SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No. 0-23866
September 30, 2001
VARI-L COMPANY, INC.
(Exact name of Registrant as specified in its charter.)
Colorado 06-0679347
------------------------ -------------------------------
(State of Incorporation) (I.R.S. Employer identification No.)
4895 Peoria Street
Denver, Colorado 80239
----------------------
(Address of principal executive offices)
(303) 371-1560
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 2001:
<Table>
<Caption>
Class of Securities Outstanding Securities
------------------- ----------------------
$0.01 par value 7,128,123 shares
Common shares
</Table>
VARI-L COMPANY, INC.
September 30, 2001
Index
<Table>
Part I. Financial Information
Item 1. Financial Statements:
Balance Sheets, September 30, 2001 (unaudited) and June 30, 2001 2
Statements of Operations, three months ended September 30, 2001
and 2000 (unaudited) 3
Statements of Stockholders' Equity, three months ended September 30,
2001 (unaudited) and year ended June 30, 2001 4
Statements of Cash Flows, three months ended September 30, 2001
and 2000 (unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
</Table>
1
VARI-L COMPANY, INC.
Balance Sheets
(in thousands of dollars)
<Table>
<Caption>
SEPTEMBER 30, JUNE 30,
ASSETS 2001 2001
------------- ----------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,683 2,013
Trade accounts receivable, less allowance for doubtful
accounts of $212 and $279, respectively 4,276 5,942
Inventories 3,119 3,640
Prepaid expenses and other current assets 697 645
------------- ----------
Total current assets 9,775 12,240
------------- ----------
Property and equipment:
Machinery and equipment 11,714 11,616
Furniture and fixtures 839 822
Leasehold improvements 1,499 1,500
------------- ----------
14,052 13,938
Less accumulated depreciation and amortization 6,822 6,362
------------- ----------
Net property and equipment 7,230 7,576
Intangible and other assets, net of accumulated amortization
of $121 and $109, respectively 637 638
------------- ----------
Total assets $ 17,642 20,454
============= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,261 1,669
Accrued compensation 1,004 1,286
Other accrued expenses 422 428
Notes payable and current installments of long-term
obligations 756 1,764
------------- ----------
Total current liabilities 3,443 5,147
Long-term obligations 1,272 1,321
Other liabilities 157 157
------------- ----------
Total liabilities 4,872 6,625
------------- ----------
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized;
7,128,123 and 7,107,161 shares issued and outstanding,
respectively 71 71
Additional paid-in capital 36,877 36,829
Unamortized stock compensation cost (66) (79)
Accumulated deficit (24,112) (22,992)
------------- ----------
Total stockholders' equity 12,770 13,829
------------- ----------
Commitments and contingencies
Total liabilities and stockholders' equity $ 17,642 20,454
============= ==========
</Table>
See accompanying notes to financial statements.
2
VARI-L COMPANY, INC.
Statements of Operations
(in thousands of dollars, except share and per share data)
<Table>
<Caption>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------- -------------
(unaudited) (unaudited)
Net sales $ 5,676 11,495
Cost of goods sold 3,530 6,138
------------- -------------
Gross profit 2,146 5,357
------------- -------------
Operating expenses:
Selling 654 1,067
General and administrative 1,879 1,578
Research and development 607 1,514
Expenses relating to accounting restatements and
the related shareholder litigation 85 1,248
------------- -------------
Total operating expenses 3,225 5,407
------------- -------------
Operating loss (1,079) (50)
Other income (expense):
Interest income 18 158
Interest expense (50) (329)
Other, net (9) 20
------------- -------------
Total other income (expense) (41) (151)
------------- -------------
Net loss $ (1,120) (201)
============= =============
Loss per share, basic and diluted $ (0.16) (0.03)
============= =============
Weighted average shares outstanding, basic and diluted 7,123,456 7,070,702
============= =============
</Table>
See accompanying notes to financial statements.
3
VARI-L COMPANY, INC.
