SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No. 0-23866
December 31, 2001
VARI-L COMPANY, INC.
(Exact name of Registrant as specified in its charter.)
Colorado 06-0679347
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer identification No.)
4895 Peoria Street
Denver, Colorado 80239
----------------------------------------
(Address of principal executive offices)
(303) 371-1560
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
The number of shares outstanding of each of the issuer's classes of
common stock, as of December 31, 2001:
<Table>
<Caption>
Class of Securities Outstanding Securities
------------------- ----------------------
$0.01 par value 7,128,723 shares
Common shares
</Table>
VARI-L COMPANY, INC.
December 31, 2001
Index
<Table>
Part I. Financial Information
Item 1. Financial Statements:
Balance Sheets, December 31, 2001 (unaudited) and June 30, 2001 2
Statements of Operations, three months ended December 31, 2001 and 2000
and six months ended December 31, 2001 and 2000 (unaudited) 3-4
Statement of Stockholders' Equity, six months ended December 31,
2001 (unaudited) 5
Statements of Cash Flows, six months ended December 31, 2001
and 2000 (unaudited) 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
</Table>
VARI-L COMPANY, INC.
Balance Sheets
(in thousands of dollars)
<Table>
<Caption>
DECEMBER 31, JUNE 30,
ASSETS 2001 2001
----------- ----------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,580 2,013
Trade accounts receivable, net of allowance for doubtful
accounts of $171 and $279, respectively 4,588 5,942
Inventories 2,812 3,640
Prepaid expenses and other current assets 541 645
-------- --------
Total current assets 9,521 12,240
-------- --------
Property and equipment:
Machinery and equipment 11,897 11,616
Furniture and fixtures 839 822
Leasehold improvements 1,499 1,500
-------- --------
14,235 13,938
Less accumulated depreciation and amortization 7,279 6,362
-------- --------
Net property and equipment 6,956 7,576
Intangible and other assets, net of accumulated amortization
of $133 and $109, respectively 649 638
-------- --------
Total assets $ 17,126 20,454
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 924 1,669
Accrued compensation 722 1,286
Other accrued expenses 261 428
Notes payable and current installments of long-term
obligations 1,307 1,764
-------- --------
Total current liabilities 3,214 5,147
Long-term obligations 1,470 1,321
Other liabilities 156 157
-------- --------
Total liabilities 4,840 6,625
-------- --------
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized;
7,128,723 and 7,107,161 shares issued and outstanding,
respectively 71 71
Additional paid-in capital 36,878 36,829
Unamortized stock compensation cost (52) (79)
Accumulated other comprehensive income 29 --
Accumulated deficit (24,640) (22,992)
-------- --------
Total stockholders' equity 12,286 13,829
-------- --------
Commitments and contingencies
Total liabilities and stockholders' equity $ 17,126 20,454
======== ========
</Table>
See accompanying notes to financial statements.
2
VARI-L COMPANY, INC.
Statements of Operations
(in thousands of dollars, except share and per share data)
<Table>
<Caption>
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
(unaudited) (unaudited)
Net sales $ 5,607 10,894
Cost of goods sold 3,285 5,705
----------- -----------
Gross profit 2,322 5,189
----------- -----------
Operating expenses:
Selling 628 1,246
General and administrative 1,521 2,224
Research and development 717 879
Expenses relating to accounting restatements and
the related shareholder litigation, net of recoveries (51) 620
----------- -----------
Total operating expenses 2,815 4,969
----------- -----------
Operating income (loss) (493) 220
Other income (expense):
Interest income 11 104
Interest expense (48) (316)
Other, net 2 (18)
----------- -----------
Total other income (expense) (35) (230)
----------- -----------
Net loss $ (528) (10)
=========== ===========
Loss per share, basic and diluted $ (0.07) *
=========== ===========
Weighted average shares outstanding, basic and diluted 7,128,503 7,079,692
=========== ===========
</Table>
* Loss per share is less than $0.01
See accompanying notes to financial statements.
3
VARI-L COMPANY, INC.
Statements of Operations
(in thousands of dollars, except share and per share data)
<Table>
<Caption>
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
----------- -----------
(unaudited) (unaudited)
Net sales $ 11,283 22,389
Cost of goods sold 6,815 11,843
----------- -----------
Gross profit 4,468 10,546
----------- -----------
Operating expenses:
Selling 1,282 2,313
General and administrative 3,400 3,802
Research and development 1,324 2,393
Expenses relating to accounting restatements and
the related shareholder litigation, net of recoveries 34 1,868
----------- -----------
Total operating expenses 6,040 10,376
----------- -----------
Operating income (loss) (1,572) 170
Other income (expense):
Interest income 29 262
Interest expense (98) (645)
Other, net (7) 2
----------- -----------
Total other income (expense) (76) (381)
----------- -----------
Net loss $ (1,648) (211)
=========== ===========
Loss per share, basic and diluted $ (0.23) (0.03)
=========== ===========
Weighted average shares outstanding, basic and diluted 7,125,980 7,070,861
=========== ===========
</Table>
See accompanying notes to financial statements.
4
VARI-L COMPANY, INC.
