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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No. 0-23866
March 31, 2001
VARI-L COMPANY, INC.
(Exact name of Registrant as specified in its charter.)
Colorado 06-0679347
________________________ ____________________________________
(State of Incorporation) (I.R.S. Employer identification No.)
4895 Peoria Street
Denver, Colorado 80239
(Address of principal executive offices)
(303) 371-1560
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes__________ No_____X______
The number of shares outstanding of each of the issuer's classes of common
stock, as of March 31, 2001:
Class of Securities Outstanding Securities
------------------- ----------------------
$0.01 par value 7,106,811 shares
Common shares
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VARI-L COMPANY, INC.
March 31, 2001
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets, March 31, 2001 and June 30, 2000 (unaudited) 2
Statements of Operations, three months ended March 31, 2001
and 2000 and nine months ended March 31, 2001 and 2000
(unaudited) 3-4
Statements of Stockholders' Equity, nine months ended March 31,
2001 (unaudited) 5
Statements of Cash Flows, nine months ended March 31, 2001
and 2000 (unaudited) 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
The unaudited interim financial statements for the three and nine months ended
March 31, 2000, included herein have not been reviewed by the Company's
independent accountants. The Company has been informed by its independent
accountants that they are not able to complete the review procedures required
under Statement of Auditing Standards No. 71 for periods prior to June 30, 2000
based on their determination that the internal controls over inventory
accounting and management systems prior to June 30, 2000 were not sufficiently
reliable to enable them to perform review procedures relating to the Company's
inventory.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
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PART I FINANCIAL INFORMATION
VARI-L COMPANY, INC.
Balance Sheets
(unaudited)
March 31, June 30,
ASSETS 2001 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 4,704,814 $ 11,030,293
Trade accounts receivable, less allowance for doubtful
accounts of $258,030 and $174,634, respectively 6,459,381 5,881,280
Inventories (note 2) 5,566,801 7,434,660
Prepaid expenses and other current assets 581,283 189,485
------------ ------------
Total current assets 17,312,279 24,535,718
------------ ------------
Property and equipment:
Machinery and equipment 11,565,574 9,845,402
Furniture and fixtures 793,761 720,971
Leasehold improvements 1,576,730 1,538,575
------------ ------------
13,936,065 12,104,948
Less accumulated depreciation and amortization 5,969,899 4,767,159
------------ ------------
Net property and equipment 7,966,166 7,337,789
Intangible and other assets 733,848 697,185
------------ ------------
Total assets $ 26,012,293 $ 32,570,692
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 301,312 $ 320,798
Trade accounts payable 2,104,958 4,182,270
Accrued compensation 1,483,803 1,499,890
Other accrued expenses 232,336 225,105
Notes payable and current installments of long-term obligations (note 3) 6,791,178 11,566,386
------------ ------------
Total current liabilities 10,913,587 17,794,449
Long-term obligations (note 3) 53,507 91,666
------------ ------------
Total liabilities 10,967,094 17,886,115
------------ ------------
Stockholders' equity
Common stock, $.01 par value, 50,000,000 shares authorized;
7,106,811 and 7,070,423 shares issued and outstanding, respectively 71,068 70,704
Additional paid-in capital 36,827,924 40,524,974
Unamortized stock compensation cost (92,936) (4,318,371)
Accumulated deficit (21,760,857) (21,592,730)
------------ ------------
Total stockholders' equity 15,045,199 14,684,577
------------ ------------
Commitments and contingencies (note 6)
Total liabilities and stockholders' equity $ 26,012,293 $ 32,570,692
============ ============
See accompanying notes to financial statements.
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VARI-L COMPANY, INC.
STATEMENTS OF OPERATIONS
Three months ended March 31, 2001 and 2000
(unaudited)
2001 2000
---------- ----------
Net sales $9,999,988 $7,746,763
Cost of goods sold 4,438,864 4,399,225
---------- ----------
Gross profit 5,561,124 3,347,538
---------- ----------
Operating expenses:
Selling 1,101,996 888,719
General and administrative 2,823,555 1,075,797
Research and development 954,930 1,462,607
Expenses relating to accounting restatements
and the related shareholder litigation (note 5) 465,489 16,483
---------- ----------
Total operating expenses 5,345,970 3,443,606
---------- ----------
Operating profit (loss) 215,154 (96,068)
Other income (expense):
Interest income 92,322 151,697
Interest expense (258,293) (252,790)
Other, net (6,226) 6,370
---------- ----------
Total other income (expense) (172,197) (94,723)
---------- ----------
Net income (loss) $ 42,957 $ (190,791)
========== ==========
Basic earnings (loss) per share $ 0.01 $ (0.03)
========== ==========
Basic weighted average shares outstanding 7,087,048 7,014,347
========== ==========
Diluted earnings (loss) per share $ 0.01 $ (0.03)
========== ==========
Diluted weighted average shares outstanding 7,119,614 7,014,347
========== ==========
See accompanying notes to financial statements.
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VARI-L COMPANY, INC.