Statements of Stockholders' Equity
(in thousands of dollars)
<Table>
<Caption>
UNAMORTIZED
COMMON STOCK ADDITIONAL STOCK TOTAL
------------------- PAID-IN COMPENSATION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COST DEFICIT EQUITY
---------- ------ ---------- ------------ ----------- -------------
Balance, June 30, 2000 7,070,423 71 40,525 (4,318) (21,593) 14,685
Common stock issued under employee stock
purchase plan 35,388 -- 45 -- -- 45
Common stock issued under stock award plan 1,350 -- 11 -- -- 11
Stock options forfeited -- -- (219) 219 -- --
Amortization of stock compensation cost -- -- -- 487 -- 487
Reversal of stock compensation due to reformation -- -- (3,533) 3,533 -- --
Net loss -- -- -- -- (1,399) (1,399)
---------- ------ ---------- ------------ ----------- -------------
Balance, June 30, 2001 7,107,161 $ 71 36,829 (79) (22,992) 13,829
Common stock issued under employee stock purchase
plan (unaudited) 20,412 -- 48 -- -- 48
Common stock issued under stock award plan
(unaudited) 550 -- -- -- -- --
Amortization of stock compensation cost (unaudited) -- -- -- 13 -- 13
Net loss (unaudited) -- -- -- -- (1,120) (1,120)
---------- ------ ---------- ------------ ----------- -------------
Balance September 30, 2001 (unaudited) 7,128,123 $ 71 36,877 (66) (24,112) 12,770
========== ====== ========== ============ =========== =============
</Table>
See accompanying notes to financial statements.
4
VARI-L COMPANY, INC.
Statement of Cash Flows
(in thousands of dollars)
<Table>
<Caption>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------- -------------
(unaudited) (unaudited)
Net loss $ (1,120) (201)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
Depreciation of property and equipment 489 406
Loss on disposal of assets 12 --
Amortization of intangible assets 8 7
Common stock issued under profit sharing and stock award plans -- 8
Amortization of stock compensation 13 211
Changes in operating assets and liabilities:
Trade accounts receivable, net 1,666 (1,835)
Inventories, net 521 166
Prepaid expenses and other current assets (52) (423)
Trade accounts payable (408) (1,289)
Accrued compensation (282) 344
Other accrued expenses and liabilities (6) 59
------------- -------------
Total adjustments 1,961 (2,346)
------------- -------------
Cash provided by (used in) operating activities 841 (2,547)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (175) (281)
Proceeds from sale of equipment 20 --
Increase (decrease) in other assets (11) (8)
------------- -------------
Cash used in investing activities (166) (289)
------------- -------------
Cash flows from financing activities:
Increase (decrease) in bank overdraft -- 486
Proceeds from notes payable 1,211 --
Payments of notes payable (2,199) (1,600)
Proceeds from long-term obligations -- --
Payments of long-term obligations (69) (16)
Amortization of debt issue costs 4 --
Proceeds from stock options exercised -- --
Proceeds from common stock issued under stock purchase plan 48 --
------------- -------------
Cash provided by (used in) financing activities (1,005) (1,130)
------------- -------------
Increase (decrease) in cash and cash equivalents (330) (3,966)
Cash and cash equivalents at beginning of period 2,013 11,030
------------- -------------
Cash and cash equivalents at end of period $ 1,683 7,064
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 40 477
============= =============
Cash paid for income taxes $ -- --
============= =============
</Table>
See accompanying notes to financial statements.
5
VARI-L COMPANY, INC.
Notes to Financial Statements
Three months ended September 30, 2001 and 2000
(1) BASIS OF PRESENTATION
The accompanying financial statements of the Company have been prepared
without audit (except for the balance sheet information as of June 30,
2001, which is derived from the Company's audited financial statements).
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. These financial statements should be read
in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the period ended June 30,
2001. In the opinion of management, the accompanying unaudited financial
statements include all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the financial position and
results of operations for the periods presented. Interim results of
operations for the three months ended September 30, 2001 are not
necessarily indicative of operating results that can be expected for the
full year.
(2) INVENTORIES
Inventories, net of allowances for excess and obsolete items, consist of
the following:
<Table>
<Caption>
SEPTEMBER 30, JUNE 30,
2001 2001
------------- ------------
(in thousands of dollars)
Finished goods $ 414 463
Work-in-process 483 623
Raw materials 2,222 2,554
------------- ------------
$ 3,119 3,640
============= ============
</Table>
(3) NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable and long-term obligations consist of the following:
<Table>
<Caption>
SEPTEMBER 30, JUNE 30,
2001 2001
------------- ------------
(in thousands of dollars)
Notes payable under Revolving Credit Facility:
Revolving loan $ 493 1,481
Term Loan 1,464 1,500
Promissory notes 1 21
Capital lease obligations 70 83
------------- ------------
2,028 3,085
Less current installments 756 1,764
------------- ------------
Long-term obligations $ 1,272 1,321
============= ============
</Table>
On June 28, 2001, the Company entered into a credit agreement with Wells
Fargo Business Credit, Inc (the "Credit Facility"). The Credit Facility
provides for a $6.0 million secured revolving line of
6
VARI-L COMPANY, INC.
Notes to Financial Statements
Three months ended September 30, 2001 and 2000
credit ("Revolving Loan"), up to a $2.5 million secured term loan ("Term
Loan"), and a $1.5 million secured capital expenditures loan ("Capital
Expenditures Loan") (collectively "the Credit Facility").
