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