Statement of Stockholders' Equity
(in thousands of dollars, except share amounts)
(Unaudited)
<Table>
<Caption>
UNAMORTIZED
COMMON STOCK ADDITIONAL STOCK
-------------------------- PAID-IN COMPENSATION
SHARES AMOUNT CAPITAL COST
---------- ----------- ------------ ------------
Balance, June 30, 2001 7,107,161 $ 71 36,829 (79)
Common stock issued under employee stock purchase plan 20,412 -- 48 --
Common stock issued under stock award plan 1,150 -- 1 --
Amortization of stock compensation cost -- -- -- 27
Unrealized gain on marketable securities -- -- -- --
Net loss -- -- -- --
Comprehensive loss
----------- ----------- ----------- -----------
Balance, December 31, 2001 7,128,723 $ 71 36,878 (52)
=========== =========== =========== ===========
<Caption>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
INCOME DEFICIT LOSS EQUITY
------------- ----------- ------------- -------------
Balance, June 30, 2001 -- (22,992) 13,829
Common stock issued under employee stock purchase plan -- -- 48
Common stock issued under stock award plan -- -- 1
Amortization of stock compensation cost -- -- 27
Unrealized gain on marketable securities 29 -- 29 29
Net loss -- (1,648) (1,648) (1,648)
-----------
Comprehensive loss $ (1,619)
===========
----------- ----------- --------
Balance, December 31, 2001 29 (24,640) 12,286
=========== =========== ========
</Table>
See accompanying notes to financial statements.
5
VARI-L COMPANY, INC.
Statement of Cash Flows
(in thousands of dollars)
<Table>
<Caption>
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
------------ -----------
(unaudited) (unaudited)
Net loss $(1,648) (211)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
Depreciation of property and equipment 996 819
Loss on disposal of assets 7 --
Amortization of intangible assets 16 13
Amortization of debt issue costs 8 --
Common stock issued under profit sharing and stock award plans 1 9
Amortization of stock compensation 27 445
Changes in operating assets and liabilities:
Trade accounts receivable, net 1,354 (473)
Inventories, net 828 1,293
Prepaid expenses and other current assets 133 (395)
Trade accounts payable (745) (1,758)
Accrued compensation (564) 431
Other accrued expenses and liabilities (167) 13
------- -------
Total adjustments 1,894 397
------- -------
Cash provided by operating activities 246 186
------- -------
Cash flows from investing activities:
Purchases of property and equipment (442) (668)
Proceeds from sale of equipment 59 --
Increase (decrease) in other assets (35) (25)
------- -------
Cash used in investing activities (418) (693)
------- -------
Cash flows from financing activities:
Increase (decrease) in bank overdraft -- (321)
Proceeds from notes payable 6,899 --
Payments of notes payable (7,374) (2,700)
Proceeds from long-term obligations 308 --
Payments of long-term obligations (142) (36)
Proceeds from common stock issued under stock purchase plan 48 --
------- -------
Cash used in financing activities (261) (3,057)
------- -------
Decrease in cash and cash equivalents (433) (3,564)
Cash and cash equivalents at beginning of period 2,013 11,030
------- -------
Cash and cash equivalents at end of period $ 1,580 7,466
======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 85 739
======= =======
Cash paid for income taxes $ -- --
======= =======
</Table>
See accompanying notes to financial statements.
6
VARI-L COMPANY, INC.
Notes to Financial Statements
Three and six months ended December 31, 2001 and 2000
(1) BASIS OF PRESENTATION
The accompanying financial statements of the Company have been prepared
without audit (except for the balance sheet information as of June 30,
2001, which is derived from the Company's audited financial statements).
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. These financial statements should be read
in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the period ended June 30,
2001. In the opinion of management, the accompanying unaudited financial
statements include all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the financial position and
results of operations for the periods presented. Interim results of
operations for the three and six months ended December 31, 2001 are not
necessarily indicative of operating results that can be expected for the
full year.
Certain 2000 amounts have been reclassified to conform to the 2001
presentation.
(2) INVENTORIES
Inventories, net of allowances for excess and obsolete items, consist of
the following:
<Table>
<Caption>
DECEMBER 31, JUNE 30,
2001 2001
----------- --------
(in thousands of dollars)
Finished goods $ 396 463
Work-in-process 334 623
Raw materials 2,082 2,554
------- ------
$ 2,812 3,640
======= ======
</Table>
(3) NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable and long-term obligations consist of the following:
<Table>
<Caption>
DECEMBER 31, JUNE 30,
2001 2001
----------- --------
(in thousands of dollars)
Notes payable under Revolving Credit Facility:
Revolving loan $1,005 1,481
Term Loan 1,716 1,500
Promissory notes -- 21
Capital lease obligations 56 83
------ -----
2,777 3,085
Less current installments 1,307 1,764
------ -----
Long-term obligations $1,470 1,321
====== =====
</Table>
7
VARI-L COMPANY, INC.
Notes to Financial Statements
Three and six months ended December 31, 2001 and 2000
On June 28, 2001, the Company entered into a credit agreement with Wells
Fargo Business Credit, Inc (the "Credit Facility"). The Credit Facility
provides for a $6.0 million secured revolving line of credit ("Revolving
Loan"), up to a $2.5 million secured term loan ("Term Loan"), and a $1.5
million secured capital expenditures loan ("Capital Expenditures Loan").