In September 2001, the Credit Facility was amended to establish revised
financial covenants for the fiscal years ending June 30, 2002 and June
30, 2001.
The Credit Facility is secured by substantially all of the Company's
accounts receivable, inventories and equipment and is subject to
covenants that, among other things, impose limitations on capital
expenditures and investments, restrict certain payments and distributions
and require the Company to maintain certain financial ratios.
The Revolving Loan matures on June 28, 2004 and has interest payable in
monthly installments at the prime rate plus 0.5%. The interest rate at
September 30, 2001 was 6.5%. The Company is required to pay an unused
credit line fee of 0.25% per annum on the average daily unused amount.
The unused line fee is payable monthly in arrears. At September 30, 2001,
the Company had additional borrowing availability of $2.0 million under
its Revolving loan, calculated using a formula based on inventories and
accounts receivable aged less than 90 days.
The Term Loan and Capital Expenditures Loan mature on June 28, 2004 and
have principal and interest payable in monthly installments at the prime
rate plus 1% amortized over seven and five years, respectively. The
interest rate on the loans outstanding at September 30, 2001 was 7.0%.
The Company is required to pay a minimum interest charge on the Credit
Facility of $30,000 per calendar quarter.
Proceeds from the Credit Facility were used to repay the amount
outstanding under the former credit facility, which consisted of a $20.0
million revolving line of credit. The former credit facility provided for
interest based on the prime rate plus a margin (9.5% at June 30, 2000).
The former credit facility was secured by receivables, inventory,
property and equipment.
(4) INCOME TAXES
For the three months ended September 30, 2001 and 2000, the Company
recorded no provision for federal or state income taxes since a valuation
allowance was provided for the income tax benefit of the net operating
losses incurred during those periods.
(5) EXPENSES OF ACCOUNTING RESTATEMENTS, SHAREHOLDER LITIGATION AND RELATED
MATTERS
As discussed in note 6, in early 2000, management of the Company
commenced efforts to restate its previously issued financial statements
after being notified by the Securities and Exchange Commission (the
Commission) that the Commission was investigating its accounting and
reporting practices. Certain costs incurred in conjunction with these
efforts have been separately classified on the Company's statements of
operations as "expenses relating to accounting restatements and the
related shareholder litigation." Expenses included in this classification
include the cost of external
7
VARI-L COMPANY, INC.
Notes to Financial Statements
Three months ended September 30, 2001 and 2000
counsel for services provided in connection with shareholder lawsuits and
the Commission's investigation of the Company, the cost of certain
consultants and temporary labor hired to assist in the accounting
restatements, and reimbursements to current and former employees of the
Company for their legal fees and expenses. The accounting restatements
were completed in February 2001, however the Company continues to incur
costs related to shareholder litigation.
(6) LITIGATION, COMMITMENTS AND CONTINGENCIES
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
In September 2001, the Company agreed to a settlement with the Securities
and Exchange Commission under which the Company, without admitting or
denying that it violated any laws, consented to the entry of an
injunction prohibiting future violations by the Company of certain
periodic reporting, record keeping, internal controls, proxy solicitation
and antifraud provisions of the Securities Exchange Act of 1934. The
proposed settlement would not require the Company to pay any civil
penalties or money damages. The settlement has been submitted to the
federal district court in Denver for its approval, which the Company
considers to be likely. The Commission's complaint also named certain of
the Company's current and former officers as defendants, some of whom
have also settled with the Commission.
PRIVATE SECURITIES CLASS ACTION
A number of private shareholder class actions alleging violations of
federal securities laws were filed against the Company and certain of its
former officers in the United States District Court for the District of
Colorado beginning in June 2000. On August 30, 2000, all of these class
actions were consolidated into a single action, and the Company's
obligation to respond to the complaints was deferred until such time as
the lead plaintiff for the purported class files an amended complaint. On
October 9, 2001, the plaintiff filed a consolidated amended class action
complaint alleging violations of the general antifraud provision of the
Exchange Act, Section 10(b), and Rule 10b-5 promulgated thereunder, and
vicarious liability of the individual defendants for any violations by
the Company as "controlling persons" under Section 20(a) of the Exchange
Act. The complaint seeks compensatory damages in an unspecified amount,
attorneys' fees and costs of suit, and any other relief the court deems
just and proper. While there can be no assurance that it will be
successful in its defense of this lawsuit, the Company believes that it
has valid defenses to the claims alleged against it and intends to
vigorously defend itself.