STATEMENTS OF OPERATIONS
Nine months ended March 31, 2001 and 2000
(unaudited)
2001 2000
----------- -----------
Net sales $32,388,724 $21,185,835
Cost of goods sold 16,281,520 11,628,832
----------- -----------
Gross profit 16,107,204 9,557,003
----------- -----------
Operating expenses:
Selling 3,464,920 2,576,159
General and administrative 6,505,992 3,071,624
Research and development 3,417,849 4,106,110
Expenses relating to accounting restatements
and the related shareholder litigation (note 5) 2,333,449 16,483
----------- -----------
Total operating expenses 15,722,210 9,770,376
----------- -----------
Operating profit (loss) 384,994 (213,373)
Other income (expense):
Interest income 354,489 296,449
Interest expense (903,443) (671,619)
Other, net (4,167) (1,411)
----------- -----------
Total other income (expense) (553,121) (376,581)
----------- -----------
Net loss $ (168,127) $ (589,954)
=========== ===========
Loss per share $ (0.02) $ (0.09)
=========== ===========
Weighted average shares outstanding 7,076,176 6,240,600
=========== ===========
See accompanying notes to financial statements.
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VARI-L COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Nine months ended March 31, 2001
(unaudited)
Unamortized
Common stock Additional stock Total
---------------------- paid-in compensation Accumulated stockholder's
Shares Amount capital cost deficit equity
--------- ------- ---------- ------------ ----------- -------------
Balance, June 30, 2000 7,070,423 $70,704 40,524,974 (4,318,371) (21,592,730) 14,684,577
Common stock issued under stock award plan 1,000 10 9,900 -- -- 9,910
Common stock issued under employee stock
purchase plan 35,388 354 44,766 -- -- 45,120
Stock options forfeited -- -- (218,609) 218,609 -- --
Reversal of unamortized stock compensation
upon repricing of options -- -- (3,533,107) 3,533,107 -- --
Amortization of stock compensation cost -- -- -- 473,719 -- 473,719
Net loss -- -- -- -- (168,127) (168,127)
--------- ------- ---------- --------- ----------- ----------
Balance, March 31, 2001 7,106,811 $71,068 36,827,924 (92,936) (21,760,857) 15,045,199
========= ======= ========== ========= =========== ==========
See accompanying notes to financial statements.
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VARI-L COMPANY, INC.
STATEMENTS OF CASH FLOWS
Nine months ended March 31, 2001 and 2000
(unaudited)
2001 2000
----------- ------------
Net loss $ (168,127) $ (589,954)
Adjustments to reconcile net loss to cash provided
by (used in) operating activities:
Depreciation of property and equipment 1,247,896 1,022,523
Loss on sale of asset 5,739 --
Amortization of intangible assets 20,995 15,156
Common stock issued under profit sharing and stock award plans 9,910 27,153
Amortization of stock compensation 473,719 364,913
Changes in operating assets and liabilities:
Trade accounts receivable, net (578,101) (1,628,163)
Inventories, net 1,867,859 (1,688,254)
Prepaid expenses and other current assets (391,798) (1,499)
Trade accounts payable (2,077,312) 1,066,573
Accrued compensation (16,087) 91,738
Other accrued expenses 7,231 (19,990)
----------- ------------
Total adjustments 570,051 (749,850)
----------- ------------
Cash provided by (used in) operating activities 401,924 (1,339,804)
Cash flows from investing activities:
Purchases of property and equipment (1,904,234) (930,132)
Proceeds from sale of equipment 22,222 --
Increase in other assets (57,658) (119,374)
----------- ------------
Cash used in investing activities (1,939,670) (1,049,506)
----------- ------------
Cash flows from financing activities:
Decrease in bank overdraft (19,486) (778,488)
Proceeds from notes payable -- 10,377,469
Payments of notes payable (4,779,069) (12,008,115)
Proceeds from long-term obligations -- 40,894
Payments of long-term obligations (34,298) (34,734)
Proceeds from warrants exercised -- 6,317,521
Proceeds from stock options exercised -- 6,140,561
Proceeds from common stock issued under stock purchase plan 45,120 50,205
Common stock repurchased -- (66,626)
----------- ------------
Cash provided by (used in) financing activities (4,787,733) 10,038,687
----------- ----------
Increase (decrease) in cash and cash equivalents (6,325,479) 7,649,377
Cash and cash equivalents at beginning of period 11,030,293 4,116,918
----------- ------------
Cash and cash equivalents at end of period $ 4,704,814 $ 11,766,295
=========== ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,057,877 $ 701,379
=========== ============
Cash paid for income taxes $ -- $ --
=========== ============
See accompanying notes to financial statements.
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VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
(1) BASIS OF PRESENTATION
The accompanying financial statements of the Company have been
prepared without audit. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted. These financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's Transition Report on Form 10-K/T for the period ended June 30,
2000. In the opinion of management, the accompanying unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the financial position and results of
operations for the periods presented. Interim results of operations for the
three and nine months ended March 31, 2001 are not necessarily indicative of
operating results that can be expected for the full year.
The Company's Board of Directors approved a change in the Company's year
end to June 30 effective in 2000.