The Credit Facility is secured by substantially all of the Company's
accounts receivable, inventories and equipment and is subject to
covenants that, among other things, impose limitations on capital
expenditures and investments, restrict certain payments and distributions
and require the Company to maintain certain financial ratios.
In September 2001, the Credit Facility was amended to establish revised
financial covenants for the fiscal years ending June 30, 2002 and June
30, 2001.
At December 31, 2001, the interest rates on the Revolving Loan and the
Term Loan were 5.25% and 5.75%, respectively. The Company had additional
borrowing availability of $2.1 million under the Revolving Loan.
The Company periodically reviews the state of the wireless industry in
general and the impact on its financial projections that are provided to
Wells Fargo Business Credit, Inc. Due to continued softness of sales
demand in the wireless industry, financial projections for the remainder
of the fiscal year were revised. Additionally, the Company realized that
the continuing softness in the wireless industry and the related impact
on sales could have resulted in a violation of the covenants. On February
8, 2002, the Company entered into a second amendment to the Credit
Facility. The maximum availability on the Revolving Loan was reduced to
$4.0 million, the interest rate was increased to the lender's prime rate
plus 1% and the formula for calculating availability no longer includes
inventories.
The Term Loan was modified to accelerate the amortization period of the
loan from 84 months to 42 months and the interest rate was increased to
the lender's prime rate plus 2.5%. In addition, the commitment for the
Capital Expenditures Loan was cancelled.
The Company is required to pay a minimum interest charge on the Credit
Facility of $30,000 per calendar quarter.
(4) INCOME TAXES
A valuation allowance was provided for the income tax benefit of the net
operating losses incurred during the three and six months ended December
31, 2001 and 2000.
(5) EXPENSES OF ACCOUNTING RESTATEMENTS, SHAREHOLDER LITIGATION AND RELATED
MATTERS
As discussed in note 6, in early 2000, management of the Company
commenced efforts to restate its previously issued financial statements
after being notified by the Securities and Exchange Commission (the
Commission) that the Commission was investigating its accounting and
reporting practices. Certain costs incurred in conjunction with these
efforts have been separately classified in the Company's Statements of
Operations as "Expenses relating to accounting restatements and the
8
VARI-L COMPANY, INC.
Notes to Financial Statements
Three and six months ended December 31, 2001 and 2000
related shareholder litigation." Expenses included in this
classification include the cost of external counsel for services provided
in connection with shareholder lawsuits and the Commission's
investigation of the Company, the cost of certain consultants and
temporary labor hired to assist in the accounting restatements, and
reimbursements to current and former employees of the Company for their
legal fees and expenses. The accounting restatements were completed in
February 2001, however the Company continues to incur costs related to
shareholder litigation.
(6) LITIGATION, COMMITMENTS AND CONTINGENCIES
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
In September 2001, the Company agreed to a settlement with the Securities
and Exchange Commission under which the Company, without admitting or
denying that it violated any laws, consented to the entry of an
injunction prohibiting future violations by the Company of certain
periodic reporting, record keeping, internal controls, proxy solicitation
and antifraud provisions of the Securities Exchange Act of 1934. On
November 9, 2001, the Company's settlement with the Securities and
Exchange Commission was approved by the United States District Court for
the District of Colorado.
PRIVATE SECURITIES CLASS ACTION
A number of private shareholder class actions alleging violations of
federal securities laws were filed against the Company and certain of its
former officers in the United States District Court for the District of
Colorado beginning in June 2000. Those actions have since been
consolidated and an amended consolidated complaint has been filed by the
class representatives. On November 21, 2001, the Company filed a motion
to dismiss all claims against the Company in the consolidated private
securities class action, Rasner v. Vari-L Company, Inc., Civ. No.
00-S-1181, D. Colo. The Company's motion argues that the amended
consolidated complaint alleges wrongdoing by former corporate employees
in furtherance of their personal interests, as opposed to corporate
interests, which does not state a claim for securities fraud against the
Company. The class action representatives have filed their response to
the Company's motion to dismiss and the Company has filed a reply to that
response but the court has not yet ruled on the motion.
The Company is engaged in settlement discussions with the class
representatives aimed at settling all claims against the Company. While
the Company is optimistic that it will be able to reach a settlement
agreement with the plaintiffs, there is no assurance that a settlement
acceptable to the Company can be achieved or that any settlement reached
will not have a material adverse effect on the Company. In addition, any
settlement will have to be approved by the court after giving all
affected class members an opportunity to express their views concerning
the settlement proposal. Moreover, irrespective of the outcome with
respect to the Company, the individual defendants may have claims against
the Company for advancement or indemnification of their attorneys fees
and other costs of defense, which claims may be material.
9
VARI-L COMPANY, INC.
Notes to Financial Statements
Three and six months ended December 31, 2001 and 2000
As of the date hereof, the Company is unable to reasonably estimate the
possible loss, if any, associated with the securities class action.