Although the Company previously engaged in preliminary settlement
discussions with the class representatives, there can be no assurance
that a settlement acceptable to the Company can be reached or that any
settlement reached will not have a material adverse effect on the
Company. In addition, irrespective of the outcome with respect to the
Company, the individual defendants may have claims against the Company
for advancement or indemnification of their attorneys fees and other
costs of defense, which claims may be material.
8
VARI-L COMPANY, INC.
Notes to Financial Statements
Three months ended September 30, 2001 and 2000
SHAREHOLDER DERIVATIVE SUIT
On August 4, 2000, a shareholder derivative action was filed, purportedly
on behalf of the Company, in Colorado state court in Denver against the
same officers named in the class action as well as the members of the
Company's board of directors at the time. The Company was named in that
action as a nominal defendant. The derivative complaint alleged many of
the same facts as in the class actions in federal court, claiming that
those facts demonstrate that the individual defendants breached their
fiduciary duties to the Company and the shareholders in connection with
the Company's erroneous reporting of its financial results.
On April 3, 2001, the Colorado District Court dismissed the derivative
action, without prejudice, based on the plaintiff's admitted failure to
make demand upon the other shareholders to bring the claims before filing
suit. On September 24, 2001, the plaintiff from the dismissed action
filed an amended complaint seeking to reinstate that case, claiming that
the requirements for a prior demand on the Company's shareholders and its
board of directors could not be met or would be futile. The Company has
filed a motion to dismiss on various grounds, including the failure to
make the required demands, the failure to commence a new action rather
than trying to revive the dismissed case, and the availability of new
management and a new independent Board member to evaluate the merits, and
the timing, of any claims to be brought by the Company against the
individual defendants.
DECLARATORY JUDGMENT ACTION BY EXCESS INSURER
On June 5, 2001, Agricultural Excess and Surplus Insurance Company
("AESIC"), which had issued to the Company a $2.5 million excess
directors and officers liability insurance policy for the period of time
covered by the shareholder and class action litigation referenced above,
filed suit in federal district court in Denver asking the court to find
that it is not obligated to provide coverage, or in the alternative,
seeking permission to rescind its policy. The Company is reviewing the
claim and intends to take all steps necessary to ensure that the coverage
to which it is entitled, and for which it has paid, remains in force. The
Company has had preliminary discussions with AESIC, but there can be no
assurance that a mutually acceptable resolution can be reached with the
insurer.
The Company is also seeking coverage from Reliance Insurance Company
("Reliance"), the issuer of the $5 million primary directors and officers
liability insurance policy in effect at the same time as the AESIC
policy. Since May 29, 2001, Reliance has been operating under the
supervision of the Pennsylvania Insurance Commissioner pursuant to an
Order of Rehabilitation entered by the Commonwealth Court of Pennsylvania
against Reliance. On October 3, 2001, the court entered an order of
liquidation of Reliance. Reliance did not inform the Company whether it
intended to dispute coverage under its policy before the order of
liquidation was entered. As a result, Reliance's defenses to the
Company's claim, if any, will be considered as part of the liquidation
process, when the Company files the required notice of claim with the
court. There can be no assurance that the liquidator will not dispute
Reliance's obligation to provide coverage to the Company or its officers
and directors or that there will be sufficient financial resources to
satisfy the Company's claim. Any
9
VARI-L COMPANY, INC.
Notes to Financial Statements
Three months ended September 30, 2001 and 2000
such failure could have an adverse effect on the Company's future
financial results, ability to resolve the litigation pending against the
Company and its officers and directors, and on the Company's liability
for indemnification of those officers and directors.
As of the date hereof, the Company is unable to reasonably estimate the
possible loss, if any, associated with any of these matters.
OTHER
The Company is a party to other legal proceedings and claims in the
ordinary course of its business. The Company believes that the outcome of
these other matters will not have a material adverse affect on its
financial condition, results of operations or liquidity.
10
VARI-L COMPANY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations for the Three Months Ended September 30, 2001 Compared to
the Three Months Ended September 30, 2000
Net Sales
Net sales for the three months ended September 30, 2001 decreased 50.4% to $5.7
million compared with $11.5 million for the three months ended September 30,
2000. This decline is primarily due to a decrease in demand for commercial
signal source products consistent with an overall slowdown in the wireless
telecommunications industry. Revenue from commercial signal source products was
$4.3 million for the three months ended September 30, 2001, a 54.3% decrease
from $9.4 million for the three months ended September 30, 2000. Revenue from
all other products was $1.4 million for the three months ended September 30,
2001, a 7.7% increase from $1.3 million for the three months ended September 30,
2000. Also included in the three months ended September 30, 2000, was a
significant end of life production run generating net sales of $809,000.