(2) INVENTORIES
Inventories, net of allowances for excess and obsolete items, consist of
the following:
March 31, June 30,
2001 2000
---------- ----------
Finished goods $ 349,007 $ 363,549
Work-in-process 1,106,397 1,226,984
Raw materials 4,111,397 5,844,127
---------- ----------
$5,566,801 $7,434,660
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(3) NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable and long-term obligations consist of the following:
March 31, June 30,
2001 2000
---------- -----------
Notes payable under Revolving Credit Facility $6,720,931 $11,500,000
Promissory notes 27,816 66,756
Capital leases 95,938 91,296
---------- -----------
6,844,685 11,658,052
Less current installments 6,791,178 11,566,386
---------- -----------
Long-term obligations $ 53,507 $ 91,666
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On March 24, 2000, the Company entered into a $20,000,000 Revolving Credit
Facility (the "Loan Agreement"). The Loan Agreement provided for interest based
on the prime rate or LIBOR plus a margin, and was originally due September 30,
2002. The Company pays an annual commitment fee of .15% of the average unused
portion of the line, payable quarterly. The loan is secured by substantially all
of the Company's receivables, inventories and equipment.
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VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
Subsequent to March 24, 2000, it was determined that the Company was in default
of certain covenants under the Loan Agreement from loan inception. As of March
31, 2001, the Company continued to be in default of certain covenants under the
Loan Agreement. Upon default by the Company, the lender may call the loan at any
time. On September 28, 2000, the Company entered into a forbearance agreement
with the bank, which, among other matters delayed the bank's right to accelerate
payment of the facility to December 15, 2000. The forbearance agreement
increased the interest rate to the prime rate plus 1.5% through December 15,
2000. Additionally, the forbearance agreement limited the maximum loan
outstanding to an amount determined by a borrowing base formula which is
calculated on the 15th and last day of each month (measurement dates). The
formula relates to inventories, accounts receivable aged less than 90 days, and
equipment. If the value determined by the formula is less than the loan
outstanding on two consecutive measurement dates, the Company is required to
reduce the loan balance to the amount determined by the borrowing base formula.
On December 15, 2000 the Company entered into a second forbearance agreement,
which delayed the bank's right to accelerate payment of the facility to March
31, 2001. The second forbearance agreement also increased the interest rate to
the prime rate plus 2.0% through March 31, 2001. On March 15, 2001, the Company
was required to reduce the loan outstanding by $579,069, to $8,220,931, the
amount determined by the borrowing base formula on that measurement date. On
March 31, 2001, the Company entered into a third forbearance agreement, which
delayed the bank's right to accelerate payment of the facility to June 30, 2001.
Accordingly, the amounts outstanding as of March 31, 2001 have been classified
as current. The third forbearance agreement required an additional $1,500,000
reduction in the loan outstanding, to bring the outstanding balance to
$6,720,931. The third forbearance agreement requires the Company to maintain a
borrowing base of at least $6,720,931. The third forbearance agreement also
maintained the interest rate at the prime rate plus 2% through June 30, 2001
(10.0% at March 31, 2001).
The Company is seeking a new lender to provide a long-term credit facility
with more favorable terms and more capacity than is available under the
forbearance agreement with its current lender. There can be no assurance,
however, that the Company will be successful in obtaining a new lender or, if it
is not successful, in negotiating additional forbearance agreements with its
current lender.
(4) INCOME TAXES
For the three months ended March 31, 2001, the Company's provision for
income taxes was offset by a reduction in the valuation allowance for net
deferred tax assets. For the three months ended March 31, 2000 and nine months
ended March 31, 2001 and 2000, the Company recorded no provision for federal or
state income taxes since a valuation allowance was provided for the income tax
benefit of the net operating losses incurred during those periods.
(5) EXPENSES OF ACCOUNTING RESTATEMENTS AND RELATED MATTERS
As discussed in note 6, early in 2000, management of the Company commenced
efforts to restate its previously issued financial statements after being
notified by the Securities and Exchange Commission (the "Commission") that the
Commission was investigating its accounting and reporting practices. Certain
costs incurred in conjunction with these efforts have been separately classified
on the Company's statements of operations as "expenses relating to accounting
restatements and the
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VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
related shareholder litigation." Expenses included in this classification
include the cost of external counsel for services provided in connection with
shareholder lawsuits and the Commission's investigation of the Company, the cost
of certain consultants and temporary labor hired to assist in the accounting
restatements, and reimbursements to current and former employees of the Company
for their legal fees and expenses.
(6) LITIGATION, COMMITMENTS AND CONTINGENCIES
LITIGATION
In late 1999, the Securities and Exchange Commission commenced an
investigation into the Company's accounting and reporting practices in recent
years. Subsequently, the Company announced that its previously issued financial
statements should not be relied upon and that it would be amending its 1997 and
subsequent financial statements. It also announced that the Audit Committee of
the Board of Directors was conducting an investigation into the Company's
accounting policies and practices which may result in further adjustments to the
Company's financial statements. The preliminary results of the Company's
investigation were reported to the audit committee in September 2000, and on
September 12, 2000, the Company announced that it would restate its previously
issued financial statements. The accompanying financial statements for the three
and nine months ended March 31, 2000 have been previously restated.
The Commission is currently investigating the Company to determine whether
there were violations of the federal securities laws by the Company or any of
its officers, directors or employees. The Company believes that the Commission's
investigation is focused on the Company's prior financial reporting and its
accounting practices and procedures. The Company has been providing documents
and other information requested by the Commission staff in the course of its
investigation. The Commission has not brought an action against the Company, but
it may do so in the future. In such an event, the Commission may seek injunctive
or other relief from the Company.