SHAREHOLDER DERIVATIVE SUIT
On August 4, 2000, a shareholder derivative action was filed, purportedly
on behalf of the Company, in Colorado state court in Denver against the
same officers named in the class action as well as the members of the
Company's board of directors at the time. The Company was also named as a
nominal defendant. The derivative complaint alleged many of the same
facts as in the federal securities class action, claiming that those
facts demonstrate that the individual defendants breached their fiduciary
duties to the Company and the shareholders. The action was dismissed
without prejudice in April 2001 but an amended complaint was filed by the
same plaintiff in September 2001.
On October 9, 2001, the Company filed a motion to dismiss the second
shareholder derivative action, on various grounds, including the failure
to make the required demands, the failure to commence a new action rather
than trying to revive the previously dismissed case, and the availability
of new management and a new independent Board member to evaluate the
merits, and the timing, of any claims which could be brought by the
Company against the individual defendants. Substantially all of the
individual named defendants subsequently joined in the Company's motion.
Reliance Insurance Company ("Reliance") is the issuer of the $5 million
primary directors and officers liability insurance policy in effect for
the period of time covered by the securities class action and the
derivative action. On October 3, 2001, the Commonwealth Court of
Pennsylvania entered an Order of Liquidation for Reliance. In that order,
the Pennsylvania court requested, as a matter of comity, that all actions
against Reliance, or in which Reliance is obligated to defend a party,
that are pending in courts outside of Pennsylvania, be stayed by those
courts for a period of ninety days. As a result, the Colorado state court
on October 24, 2001 entered an order staying the derivative action
involving the Company for said ninety day period.
The Reliance liquidator has indicated that claimants will be notified in
January 2002 concerning the procedures by which insureds and other
claimants may file claims against the Reliance estate.
As of the date hereof, the Company is unable to reasonably estimate the
possible loss, if any, associated with the derivative action.
10
VARI-L COMPANY, INC.
Notes to Financial Statements
Three and six months ended December 31, 2001 and 2000
DECLARATORY JUDGMENT ACTION BY EXCESS INSURER
On June 5, 2001, Agricultural Excess and Surplus Insurance Company
("AESIC"), which had issued to the Company a $2.5 million excess
directors and officers liability insurance policy for the period of time
covered by the shareholder and class action litigation referenced above,
filed suit in United States District Court for the District of Colorado
asking the court to find that it is not obligated to provide coverage, or
in the alternative, seeking permission to rescind its policy. A
settlement conference has been scheduled for February 2002 by the U.S.
Magistrate assigned to the case.
As of the date hereof, the Company is unable to reasonably estimate the
possible loss, if any, associated with declaratory judgment action.
FORMATION OF SPECIAL LITIGATION COMMITTEE
On December 5, 2001, the Company formed a Special Litigation Committee of
the Board of Directors to investigate allegations of wrongdoing during
prior financial periods by former employees, as well as current and
former members of the Company's Board of Directors.
The Special Litigation Committee is comprised of two outside directors
who joined the Company's Board subsequent to the time of the alleged
wrongdoing. The Special Litigation Committee has retained separate
counsel to complete the investigation.
OTHER
The Company is a party to other legal proceedings and claims in the
ordinary course of its business. The Company believes that the outcome of
these other matters will not have a material adverse affect on its
financial condition, results of operations or liquidity.
(7) SUBSEQUENT EVENT
On January 25, 2002, the Company acquired certain assets of Asvan
Technologies, LLC. The purchase price was $100,000 in cash and a two year
promissory note in the amount of $175,000 secured by a letter of credit.
The note has principal and interest payable in equal monthly installments
at an annual rate of 10%.
11
VARI-L COMPANY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations for the Three Months Ended December 31, 2001 Compared to
the Three Months Ended December 31, 2000
Net Sales
Net sales for the three months ended December 31, 2001 decreased 48.5% to $5.6
million compared with $10.9 million for the three months ended December 31,
2000. This decline is primarily due to a decrease in demand for commercial
signal source products consistent with an overall slowdown in the wireless
telecommunications industry. Revenue from commercial signal source products was
$4.4 million for the three months ended December 31, 2001, a 52.7% decrease from
$9.3 million for the three months ended December 31, 2000. Revenue for the three
months ended December 31, 2000 included fees earned from contract modification
of approximately $0.3 million. Revenue from all other products was $1.2 million
for the three months ended December 31, 2001, a 25.0% decrease from $1.6 million
for the three months ended December 31, 2000.
Gross Profit
Gross profit for the three months ended December 31, 2001 decreased 55.3% to
$2.3 million, or 41.4% of net sales, compared with $5.2 million, or 47.6% of net
sales, for the three months ended December 31, 2000. The gross profit percent in
any period can be affected significantly by volume and unusual items.
Fixed manufacturing overhead adversely affects gross profit at lower sales
volumes. Accordingly, the reduced sales level for the three months ended
December 31, 2001 had the effect of lowering gross profit as a percentage of
sales. In prior years, we sometimes increased our inventory of certain parts
used in our products to reduce the risk of part shortages. However, this
strategy has exposed us to the countervailing risk of accumulating excess
inventory. In June 2001, we hired a Director of Materials Management to minimize
the risk of excess and obsolete inventory. The Director of Materials Management
has introduced new procurement processes that minimize future purchase
commitments in excess of our firm order demand, although, parts previously
identified as excess inventory continue to exist. On a quarterly basis, we
review our inventory on hand and firm purchase commitments versus our sales
forecast to determine the adequacy of the existing reserve for excess and
obsolete inventory.