Gross Profit
Gross profit for the three months ended September 30, 2001 decreased 61.1% to
$2.1 million, or 36.8% of net sales, compared with $5.4 million, or 47.0% of net
sales, for the three months ended September 30, 2000. Included in cost of goods
sold for the three months ended September 30, 2001 is a charge of $56,000 for an
adjustment to inventory carrying costs. Included in cost of goods sold for the
three months ended September 30, 2000 is a charge of $546,000 for excess and
obsolete inventory. The lower gross profit margin in the 2001 period is
primarily attributable to fixed manufacturing overhead incurred on a reduced
volume of sales.
Operating Expenses
Included in operating expenses are charges for non-cash stock compensation. The
charges for stock compensation principally relate to amortization of deferred
stock compensation attributable to stock options granted at less than the market
price of the common stock on the date of the grant. Of the $211,000 total amount
of stock compensation recorded for the three months ended September 30, 2000,
$191,000 relates to options granted in December 1999. In December 2000, these
options were re-priced at $34.50 per share, the market price of the common stock
at the date of the original grant. As a result, the remaining unamortized stock
compensation associated with these option grants was reversed in December 2000.
Selling Expenses
Selling expenses for the three months ended September 30, 2001 decreased 38.7%
to $654,000, or 11.5% of net sales, compared with $1.1 million, or 9.6% of net
sales, for the three months ended September 30, 2000. The decrease in selling
expenses was primarily attributable to lower commissions paid to manufacturer's
representatives over the reduced volume of sales and a decrease in charges for
stock compensation.
11
General and Administrative Expenses
General and administrative expenses for the three months ended September 30,
2001 increased 19.1% to $1.9 million, or 33.3% of net sales, compared with $1.6
million, or 13.9% of net sales, for the three months ended September 30, 2000.
The increase was primarily attributable to higher salaries and wages for new
employees hired in 2001, higher amounts paid to independent contractors for
information technology consulting services and the timing of audit fees paid in
connection with the audit of our financial statements for the year ended June
30, 2001. These increases were partially offset by reduced spending on
independent contractors for interim management and accounting services and a
decrease in charges for stock compensation.
Research and Development Expenses
Research and development expenses for the three months ended September 30, 2001
decreased 59.9% to $607,000, or 10.6% of net sales, compared with $1.5 million
or 13.0% of net sales, for the three months ended September 30, 2000. The
decrease was primarily attributable to lower salaries and benefits from the
permanent transfer of personnel to assist in business development efforts, fewer
employees engaged in research and development efforts and a decrease in charges
for stock compensation.
Expenses Relating to Accounting Restatements and the Related Shareholder
Litigation
Expenses relating to the accounting restatements and the related shareholder
litigation for the three months ended September 30, 2001 and 2000, were $85,000
and $1.2 million, respectively. These expenses include the cost of external
counsel for services provided in connection with shareholder lawsuits and the
Securities and Exchange Commission investigation, the cost of certain
consultants and temporary labor hired to assist in the accounting restatements,
and reimbursements to current and former employees for their legal fees and
expenses.
Other Income (Expense)
Interest income decreased 88.6% to $18,000 for the three months ended September
30, 2001 compared with $158,000 for the three months ended September 30, 2000.
The decrease was attributable to lower average cash balances available in the
quarter for investing, along with lower interest rates on invested balances.
Interest expense and other, net, decreased 80.9% to $59,000 for the three months
ended September 30, 2001 compared with $309,000 for the three months ended
September 30, 2000. The decrease was primarily attributable to reduction in the
outstanding debt associated with the new credit facility and lower interest
rates on the new credit facility.
Net Income (Loss) and Income (Loss) Per Share
The net loss for the three months ended September 30, 2001 was $1.1 million, or
$0.16 per share, compared with a net loss of $201,000, or $0.03 per share, for
the three months ended September 30, 2000. Excluding the impact of stock
compensation, which is a non-cash charge, and expenses relating to accounting
restatements (which management believes are not indicative of continuing
operating expenses), net loss for the three months ended September 30, 2001
would have been $1.0 million or $0.14 per share, compared with a net income of
$1.3 million, or $0.18 per share (basic and diluted), for the three months ended
September 30, 2000.
12
Liquidity and Capital Resources
As of September 30, 2001, working capital was $6.3 million, including cash and
cash equivalents of $1.7 million. Working capital at June 30, 2001 was $7.1
million, including cash and cash equivalents of $2.0 million. Operations
generated $841,000 of cash from the reduction of accounts receivable through
collections and lower sales volumes in the quarter. Additionally, we continued
our focus on reducing inventory levels and increasing inventory turns. The cash
generated from these efforts was partially offset by the net loss, adjusted for
non-cash charges, the payment of annual bonuses to employees and reduced
accounts payable due to lower costs and expenses from the lower sales volumes.