A number of private shareholder class actions alleging violations of
federal securities laws were filed against the Company in the U.S. District
Court for the District of Colorado beginning in June 2000. On August 3, 2000,
all of these class actions were consolidated into a single action. Lead counsel
for the representatives of the putative plaintiff class have been appointed but,
pursuant to the court's order the Company's obligation to respond to the
complaints has been deferred until such time as the lead plaintiff files an
amended complaint. As of May 10, 2001, an amended complaint has not yet been
filed and a class has not been certified.
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VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
The consolidated class action complaints were filed on behalf of persons
who purchased shares of the Company's stock between 1997 and sometime in 2000
(the "Class Period"). All of the complaints name the Company; David G. Sherman,
the Company's former President and Chief Executive Officer; Joseph H. Kiser, the
Company's Chief Scientific Officer and Jon L. Clark, the Company's former Chief
Financial Officer, as defendants. Some of the complaints also name Derek L.
Bailey, the Company's former Executive Vice President of Sales and Marketing,
as an additional defendant. The various complaints allege that the Company's
financial statements for the years 1997, 1998 and 1999 did not conform to
generally accepted accounting principles and were materially false and
misleading. The complaints allege violations of Section 10(b) of the Securities
Exchange Act of 1934 and seek to impose "control person" liability on the
individual defendants pursuant to Section 20(a) of the Exchange Act. The
complaints generally seek compensatory damages in an unspecified amount,
attorneys' fees and costs of suit, equitable and injunctive relief as permitted
by law, including the imposition of a constructive trust on the assets of the
individual defendants, and any other relief the court deems just and proper.
Some of the complaints allege that the individual defendants sold stock
throughout the Class Period as part of an alleged scheme to defraud the public.
Some complaints specifically allege that the Company instituted a policy of
"bill and hold," in which the Company would book and report revenue for the sale
of its products even though the Company retained physical possession of the
product. Some complaints also cite a May 18, 2000 Denver newspaper article in
which Mr. Sherman stated that he believed that the restatements would have
little effect on the Company's 1998 and 1999 earnings.
The parties have had preliminary discussions regarding the possibility of
settlement. There can be no assurance, however, that a settlement acceptable to
the Company can be reached or that any settlement reached will not have
a material adverse effect on the Company. In addition, the individual defendants
in the class action may have claims against the Company for indemnification of
their cost of defense, which claims may be material.
On August 4, 2000, a shareholder derivative action was filed purportedly on
behalf of the Company in Colorado state court in Denver. The Company was named
in that action as a nominal defendant. A shareholder derivative action is
a state law action in which shareholders assert claims against third parties on
behalf of the corporation. The derivative complaint alleges some of the same
facts as were asserted in the class actions in federal court and claims that
those facts demonstrate that the officers named in the class actions, as well as
the Company's directors, breached their fiduciary duties to the Company and the
shareholders in connection with the Company's erroneous reporting of its
financial results.
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VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
On April 3, 2001, the Colorado District Court dismissed the derivative
action, without prejudice, based on the plaintiff's admitted failure to make
demand upon the other shareholders to bring the claims before filing suit. Since
the dismissal, the derivative plaintiff has requested access to the Company's
shareholder list, presumably to make the previously omitted demand on
shareholders in preparation for refiling the action.
As of May 10, 2001, the Company is unable to reasonably estimate the
possible loss associated with these matters.
OTHER
The Company is a party to other legal proceedings and claims in the
ordinary course of its business. The Company believes that the outcome of these
other matters will not have a material adverse effect on its financial
condition, results of operations or liquidity.
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VARI-L COMPANY, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2000
Net Sales
Net sales for the three months ended March 31, 2001 increased 29.1% to
$9,999,988 compared with $7,746,763 for the three months ended March 31, 2000.
This improvement primarily reflects increased demand for commercial signal
source products. Revenue from commercial signal source products was $8,282,330
for the three months ended March 31, 2001, a 30.7% increase from $6,336,396 for
the three months ended March 31, 2000. Revenue from all other products was
$1,717,658 for the three months ended March 31, 2001, a 21.8% increase from
$1,410,367 for the three months ended March 31, 2000.
Gross Profit
Gross profit for the three months ended March 31, 2001 increased 66.1% to
$5,561,124, or 55.6% of net sales, compared with $3,347,538, or 43.2% of net
sales, for the three months ended March 31, 2000. Included in cost of goods sold
for the three months ended March 31, 2001 is a charge of $216,040 for an
adjustment to inventory carrying costs. The impact of this charge on cost of
goods sold is offset by a reduction of $145,952 resulting from a decrease in
certain inventory reserves. Included in cost of goods sold for the three months
ended March 31, 2000 is a charge of $143,465 for excess and obsolete inventory.
The higher gross profit margin in the 2001 period is primarily attributable to
reduced labor costs resulting from reduced overtime, reduced material costs due
to an improvement in prices paid for raw materials and a substantial reduction
in charges for expedited shipments of raw materials, along with improved
production yields.
Operating Expenses
Included in operating expenses are charges for non-cash stock compensation.