Included in cost of goods sold for the three months ended December 31, 2001 and
2000 are charges of $66,000 and $340,000, respectively, for excess and obsolete
inventory. Additionally, for the three months ended December 31, 2001, we
charged $65,000 to cost of goods sold for severance costs related to a reduction
in our work force. These charges were offset by $268,000 of recoveries for
previously written-off inventory.
12
Operating Expenses
Included in operating expenses are charges for non-cash stock compensation. The
charges for stock compensation principally relate to amortization of deferred
stock compensation attributable to stock options granted at less than the market
price of the common stock on the date of the grant. Of the $235,000 total amount
of stock compensation recorded for the three months ended December 31, 2000,
$218,000 relates to options granted in December 1999. In December 2000, these
options were re-priced at $34.50 per share, the market price of the common stock
at the date of the original grant. As a result, the remaining unamortized stock
compensation associated with these option grants was reversed in December 2000.
Selling Expenses
Selling expenses for the three months ended December 31, 2001 decreased 49.6% to
$0.6 million, or 11.2% of net sales, compared with $1.2 million, or 11.4% of net
sales, for the three months ended December 31, 2000. The decrease in selling
expenses was primarily attributable to lower commissions paid to manufacturer's
representatives as a result of reduced sales volume and a decrease in charges
for non-cash stock compensation.
General and Administrative Expenses
General and administrative expenses for the three months ended December 31, 2001
decreased 31.6% to $1.5 million, or 27.1% of net sales, compared with $2.2
million, or 20.4% of net sales, for the three months ended December 31, 2000.
The dollar decrease was primarily attributable to significantly reduced spending
on independent contractors for interim management and accounting services and a
decrease in charges for non-cash stock compensation, partially offset by an
increase in salaries and wages for new employees hired in 2001. Additionally, we
recognized a $145,000 benefit from an insurance recovery for undocumented travel
advances to a former employee offset by $20,000 for severance costs related to a
reduction in our work force.
Research and Development Expenses
Research and development expenses for the three months ended December 31, 2001
decreased 18.4% to $0.7 million, or 12.8% of net sales, compared with $0.9
million or 8.1% of net sales, for the three months ended December 31, 2000. The
decrease was primarily attributable to a decrease in charges for non-cash stock
compensation offset by $16,000 for severance costs related to a reduction in our
work force.
Expenses Relating to Accounting Restatements and the Related Shareholder
Litigation
Expenses relating to the accounting restatements and the related shareholder
litigation include the cost of external counsel for services provided in
connection with shareholder lawsuits and the Securities and Exchange Commission
investigation, the cost of certain consultants and temporary labor hired to
assist in the accounting restatements, and reimbursements to current and former
employees for their legal fees and expenses. Included in expenses relating to
accounting restatements and the related shareholder litigation for the three
months ended December 31, 2001, is a benefit of $117,000 resulting from an
adjustment of an estimated liability recorded in a previous period. Expenses
relating to the accounting restatements and the related shareholder litigation
for the three months ended December 31, 2000 were $0.6 million.
13
Other Income (Expense)
Interest income decreased 89.4% to $11,000 for the three months ended December
31, 2001 compared with $104,000 for the three months ended December 31, 2000.
The decrease was attributable to lower average cash balances available in the
quarter for investing, along with lower interest rates on invested balances.
Interest expense and other, net, decreased 86.2% to $46,000 for the three months
ended December 31, 2001 compared with $334,000 for the three months ended
December 31, 2000. The decrease was primarily attributable to reduction in the
outstanding debt associated with the new credit facility and lower interest
rates on the new credit facility.
Net Loss and Loss per Share
The net loss for the three months ended December 31, 2001 was $528,000 or $0.07
per share. Excluding the impact of stock compensation, which is a non-cash
charge, expenses relating to accounting restatements and the related shareholder
litigation (which management believes are not indicative of continuing operating
expenses) and severance costs associated with the reduction in our workforce,
offset by the benefit of the inventory recovery and the insurance recovery for
undocumented travel advances, net loss would have been $878,000 or $0.12 per
share.
For the three months ended December 31, 2000, the net loss was $10,000, or less
than $0.01 per share. Excluding the impact of stock compensation, which is a
non-cash charge and expenses relating to accounting restatements (which
management believes are not indicative of continuing operating expenses) net
income for the three months ended December 31, 2000 would have been $845,000 or
$0.12 per share.
Results of Operations for the Six Months Ended December 31, 2001 Compared to the
Six Months Ended December 31, 2000
Net Sales
Net sales for the six months ended December 31, 2001 decreased 49.6% to $11.3
million compared with $22.4 million for the six months ended December 31, 2000.