Capital expenditures for the three months ended September 30, 2001 were
$175,000. We focused capital expenditures on new production and test equipment
to continue increasing our manufacturing capacity.
We reduced our notes payable and long-term obligations by $1.0 million as of
September 30, 2001 as compared to June 30, 2001. Our new credit facility under
Wells Fargo Business Credit, Inc. allows us to borrow and re-pay our obligations
based upon our cash flow needs at any time subject to maximum loan amounts as
determined by our borrowing base.
We are involved in legal proceedings and claims in the ordinary course of our
business for which we may be exposed to a certain amount of risk. We are unable
to estimate the possible loss, if any, associated with these matters.
Credit Facility
On June 28, 2001, we entered into a credit agreement with Wells Fargo Business
Credit, Inc (the "Credit Facility"). Concurrent with the closing of the Credit
Facility, we paid our former lender, Bank One, in full.
The Credit Facility provides for a $6.0 million secured revolving line of credit
("Revolving Loan"), a $2.5 million secured term loan ("Term Loan"), and a $1.5
million secured capital expenditures loan ("Capital Expenditures Loan"). In
September 2001, the Credit Facility was amended to establish revised financial
covenants for the fiscal years ending June 30, 2002 and June 30, 2001. The
Credit Facility is secured by substantially all of our accounts receivable,
inventories and equipment and is subject to covenants that, among other things,
impose limitations on capital expenditures and investments, restrict certain
payments and distributions and requires us to maintain certain financial ratios.
The Revolving Loan matures on June 28, 2004 and has interest payable in monthly
installments at the prime rate plus 0.5%. The interest rate at September 30,
2001 was 6.5%. We are required to pay an unused credit line fee of 0.25% per
annum on the average daily unused amount. The unused line fee is payable monthly
in arrears. At September 30, 2001, we had additional borrowing availability of
$2.0 million under our Revolving Loan, calculated using a formula based on
inventories and accounts receivable aged less than 90 days.
The Term Loan and Capital Expenditures Loan mature on June 28, 2004 and have
principal and interest payable in monthly installments at the prime rate plus 1%
amortized over seven and five years, respectively. The interest rate on the
loans outstanding at September 30, 2001 was 7.0%.
13
We are required to pay a minimum interest charge on the Credit Facility of
$30,000 per calendar quarter.
We believe that anticipated cash flows from operations and borrowings available
under the Credit Facility will be adequate to fund our currently planned working
capital and capital expenditure requirements at least through June 30, 2002.
Forward-Looking Statements
Some of the statements we make in this report are "forward-looking statements"
as that term is used in the Private Securities Litigation Reform Act of 1995. In
most cases, when we use words like "believe," "expect," "estimate,"
"anticipate," "project," or "plan" to describe something which has not yet
occurred, we are making a forward-looking statement. Forward-looking statements
we make are based on a number of assumptions by us about the future, usually
based on current conditions or on the broader expectations of others. These
assumptions may or may not prove to be correct and, as a result, our own
forward-looking statements may also be inaccurate. On the other hand, based on
what we know today and what we expect in the future, we believe that the
forward-looking statements we make in this report are reasonable.
The tragic events of September 11, 2001 have created broad uncertainty on the
global economy as a whole. We and our customers are still in the process of
assessing the impact on the telecommunications industry in general and more
specifically, on the wireless infrastructure market.
While we believe that our facilities are adequate for our current operations, we
believe that a single building or facility would be more efficient and cost
effective. Accordingly, we are in the process of identifying potential new
sites. At this time, we are limiting the search to facilities within a six mile
radius of our current facilities.
We cannot list here all of the risks and uncertainties that could cause our
actual future financial and operating results to differ materially from our
historical experience and our present expectations or projections but we can
identify many of them. For example, our future results could be affected by the
overall market for various types of wireless communications products, the
success of the specific products into which our products are integrated,
governmental action relating to wireless communications, licensing and
regulation, the accuracy of our internal projections as to the demand for
certain types of technological innovation, competitors' products and pricing,
the success of new product development efforts, the timely release for
production and the delivery of products under existing contracts and the
ultimate outcome of pending and threatened litigation and regulatory action. It
is also important to remember that forward-looking statements speak only as of
the date when they are made and we do not promise that we will publicly update
or revise those statements whenever conditions change or future events occur.
Accordingly, we do not recommend that any person seeking to evaluate our company
should place undue reliance on any forward-looking statement in this report.