The charges for stock compensation principally relate to amortization of
deferred stock compensation attributable to stock options granted at less than
the market price of the common stock on the date of the grant. Of the $307,399
total amount of stock compensation recorded for the three months ended March 31,
2000, $285,542 relates to options granted in December, 1999. In December, 2000,
these options were re-priced at $34.50 per share, the market price of the common
stock at the date of the original grant. As a result, the remaining unamortized
stock compensation associated with these option grants was reversed in
December 2000. The following table summarizes stock compensation expense
included in each category of operating expenses:
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Three months ended
--------------------------
March 31, March 31,
2001 2000
---------- ----------
Selling:
Non-cash stock compensation $ 4,577 $ 49,186
Other selling expenses 1,097,419 839,533
---------- ----------
Total selling expenses $1,101,996 881,719
========== ==========
General and administrative:
Non-cash stock compensation $ 10,584 $ 114,471
Other general and administrative expenses 2,812,971 961,326
---------- ----------
Total general and administrative expenses $2,823,555 $1,075,797
========== ==========
Research and development:
Non-cash stock compensation $ 13,445 $ 143,742
Other research and development expenses 941,485 1,318,865
---------- ----------
Total research and development expenses $ 954,930 $1,462,607
========== ==========
Selling Expenses
Selling expenses for the three months ended March 31, 2001 increased 25.0%
to $1,101,996, or 11.0% of net sales, compared with $881,719, or 11.4% of net
sales, for the three months ended March 31, 2000. Excluding non-cash stock
compensation, selling expenses for the three months ended March 31, 2001
increased 30.7% to $1,097,419, or 11.0% of net sales, compared with $839,533, or
10.8% of net sales, for the three months ended March 31, 2000. The increase in
selling expenses was primarily attributable to higher commissions paid
to manufacturer's representatives.
General and Administrative Expenses
General and administrative expenses for the three months ended March 31,
2001 increased 162.5% to $2,823,555, or 28.2% of net sales, compared with
$1,075,797, or 13.9% of net sales, for the three months ended March 31, 2000.
Excluding non-cash stock compensation, general and administrative expenses for
the three months ended March 31, 2001 increased 192.6% to $2,812,971, or 28.1%
of net sales, compared with $961,326, or 12.4% of net sales, for the three
months ended March 31, 2000. The increase was primarily attributable to higher
amounts paid to independent contractors for interim management and accounting
services, stay bonuses paid to employees, and higher insurance premiums.
Research and Development Expenses
Research and development expenses for the three months ended March 31, 2001
decreased 34.7% to $954,930, or 9.5% of net sales, compared with $1,462,607 or
18.9% of net sales, for the three months ended March 31, 2000. Excluding
non-cash compensation, research and development expenses for the three months
ended March 31, 2001 decreased 28.6% to $941,485, or 9.4% of net sales, compared
with $1,318,865, or 17.0% of net sales, for the three months ended March 31,
2000. The decrease was primarily attributable to lower salaries and benefits
from the temporary transfer of personnel to assist in production efforts and
fewer employees engaged in research and development efforts.
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Expenses Relating to Accounting Restatements and the Related Shareholder
Litigation
Expenses relating to the accounting restatements and the related
shareholder litigation for the three months ended March 31, 2001 and 2000, were
$465,489 and $16,483, respectively. These expenses include the cost of external
counsel for services provided in connection with shareholder lawsuits and the
Securities and Exchange Commission investigation of the Company, certain
consultants and temporary labor hired to assist in the accounting restatements,
and reimbursements to current and former employees of the Company for their
legal fees and expenses.
Other Income (Expense)
Interest income decreased 39.1% to $92,322 for the three months ended
March 31, 2001 compared with $151,697 for the three months ended March 31, 2000.
The decrease was attributable to lower average cash balances available in the
quarter for investing. Interest expense and other, net, increased 7.3% to
$264,519 for the three months ended March 31, 2001 compared with $246,420 for
the three months ended March 31, 2000. The increase was primarily attributable
to interest and fees associated with the forbearance agreement, along with
higher interest rates on the Company's credit facility.
Net Income (Loss) and Income (Loss) Per Share
The net income for the three months ended March 31, 2001 was $42,957, or
$0.01 per share, compared with a net loss of $190,791, or $0.03 per share, for
the three months ended March 31, 2000. Excluding the impact of stock
compensation, which is a non-cash charge, and expenses relating to accounting
restatements (which management believes is nonrecurring), net income for the
three months ended March 31, 2001 would have been $537,052 or $0.08 per share
(basic and diluted), compared with a net income of $133,091, or $0.02 per share,
for the three months ended March 31, 2000.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2001
COMPARED TO THE NINE MONTHS ENDED MARCH 31, 2000
Net Sales
Net sales for the nine months ended March 31, 2001 increased 52.9% to
$32,388,724 compared with $21,185,835 for the nine months ended March 31, 2000.
This improvement primarily reflects increased demand for commercial signal
source products. Revenue from commercial signal source products was $26,971,568
for the nine months ended March 31, 2001, a 64.7% increase from $16,379,270 for
the nine months ended March 31, 2000. The nine months ended March 31, 2001
included a significant end-of-life production run generating net sales of
$809,285 and fees earned from a contract modification of approximately $295,000.