This decline is primarily due to a decrease in demand for commercial signal
source products consistent with an overall slowdown in the wireless
telecommunications industry. Revenue from commercial signal source products was
$8.7 million for the six months ended December 31, 2001, a 53.5% decrease from
$18.7 million for the six months ended December 31, 2000. Revenue for the six
months ended December 31, 2000 included fees earned from a contract modification
of approximately $0.3 million. Revenue from all other products was $2.6 million
for the six months ended December 31, 2001, a 29.7% decrease from $3.7 million
for the six months ended December 31, 2000. Revenue for the six months ended
December 31, 2000 included a significant end-of-life production run generating
net sales of approximately $0.8 million.
Gross Profit
Gross profit for the six months ended December 31, 2001 decreased 57.6% to $4.5
million, or 39.6% of net sales, compared with $10.5 million, or 47.1% of net
sales, for the six months ended December 31, 2000. The gross profit percent in
any period can be affected significantly by volume and unusual items.
14
Fixed manufacturing overhead adversely affects gross profit at lower sales
volumes. Accordingly, the reduced sales level for the six months ended December
31, 2001 had the effect of lowering gross profit as a percentage of sales. In
prior years, we sometimes increased our inventory of certain parts used in our
products to reduce the risk of part shortages. However, this strategy has
exposed us to the countervailing risk of accumulating excess inventory. In June
2001, we hired a Director of Materials Management to minimize the risk of excess
and obsolete inventory. The Director of Materials Management has introduced new
procurement processes that minimize future purchase commitments in excess of our
firm order demand, although, parts previously identified as excess inventory
continue to exist. On a quarterly basis, we review our inventory on hand and
firm purchase commitments versus our sales forecast to determine the adequacy of
the existing reserve for excess and obsolete inventory.
Included in cost of goods sold for the six months ended December 31, 2001 and
2000 are charges of $122,000 and $886,000, respectively, for excess and obsolete
inventory. Additionally, for the six months ended December 31, 2001, we charged
$65,000 to cost of goods sold for severance costs related to a reduction in our
work force. These charges were offset by $268,000 of recoveries for previously
written-off inventory.
Operating Expenses
Included in operating expenses are charges for non-cash stock compensation. The
charges for stock compensation principally relate to amortization of deferred
stock compensation attributable to stock options granted at less than the market
price of the common stock on the date of the grant. Of the $445,000 total amount
of stock compensation recorded for the six months ended December 31, 2000,
$409,000 relates to options granted in December 1999. In December 2000, these
options were re-priced at $34.50 per share, the market price of the common stock
at the date of the original grant. As a result, the remaining unamortized stock
compensation associated with these option grants was reversed in December 2000.
Selling Expenses
Selling expenses for the six months ended December 31, 2001 decreased 44.6% to
$1.3 million, or 11.4% of net sales, compared with $2.3 million, or 10.3% of net
sales, for the six months ended December 31, 2000. The decrease in selling
expenses was primarily attributable to lower commissions paid to manufacturer's
representatives as a result of reduced sales volume and a decrease in charges
for non-cash stock compensation.
General and Administrative Expenses
General and administrative expenses for the six months ended December 31, 2001
decreased 10.6% to $3.4 million, or 30.1% of net sales, compared with $3.8
million, or 17.0% of net sales, for the six months ended December 31, 2000. The
dollar decrease was primarily attributable to reduced spending on independent
contractors for interim management and accounting services and a decrease in
charges for non-cash stock compensation, partially offset by an increase in
salaries and wages for new employees hired in 2001. Additionally, we recognized
a $145,000 benefit from an insurance recovery for undocumented travel advances
to a former employee offset by $20,000 for severance costs related to a
reduction in our work force.
Research and Development Expenses
Research and development expenses for the six months ended December 31, 2001
decreased 44.7% to $1.3 million, or 11.7% of net sales, compared with $2.4
million or 10.7% of net sales,
15
for the six months ended December 31, 2000. The decrease was primarily
attributable to lower salaries and benefits from the permanent transfer of
personnel to assist in business development efforts, fewer employees engaged in
research and development efforts and a decrease in charges for non-cash stock
compensation offset by $16,000 for severance costs related to a reduction in our
work force.
Expenses Relating to Accounting Restatements and the Related Shareholder
Litigation
Expenses relating to the accounting restatements and the related shareholder
litigation for the six months ended December 31, 2001 and 2000, were $34,000 and
$1.9 million, respectively. Included in expenses relating to accounting
restatements and the related shareholder litigation for the six months ended
December 31, 2001, is a benefit of $117,000 resulting from an adjustment of an
estimated liability recorded in a previous period. These expenses include the
cost of external counsel for services provided in connection with shareholder
lawsuits and the Securities and Exchange Commission investigation, the cost of
certain consultants and temporary labor hired to assist in the accounting
restatements, and reimbursements to current and former employees for their legal
fees and expenses.
Other Income (Expense)
Interest income decreased 88.9% to $29,000 for the six months ended December 31,
2001 compared with $262,000 for the six months ended December 31, 2000. The
decrease was attributable to lower average cash balances available in the
quarter for investing, along with lower interest rates on invested balances.
Interest expense and other, net, decreased 83.7% to $105,000 for the six months
ended December 31, 2001 compared with $643,000 for the six months ended December
31, 2000. The decrease was primarily attributable to reduction in the
outstanding debt associated with the new credit facility and lower interest
rates on the new credit facility.