14
Effect of Recently Issued Accounting Standards
The Financial Accounting Standards Board recently issued FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. Statement No. 144 supersedes the accounting and reporting provisions of
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, with respect to when certain asset
impairment losses must be measured and recorded. Statement No. 144 also
supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
it retains the requirement in Opinion 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. We do not anticipate a material impact on our
financial condition or results of operations as a result of implementing this
standard. Statement No. 144 is effective for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, including the effects of adverse changes in
interest rates. Our exposure to changes in interest rates results from
borrowings with floating interest rates. At the present time, we have no
financial instruments in place to manage the impact of changes in interest
rates. As of September 30, 2001, we had notes payable outstanding under our
Credit Facility of $2.0 million. Of this amount, $1.5 million was outstanding on
our Term Loan at an interest rate of 7.0% and $500,000 was outstanding on our
Revolving Loan at an interest rate of 6.5%.
15
VARI-L COMPANY, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Note 6 to the financial
statements.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
In September 2001, the Company agreed to a settlement with the Securities and
Exchange Commission under which the Company, without admitting or denying that
it violated any laws, consented to the entry of an injunction prohibiting future
violations by the Company of certain periodic reporting, record keeping,
internal controls, proxy solicitation and antifraud provisions of the Securities
Exchange Act of 1934. The proposed settlement would not require the Company to
pay any civil penalties or money damages. The settlement has been submitted to
the federal district court in Denver for its approval, which the Company
considers to be likely. The Commission's complaint also named certain of the
Company's current and former officers as defendants, some of whom have also
settled with the Commission.
Without admitting or denying the allegations in the complaint, Jon L. Clark, the
Company's former vice president of finance and chief financial officer, has
consented to the entry of an injunction prohibiting future violations of the
periodic reporting, record keeping, internal controls, lying to auditors, and
antifraud provisions of the federal securities laws. Clark has also agreed to be
prohibited from acting as an officer or director of a public company, to pay
disgorgement, including prejudgment interest, in the amount of approximately
$167,000, and to pay a $50,000 civil penalty. The Commission's complaint also
named David G. Sherman, the Company's former president and chief executive
officer and a former director, and Sarah H. Hume, the Company's former
controller. The Commission's action remains pending against Sherman and Hume.
SEC v. Vari-L Company, Inc., David G. Sherman, Jon L. Clark, and Sarah E. Hume,
Civ. No. 01-WM-1903, D. Colo.
On September 27, 2001, the Commission entered an order pursuant to Rule 102(e)
of the Commission's Rules of Practice barring the Company's former auditors,
Haugen, Springer & Co., PC, and its two shareholders, Charles K. Springer and
Robert S. Haugen, (the "Auditors") from appearing or practicing before the
Commission as accountants. The Commission also entered a cease and desist order
against Springer for failing to report fraud and for willfully aiding and
abetting violations of the antifraud and reporting provisions of the federal
securities laws. The Commission found that the Auditors acted recklessly in
failing to obtain sufficient competent evidential matter in the area of revenue
recognition, capitalized costs, and inventory; demonstrated a lack of due
professional care and professional skepticism in the areas of revenue, long-term
assets, and inventory; and violated reporting standards. The Commission also
found that Springer knew in 1998 that the Company had or may have improperly
recognized $1.3 million of revenue in 1997 but failed to inform the Company's
audit committee of the false revenue. The order provides that Haugen and Haugen,
Springer & Co. may apply for reinstatement after three years, and Springer may
apply for reinstatement after ten years. In addition, Springer was ordered to
cease and desist from future violations of Sections 10A, 10(b),
16
and 13(a) of the Exchange Act and rules thereunder. The Auditors consented to
the entry of the order without admitting or denying its findings.
On the same date, the Commission ordered Joseph H. Kiser, the Company's Chief
Scientific Officer and former Chairman of the Board, to cease and desist from
violations of reporting and proxy provisions and to disgorge $58,000 in
previously undisclosed compensation he received from the Company. The Commission
found that Kiser knew or should have known that the Company lacked accounting
procedures and internal controls to prevent financial fraud and failed to cause
such controls to be implemented and to ensure that the Company disclosed the
payment to him of the additional $58,000 in compensation. Kiser consented to the
entry of the Commission's order without admitting or denying its findings.