Revenue from all other products was $5,417,156 for the nine months ended
March 31, 2001, a 12.7% increase from $4,806,565 for the nine months ended
March 31, 2000.
Gross Profit
Gross profit for the nine months ended March 31, 2001 increased 68.5% to
$16,107,204, or 49.7% of net sales, compared with $9,557,003, or 45.1% of net
sales, for the nine months ended March 31, 2000. Included in cost of goods sold
for the nine months ended March 31, 2001 is a charge of $739,580 for obsolete
and excess inventory and a charge of $216,040 for an adjustment to inventory
carrying costs. Included in the cost of goods sold for the nine months ended
March 31, 2000 is a charge of $216,339 for obsolete and excess inventory. The
higher gross profit margin in the 2001 period principally reflected the benefit
from the end-of-life production run
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16
and contract modification, partially offset by a decrease in average net selling
prices of the Company's products, a higher ratio of material costs to net sales,
due in part to the Company's decision to pay higher costs in return for
expedited delivery of raw materials in the first two quarters of fiscal 2001, as
well as an increase in the provision for obsolete and excess inventory.
Operating Expenses
Included in operating expenses are charges for non-cash stock compensation.
The charges for stock compensation principally relate to amortization of
deferred stock compensation attributable to stock options granted at less than
the market price of the common stock on the date of the grant. Of the $473,719
total amount of stock compensation recorded in the nine months ended March 31,
2001, $408,559 relates to options granted in December, 1999. In December, 2000,
these options were re-priced at $34.50 per share, the market price of the common
stock at the date of the original grant. As a result, the remaining unamortized
stock compensation associated with these option grants was reversed in December
2000. The following table summarizes stock compensation expense included in each
category of operating expenses:
Nine months ended
-----------------
March 31, 2001 March 31, 2000
-------------- --------------
Selling:
Non-cash stock compensation $ 75,797 $ 58,389
Other selling expenses 3,389,123 2,517,770
---------- ----------
Total selling expenses $3,464,920 $2,576,159
========== ==========
General and administrative:
Non-cash stock compensation $ 176,337 $ 135,888
Other general and administrative expenses 6,329,655 2,935,736
---------- ----------
Total general and administrative expenses $6,505,992 $3,071,624
========== ==========
Research and development:
Non-cash stock compensation $ 221,585 $ 170,636
Other research and development expenses 3,196,264 3,935,474
---------- ----------
Total research and development expenses $3,417,849 $4,106,110
========== ==========
Selling Expenses
Selling expenses for the nine months ended March 31, 2001 increased 34.5%
to $3,464,920, or 10.7% of net sales, compared with $2,576,159, or 12.2% of net
sales, for the nine months ended March 31, 2000. Excluding non-cash stock
compensation, selling expenses for the nine months ended March 31, 2001
increased 34.6% to $3,389,123, or 10.5% of net sales, compared with $2,517,770,
or 11.9% of net sales, for the nine months ended March 31, 2000. The increase in
selling expenses was primarily attributable to higher commissions paid to
manufacturer's representatives, as well as an increase in stock compensation
expense.
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General and Administrative Expenses
General and administrative expenses for the nine months ended March 31,
2001 increased 111.8% to $6,505,992, or 20.1% of net sales, compared with
$3,071,624, or 14.5% of net sales, for the nine months ended March 31, 2000.
Excluding non-cash stock compensation, general and administrative expenses for
the nine months ended March 31, 2001 increased 115.6% to $6,329,655, or 19.5% of
net sales, compared with $2,935,736, or 13.9% of net sales, for the nine months
ended March 31, 2000. The increase was primarily attributable to higher amounts
paid to independent contractors for interim management and accounting services,
stay bonuses paid to employees, higher insurance premiums, as well as an
increase in stock compensation expense.
Research and Development Expenses
Research and development expenses for the nine months ended March 31, 2001
decreased 16.8% to $3,417,849, or 10.6% of net sales, compared with $4,106,110,
or 19.4% of net sales for the nine months ended March 31, 2000. Excluding
non-cash compensation, research and development expenses for the nine months
ended March 31, 2001 decreased 18.8% to $3,196,264, or 9.9% of net sales,
compared with $3,935,474, or 18.6% of net sales, for the nine months ended March
31, 2000. The decrease was primarily attributable to lower salaries and benefits
from the temporary transfer of personnel to assist in production efforts and
fewer employees engaged in research and development efforts, partially offset by
an increase in stock compensation expense.
Expenses Relating to Accounting Restatements and the Related
Shareholder Litigation
Expenses relating to the accounting restatements and the related
shareholder litigation for the nine months ended March 31, 2001 and 2000, were
$2,333,449 and $16,483, respectively. These expenses include the cost of
external counsel for services provided in connection with shareholder lawsuits
and the Securities and Exchange Commission investigation of the Company, certain
consultants and temporary labor hired to assist in the accounting restatements,
and the cost of counsel for current and former employees of the Company.
Other Income (Expense)
Interest income increased 19.6% to $354,489 for the nine months ended
March 31, 2001 compared with $296,449 for the nine months ended March 31, 2000.