Net Loss and Loss per Share
The net loss for the six months ended December 31, 2001 was $1.6 million or
$0.23 per share. Excluding the impact of stock compensation, which is a non-cash
charge, expenses relating to accounting restatements and the related shareholder
litigation (which management believes are not indicative of continuing operating
expenses) and severance costs associated with the reduction in our workforce,
offset by the benefit of the inventory recovery and the insurance recovery for
undocumented travel advances, net loss would have been $1.9 million or $0.27 per
share.
For the six months ended December 31, 2000, the net loss was $211,000, or $0.03
per share. Excluding the impact of stock compensation, which is a non-cash
charge and expenses relating to accounting restatements (which management
believes are not indicative of continuing operating expenses) net income for the
three months ended December 31, 2000 would have been $2.1 million or $0.30 per
share (basic and diluted).
Liquidity and Capital Resources
As of December 31, 2001, working capital was $6.3 million, including cash and
cash equivalents of $1.6 million. Working capital at June 30, 2001 was $7.1
million, including cash and cash equivalents of $2.0 million. Operating
activities generated $246,000 of cash, largely from the reduction of accounts
receivable through collections and lower sales volumes in the quarter.
Additionally, we continued our focus on reducing inventory levels and increasing
inventory turns. The cash generated from these efforts was partially offset by
the net loss, adjusted for non-
16
cash charges, the payment of annual bonuses to employees and reduced accounts
payable due to lower costs and expenses attributable to lower sales volumes.
Capital expenditures for the six months ended December 31, 2001 were $442,000.
We focused capital expenditures primarily on information technology hardware and
software.
We reduced our notes payable and long-term obligations by $0.3 million as of
December 31, 2001 as compared to June 30, 2001. Our new credit facility under
Wells Fargo Business Credit, Inc. allows us to borrow and re-pay our obligations
based upon our cash flow needs at any time subject to maximum loan amounts as
determined by a calculated borrowing base.
We are involved in legal proceedings and claims in the ordinary course of our
business for which we may be exposed to a certain amount of risk. We are unable
to estimate the possible loss, if any, associated with these matters.
While we believe that a single building or facility would be more efficient and
cost effective, we have not yet found a facility at this time which fits our
needs. We are continuing to review various alternatives on our facilities.
Credit Facility
On June 28, 2001, we entered into a credit agreement with Wells Fargo Business
Credit, Inc (the "Credit Facility"). Concurrent with the closing of the Credit
Facility, we paid our former lender, Bank One, in full.
The Credit Facility provides for a $6.0 million secured revolving line of credit
("Revolving Loan"), a $2.5 million secured term loan ("Term Loan"), and a $1.5
million secured capital expenditures loan ("Capital Expenditures Loan").
The Credit Facility is secured by substantially all of our accounts receivable,
inventories and equipment and is subject to covenants that, among other things,
impose limitations on capital expenditures and investments, restrict certain
payments and distributions and requires us to maintain certain financial ratios.
In September 2001, the Credit Facility was amended to establish revised
financial covenants for the fiscal years ending June 30, 2002 and June 30, 2001.
The Company periodically reviews the state of the wireless industry in general
and the impact on its financial projections that are provided to Wells Fargo
Business Credit, Inc. Due to continued softness of sales demand in the wireless
industry, financial projections for the remainder of the fiscal year were
revised. Additionally, the Company realized that the continuing softness in the
wireless industry and the related impact on sales could have resulted in a
violation of the covenants. On February 8, 2002, the Company entered into a
second amendment to the Credit Facility. The maximum availability on the
Revolving Loan was reduced to $4.0 million, the interest rate was increased to
the lender's prime rate plus 1% and the formula for calculating availability no
longer includes inventories.
The Term Loan was modified to accelerate the amortization period of the loan
from 84 months to 42 months and the interest rate was increased to the lender's
prime rate plus 2.5%. In addition, the commitment for the Capital Expenditures
Loan was cancelled.
17
At December 31, 2001, the interest rates on the Revolving Loan and the Term Loan
were 5.25% and 5.75%, respectively. The Company had additional borrowing
availability of $2.1 million under the Revolving Loan.
We are required to pay a minimum interest charge on the Credit Facility of
$30,000 per calendar quarter.
We believe that anticipated cash flows from operations and borrowings available
under the Credit Facility will be adequate to fund our currently planned working
capital and capital expenditure requirements at least through June 30, 2002.
Forward-Looking Statements
Some of the statements we make in this report are "forward-looking statements"
as that term is used in the Private Securities Litigation Reform Act of 1995. In
most cases, when we use words like "believe," "expect," "estimate,"
"anticipate," "project," or "plan" to describe something which has not yet
occurred, we are making a forward-looking statement. Forward-looking statements
we make are based on a number of assumptions by us about the future, usually
based on current conditions or on the broader expectations of others. These
assumptions may or may not prove to be correct and, as a result, our own
forward-looking statements may also be inaccurate. On the other hand, based on
what we know today and what we expect in the future, we believe that the
forward-looking statements we make in this report are reasonable.
The tragic events of September 11, 2001 have created broad uncertainty on the
global economy as a whole. We and our customers are still in the process of
assessing the impact on the telecommunications industry in general and more
specifically, on the wireless infrastructure market.