PRIVATE SECURITIES CLASS ACTION
A number of private shareholder class actions alleging violations of federal
securities laws were filed against the Company and certain of its former
officers in the United States District Court for the District of Colorado
beginning in June 2000. On August 30, 2000, all of these class actions were
consolidated into a single action, and the Company's obligation to respond to
the complaints was deferred until such time as the lead plaintiff for the
purported class files an amended complaint. On October 9, 2001, the plaintiff
filed a consolidated amended class action complaint alleging violations of the
general antifraud provision of the Exchange Act, Section 10(b), and Rule 10b-5
promulgated thereunder, and vicarious liability of the individual defendants for
any violations by the Company as "controlling persons" under Section 20(a) of
the Exchange Act. The complaint seeks compensatory damages in an unspecified
amount, attorneys' fees and costs of suit, and any other relief the court deems
just and proper. While there can be no assurance that it will be successful in
its defense of this lawsuit, the Company believes that it has valid defenses to
the claims alleged against it and intends to vigorously defend itself.
Although the Company previously engaged in preliminary settlement discussions
with the class representatives, there can be no assurance that a settlement
acceptable to the Company can be reached or that any settlement reached will not
have a material adverse effect on the Company. In addition, irrespective of the
outcome with respect to the Company, the individual defendants may have claims
against the Company for advancement or indemnification of their attorneys fees
and other costs of defense, which claims may be material.
SHAREHOLDER DERIVATIVE SUIT
On August 4, 2000, a shareholder derivative action was filed, purportedly on
behalf of the Company, in Colorado state court in Denver against the same
officers named in the class action as well as the members of the Company's board
of directors at the time. The Company was named in that action as a nominal
defendant. The derivative complaint alleged many of the same facts as in the
class actions in federal court, claiming that those facts demonstrate that the
individual defendants breached their fiduciary duties to the Company and the
shareholders in connection with the Company's erroneous reporting of its
financial results.
On April 3, 2001, the Colorado District Court dismissed the derivative action,
without prejudice, based on the plaintiff's admitted failure to make demand upon
the other shareholders to bring the claims before filing suit. On September 24,
2001, the plaintiff from the dismissed action filed an amended complaint seeking
to reinstate that case, claiming that the requirements for a prior
17
demand on the Company's shareholders and its board of directors could not be met
or would be futile. The Company has filed a motion to dismiss on various
grounds, including the failure to make the required demands, the failure to
commence a new action rather than trying to revive the dismissed case, and the
availability of new management and a new independent Board member to evaluate
the merits, and the timing, of any claims to be brought by the Company against
the individual defendants.
DECLARATORY JUDGMENT ACTION BY EXCESS INSURER
On June 5, 2001, Agricultural Excess and Surplus Insurance Company ("AESIC"),
which had issued to the Company a $2.5 million excess directors and officers
liability insurance policy for the period of time covered by the shareholder and
class action litigation referenced above, filed suit in federal district court
in Denver asking the court to find that it is not obligated to provide coverage,
or in the alternative, seeking permission to rescind its policy. The Company is
reviewing the claim and intends to take all steps necessary to ensure that the
coverage to which it is entitled, and for which it has paid, remains in force.
The Company has had preliminary discussions with AESIC, but there can be no
assurance that a mutually acceptable resolution can be reached with the insurer.
The Company is also seeking coverage from Reliance Insurance Company
("Reliance"), the issuer of the $5 million primary directors and officers
liability insurance policy in effect at the same time as the AESIC policy. Since
May 29, 2001, Reliance has been operating under the supervision of the
Pennsylvania Insurance Commissioner pursuant to an Order of Rehabilitation
entered by the Commonwealth Court of Pennsylvania against Reliance. On October
3, 2001, the court entered an order of liquidation of Reliance. Reliance did not
inform the Company whether it intended to dispute coverage under its policy
before the order of liquidation was entered. As a result, Reliance's defenses to
the Company's claim, if any, will be considered as part of the liquidation
process, when the Company files the required notice of claim with the court.
There can be no assurance that the liquidator will not dispute Reliance's
obligation to provide coverage to the Company or its officers and directors or
that there will be sufficient financial resources to satisfy the Company's
claim. Any such failure could have an adverse effect on the Company's future
financial results, ability to resolve the litigation pending against the Company
and its officers and directors and on the Company's liability for
indemnification of those officers and directors.
18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 First Amendment to Credit and Security Agreement dated
September 17, 2001.
(b) Reports on Form 8-K
A report on Form 8-K dated June 28, 2001 under Item 5 was filed with the
Commission on July 10, 2001. A report on Form 8-K dated July 12, 2001 under
Item 5 was filed with the Commission on August 2, 2001. A report on Form
8-K dated September 27, 2001 under Items 5 and 9 was filed with the
Commission on September 28, 2001.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
VARI-L COMPANY, INC.
Date: October 29, 2001 By: /s/ RICHARD P. DUTKIEWICZ
------------------------------ -------------------------------------
Richard P. Dutkiewicz,
Vice President of Finance and
Chief Financial Officer
20
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 First Amendment to Credit and Security Agreement dated
September 17, 2001.
</Table>