 6.12 of the Credit Agreement, as of the Reporting Date, the Borrower's Book Net Worth was $____________ which [ ] satisfies [ ] does not satisfy the requirement that such amount be not less than as set forth in table below:
PERIOD MINIMUM BOOK NET WORTH The month ending June 30, 2001 $13,800,000 The month ending July 31, 2001 $12,650,000 The month ending August 31, 2001 $12,350,000 The month ending September 30, 2001 $12,045,000 The month ending October 31, 2001 $12,000,000 The month ending November 30, 2001 $11,850,000 The month ending December 31, 2001 $12,160,000 The month ending January 31, 2002 $13,250,000 The month ending February 28, 2002 $14,400,000 The month ending March 31, 2002 $15,445,000 The month ending April 30, 2002 $16,200,000 The month ending May 31, 2002 $16,800,000 The month ending June 30, 2002 and thereafter $17,045,000
2. Minimum Net Income. Pursuant to Section 6.13 of the Credit Agreement, the Borrower's Net Income for the ________ period ending on the Reporting Date, was $____________, which [ ] satisfies [ ] does not satisfy the requirement that such amount be not less than, or such loss shall not be greater than, $_____________ during such period as set forth in table below:
PERIOD MINIMUM NET INCOME The twelve months ending June 30, 2001 ($1,400,000) The three months ending September 30, 2001 ($1,800,000) The six months ending December 31, 2001 ($1,685,000) The nine months ending March 31, 2002 $1,600,000 The twelve months ending June 30, 2002 $3,200,000
3. Minimum Debt Service Coverage Ratio. Pursuant to Section 6.14 of the Credit Agreement, as of the Reporting Date, the Borrower's Debt Service Coverage Ratio was ______ to 1.00 which [ ] satisfies [ ] does not satisfy the requirement that such ratio be no less than 2.00 to 1.00 on the Reporting Date. 4. Capital Expenditures. Pursuant to Section 7.10 of the Credit Agreement, for the year-to-date period ending on the Reporting Date, the Borrower has expended or contracted to expend during the _____ month period ending _________________, for Capital Expenditures, $__________________ in the aggregate, which [ ] satisfies [ ] does not satisfy the requirement that such expenditures not exceed $____________ in the aggregate during such period. 5. Salaries. As of the Reporting Date, the Borrower [ ] is [ ]is not in compliance with Section 7.17 of the Credit Agreement concerning salaries. Attached hereto are all relevant facts in reasonable detail to evidence, and the computations of the financial covenants referred to above. These computations were made in accordance with GAAP. VARI-L COMPANY, INC. By: --------------------------------- Its: Chief Financial Officer