The increase was attributable to higher interest earnings on larger average cash
balances available in the period for investing. Interest expense and other, net,
increased 34.9% to $907,610 for the nine months ended March 31, 2001 compared
with $673,030 for the nine months ended March 31, 2000. The increase was
primarily attributable to interest and fees associated with the forbearance
agreement, along with higher interest rates on the Company's credit facility.
Net Loss and Loss Per Share
The net loss for the nine months ended March 31, 2001 was $168,127, or
$0.02 per share, compared with a net loss of $589,954, or $0.09 per share, for
the nine months ended March 31, 2000. Excluding the impact of stock
compensation, which is a non-cash charge, and expenses relating to accounting
restatements (which management believes is nonrecurring), net income in the nine
months ended March 31, 2001 would have been $2,639,041, or $0.37 per share,
compared with a net loss of $208,558, or $0.03 per share, for the nine months
ended March 31, 2000.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at March 31, 2001 was $13,119,623, excluding
notes payable under the Company's credit facility with its current bank of
$6,720,931. Including the notes payable, working capital at March 31, 2001 was
$6,398,692. Working capital at March 31, 2001 includes cash and cash equivalents
of $4,704,814. Working capital at June 30, 2000, excluding notes payable under
the Company's credit facility with its current bank of $11,500,000, was
$18,241,269. Including the notes payable, working capital at June 30, 2000 was
$6,741,269. Working capital at June 30, 2000 includes cash and cash equivalents
of $11,030,293.
Cash provided by operating activities was $401,924 for the nine months
ended March 31, 2001. Cash provided by operating activities before changes in
working capital items was $1,590,132. This cash provided was partially offset by
cash used to reduce accounts payable, increased accounts receivable as a result
of higher net sales and increases in prepaid expenses and other current assets.
Partially offsetting this use of cash were reduced inventory levels. Cash used
in operating activities was $1,339,804 for the nine months ended March 31, 2000.
Cash provided by operating activities before changes in working capital items
was $839,791. Cash was also provided by increases in accrued compensation and
accounts payable, which was offset by increased accounts receivable and
inventories as a result of higher net sales volume.
Cash used in investing activities was $1,939,670 for the nine months ended
March 31, 2001 and was used principally for capital expenditures. The capital
expenditures for the nine months ended March 31, 2001 related to additional
production and test equipment to increase manufacturing capacity. Cash used in
investing activities for the nine months ended March 31, 2000 was $1,049,506 and
were for capital expenditures. The capital expenditures for the nine months
ended March 31, 2000 also primarily related to additional production and test
equipment to increase manufacturing capacity.
Cash used in financing activities were $4,787,733 for the nine months ended
March 31, 2001. Repayments of $4,779,069 on notes payable to the Company's
primary lender along with repayments to other lenders of $34,298 were the
principal uses of cash. Cash flows provided by financing activities for the nine
months ended March 31, 2000 were $10,038,687, including the proceeds from stock
options and warrants exercised of $12,458,082. These proceeds were offset by net
repayments of $1,624,486 to the Company's lenders.
Revolving Credit Facility
On March 24, 2000, the Company entered into a $20,000,000 Revolving Credit
Facility (the "Loan Agreement"). The Loan Agreement provided for interest based
on the prime rate or LIBOR plus a margin, and was originally due September 30,
2002. Interest payable on the line of credit was 10% at March 31, 2001. The
Company pays an annual commitment fee of .15% of the average unused portion of
the line, payable quarterly. The loan is secured by substantially all of the
Company's receivables, inventories and equipment.
Subsequent to March 24, 2000, it was determined that the Company was in
default of certain covenants under the Loan Agreement from loan inception. As of
March 31, 2001, the Company continued to be in default of certain covenants
under the Loan Agreement. Upon default by the Company, the lender may call the
loan at any time. On September 28, 2000, the Company entered into a forbearance
agreement with the bank, which, among other matters delayed the bank's right to
accelerate payment of the facility to December 15, 2000. The forbearance
agreement increased the interest rate to the prime rate plus 1.5% through
December 15, 2000. Additionally, the forbearance agreement limited the maximum
loan outstanding to an amount
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19
determined by a borrowing base formula which is calculated on the 15th and last
day of each month (measurement dates). The formula relates to inventories,
accounts receivable aged less than 90 days, and equipment. If the value
determined by the formula is less than the loan outstanding on two consecutive
measurement dates, the Company is required to reduce the loan balance to the
amount determined by the borrowing base formula. On December 15, 2000 the
Company entered into a second forbearance agreement, which delayed the bank's
right to accelerate payment of the facility to March 31, 2001. The second
forbearance agreement also increased the interest rate to the prime rate plus
2.0% through March 31, 2001. On March 15, 2001, the Company was required to
reduce the loan outstanding by $579,069, to $8,220,931, the amount determined by
the borrowing base formula on that measurement date. On March 31, 2001, the
Company entered into a third forbearance agreement, which delayed the bank's
right to accelerate payment of the facility to June 30, 2001. Accordingly, the
amounts outstanding as of March 31, 2001 have been classified as current. The
third forbearance agreement required an additional $1,500,000 reduction in the
loan outstanding, to bring the outstanding balance to $6,720,931. The third
forbearance agreement requires the Company to maintain a borrowing base of at
least $6,720,931. The third forbearance agreement also maintained the interest
rate at the prime rate plus 2% through June 30, 2001.