We cannot list here all of the risks and uncertainties that could cause our
actual future financial and operating results to differ materially from our
historical experience and our present expectations or projections but we can
identify many of them. For example, our future results could be affected by the
overall market for various types of wireless communications products, the
success of the specific products into which our products are integrated,
governmental action relating to wireless communications, licensing and
regulation, the accuracy of our internal projections as to the demand for
certain types of technological innovation, competitors' products and pricing,
the success of new product development efforts, the timely release for
production and the delivery of products under existing contracts and the
ultimate outcome of pending and threatened litigation and regulatory action. It
is also important to remember that forward-looking statements speak only as of
the date when they are made and we do not promise that we will publicly update
or revise those statements whenever conditions change or future events occur.
Accordingly, we do not recommend that any person seeking to evaluate our company
should place undue reliance on any forward-looking statement in this report.
Effect of Recently Issued Accounting Standards
The Financial Accounting Standards Board recently issued FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. Statement No. 144 supersedes the accounting and reporting provisions of
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, with respect to when certain
18
asset impairment losses must be measured and recorded. Statement No. 144 also
supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
it retains the requirement in Opinion 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. We do not anticipate a material impact on our
financial condition or results of operations as a result of implementing this
standard. Statement No. 144 is effective for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks, including the effects of adverse changes
in interest rates. Our exposure to changes in interest rates results from
borrowings with floating interest rates. At the present time, we have no
financial instruments in place to manage the impact of changes in interest
rates. As of December 31, 2001, we had notes payable outstanding under our
Credit Facility of $2.7 million. Of this amount, $1.7 million was outstanding on
our Term Loan at an interest rate of 5.75% and $1.0 million was outstanding on
our Revolving Loan at an interest rate of 5.25%.
19
VARI-L COMPANY, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Note 6 to the financial
statements.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
On November 9, 2001, the Company's settlement with the Securities and Exchange
Commission was approved by the United States District Court for the District of
Colorado.
PRIVATE SECURITIES CLASS ACTION
On November 21, 2001, the Company filed a motion to dismiss all claims against
the Company in the consolidated private securities class action, Rasner v.
Vari-L Company, Inc., Civ. No. 00-S-1181, D. Colo. The Company's motion argues
that the amended consolidated complaint alleges wrongdoing by former corporate
employees in furtherance of their personal interests, as opposed to corporate
interests, which does not state a claim for securities fraud against the
Company. The class action representatives have filed their response to the
Company's motion to dismiss and the Company has filed a reply to that response
but the court has not yet ruled on the motion.
The Company is engaged in settlement discussions with the class representatives
aimed at settling all claims against the Company. While the Company is
optimistic that it will be able to reach a settlement agreement with the
plaintiffs, there is no assurance that a settlement acceptable to the Company
can be achieved or that any settlement reached will not have a material adverse
effect on the Company. Any settlement will have to be approved by the court
after giving all affected class members an opportunity to express their views
concerning the settlement proposal. Moreover, irrespective of the outcome with
respect to the Company, the individual defendants may have claims against the
Company for advancement or indemnification of their attorneys fees and other
costs of defense, which claims may be material.
SHAREHOLDER DERIVATIVE SUIT
On October 3, 2001, the Commonwealth Court of Pennsylvania entered an Order of
Liquidation for Reliance Insurance Company, the issuer of the Company's $5
million primary directors and officers insurance policy in force for the period
of time covered by the class action and derivative litigation. In that order,
the Pennsylvania court requested, as a matter of comity, that all actions
against Reliance, or in which Reliance is obligated to defend a party, that are
pending in courts outside of Pennsylvania, be stayed by those courts for a
period of ninety days. As a result, the
20
Colorado state court on October 24, 2001 entered an order staying the derivative
action against the Company for said ninety day period.
The Reliance liquidator has indicated that claimants will be notified in January
2002 concerning the procedures by which insureds and other claimants may file
claims against the Reliance estate.
On October 9, 2001, the Company filed a motion to dismiss the shareholder
derivative action, on various grounds, including the failure to make the
required demands, the failure to commence a new action rather than trying to
revive the previously dismissed case, and the availability of new management and
a new independent Board member to evaluate the merits, and the timing, of any
claims which could be brought by the Company against the individual defendants.
Substantially all of the individual named defendants subsequently joined in the
Company's motion.
DECLARATORY JUDGMENT ACTION BY EXCESS INSURER
A settlement conference has been scheduled for February 2002 by the U.S.
Magistrate assigned to this declaratory judgment action brought by the Company's
excess liability directors and officers liability insurance carrier.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 Employee Stock Purchase Plan as of November 30, 2001.
(b) Reports on Form 8-K
A report on Form 8-K dated October 30, 2001 under Item 9 was filed
with the Commission on October 31, 2001.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
VARI-L COMPANY, INC.
Date: February 11, 2002 By:/s/ RICHARD P. DUTKIEWICZ
----------------- -----------------------------
Richard P. Dutkiewicz,
Vice President of Finance and
Chief Financial Officer
22
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
Exhibit 10.1 Employee Stock Purchase Plan as of November 30,
2001.
</Table>