The Company is seeking a new lender to provide a long-term credit facility
with more favorable terms and additional capacity than is available under the
forbearance agreement. There can be no assurance, however, that the Company will
be successful in obtaining a new lender or, if it is not successful, in
negotiating additional forbearance agreements with its current lender. Even if
the Company is successful in obtaining a new lender or negotiating an additional
forbearance agreement with its current lender, there can be no assurance that
the terms of such an agreement would provide adequate financing for additional
equipment and working capital required to support the Company's current growth
plans.
Forward-Looking Statements
Some of the statements contained in this report are forward-looking
statements. The accuracy of these statements cannot be guaranteed as they are
subject to a variety of risks, including but not limited to general economic
conditions in the United States and the overseas markets served by the Company,
the overall market for wireless communications products, the success of the
specific products into which the Company's products are integrated, governmental
action relating to wireless communications, licensing and regulation, the
accuracy of the Company's internal projections as to the demand for certain
types of technological innovation, competitive products and pricing, the success
of new product development efforts, the timely release for production and the
delivery of products under existing contracts, the outcome of pending and
threatened litigation and regulatory actions, the Company's ability to refinance
its loan agreement or obtain additional forbearance agreements, as well as other
factors.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including the effects of adverse
changes in interest rates. The Company's exposure to changes in interest rates
results from borrowings with floating interest rates. At the present time, the
Company has no financial instruments in place to manage the impact of changes in
interest rates. As of March 31, 2001, the Company had notes payable outstanding
under a bank credit facility of $6,720,931 with an interest rate of 10%. The
third forbearance agreement expires on June 30, 2001, when the notes are payable
in full.
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20
VARI-L COMPANY, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following note should be read in conjunction with Note 6 to the
financial statements.
On August 4, 2000, a shareholder derivative action was filed purportedly on
behalf of the Company in Colorado state court in Denver. The Company was named
in that action as a nominal defendant. A shareholder derivative action is a
state law action in which shareholders assert claims against third parties on
behalf of the corporation. The derivative complaint alleges some of the same
facts as were asserted in the class actions in federal court and claims that
those facts demonstrate that the officers named in the class actions, as well as
the Company's directors, breached their fiduciary duties to the Company and the
shareholders in connection with the Company's erroneous reporting of its
financial results.
On April 3, 2001, the Colorado District Court dismissed the derivative
action, without prejudice, based on the plaintiff's admitted failure to make
demand upon the other shareholders to bring the claims before filing suit. Since
the dismissal, the derivative plaintiff has requested access to the Company's
shareholder list, presumably to make the previously omitted demand on
shareholders in preparation for refiling the action.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On March 24, 2000, the Company entered into a $20,000,000 Revolving Credit
Facility (the "Loan Agreement"). Subsequent to that date, it was determined that
the Company was in default of certain covenants under the Loan Agreement from
loan inception. As of March 31, 2001, the Company continued to be in default of
certain covenants under the Loan Agreement. Upon default by the Company, the
lender may call the loan at any time. On September 28, 2000, the Company entered
into a forbearance agreement with the bank, which, among other matters delayed
the bank's right to accelerate payment of the facility to December 15, 2000. The
forbearance agreement increased the interest rate to the prime rate plus 1.5%
through December 15, 2000. Additionally, the forbearance agreement limited the
maximum loan outstanding to an amount determined by a borrowing base formula
which is calculated on the 15th and last day of each month (measurement dates).
The formula relates to inventories, accounts receivable aged less than 90 days,
and equipment. If the value determined by the formula is less than the loan
outstanding on two consecutive measurement dates, the Company is required to
reduce the loan balance to the amount determined by the borrowing base formula.
On December 15, 2000 the Company entered into a second forbearance agreement,
which delayed the bank's right to accelerate payment of the facility to March
31, 2001. The second forbearance agreement also increased the interest rate to
the prime rate plus 2.0% through March 31, 2001. On March 15, 2001, the Company
was required to reduce the loan outstanding by $579,069, to $8,220,931, the
amount determined by the borrowing base formula on that measurement date. On
March 31, 2001, the Company entered into a third forbearance agreement, which
delayed the bank's right to accelerate payment of the facility to June 30, 2001.
Accordingly, the amounts outstanding as of March 31, 2001 have been classified
as current. The third forbearance agreement required an additional $1,500,000
reduction in the loan outstanding, to bring the outstanding balance to
$6,720,931. The third forbearance agreement requires the Company to maintain a
borrowing base
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of at least $6,720,931. The third forbearance agreement also maintained the
interest rate at the prime rate plus 2% through June 30, 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 Executive Employment Agreement with Richard P. Dutkiewicz
dated January 22, 2001.
(b) Reports on Form 8-K
A report on Form 8-K dated January 10, 2001 under Item 5, 7 and 9 was filed
with the Commission on January 19, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VARI-L COMPANY, INC.
Date: May 10, 2001 By: /s/ Richard P. Dutkiewicz
------------------------------- -------------------------------
Richard P. Dutkiewicz,
Vice President of Finance and
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
10.1 Executive Employment Agreement with Richard P. Dutkiewicz
dated January 22, 2001.