ANNUAL REPORT FOR SMALL BUSINESS ISSUERS SUBJECT
TO THE 1934 ACT REPORTING REQUIREMENTS
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996
Commission File No. 0-23866
VARI-L COMPANY, INC.
(Name of Small Business Issuer in its Charter)
Colorado 06-0679347
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
11101 East 51st Avenue
Denver, Colorado 80239
(303) 371-1560
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
TITLE OF EACH 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-B contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for the fiscal year ended December 31, 1996:
$12,210,517
At March 26, 1997, 3,826,840 common shares (the registrant's only
class of Common Stock) were outstanding. The aggregate market value of
the 2,721,502 common shares of the registrant held by non-affiliates on
that date (based upon the closing price on the Nasdaq National Market
System) was approximately $24,153,330.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Vari-L Company, Inc. (the "Company") designs, manufactures and
markets a wide range of signal processing components and devices which are
used in communications equipment and systems, such as cellular telephones
and base stations, local area computer networks, and satellite
communications equipment, as well as military and aerospace applications,
such as advanced radar systems, missile guidance systems, and navigational
systems. The Company sells its products primarily to original equipment
manufacturers of communications systems.
The Company was founded in 1953 in Stamford, Connecticut and
relocated to Denver, Colorado in 1969. The Company's manufacturing and
corporate facilities are located at 11101 East 51st Avenue, Denver,
Colorado 80239, and its telephone number is 303/371-1560.
OVERVIEW
The Company's products are used in wireless communications equipment.
Wireless communication is the transmission of voice and 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 which is used in all wireless
communications. Radio Frequency ("RF") indicates lower frequencies while
"microwave" refers to relatively higher frequencies in the spectrum.
Different types of wireless communications systems utilize different
frequencies in the spectrum. Frequency is measured in cycles per second,
or Hertz. The spectrum currently in use by the various types of wireless
communications equipment ranges from 1 kiloHertz (1 thousand cycles per
second) to 20 gigaHertz (20 billion cycles per second). In the United
States, the Federal Communications Commission allocates portions of the
spectrum for different types of wireless communication systems. Wireless
communications systems currently in use include cellular telephones and
base stations, wireless cable (LMDS), satellite communications, global
positioning systems, local area networks, as well as radar systems,
missile guidance systems and navigational systems. Communications systems
currently in the development stage include personal communications systems
and direct broadcast satellites. The Company's products are designed for
use in all of these applications.
PRODUCTS
The Company produces a wide range of products which are, in essence,
basic building blocks used in many wireless communications systems, and
they perform a wide variety of RF and microwave signal processing
functions. The Company's products and technologies are also integrated
vertically by the Company into specialized assemblies which perform multi-
function microwave signal processing, as in the Company's phase locked
loop synthesizer, described below. The Company produces both standard
catalog and custom-designed products.
VOLTAGE CONTROLLED OSCILLATOR
One of the Company's major product lines is based on its patented
design of the voltage controlled oscillator ("VCO"). Oscillators are
components which provide a precise signal source within a frequency range.
They are widely used in transmitting and receiving equipment. The
Company's patented technology enables its VCOs to operate with
approximately 20% of the input power requirements of its competitors.
This unique feature, combined with the VCO's high quality performance,
allows the Company's VCOs to be utilized in battery operated and other
low-power applications, such as cellular telephones, with better
performance than competing products. The Company produces several types
of VCOs. The Company's wide-band VCOs are sophisticated, high reliability
components sold for use in both military and high-end commercial
applications.
The Company introduced its low-cost VCO line in May 1994. This
surface mount product was the first of an entire product line of very
narrow-band VCOs priced at approximately 75% less than the Company's wide-
band VCOs. These products are designed to perform at high levels of
efficiency while being priced competitively for higher volume commercial
applications. Most of the increase in the Company's sales over the past
two years is attributable to the low-cost VCO. In addition to direct
sales, the Company's low-cost VCOs are also utilized by the Company as
components in its phase locked loop synthesizers, discussed below.
Commercial and military applications of the Company's VCOs are also
described below.
PHASE LOCKED LOOP SYNTHESIZERS
The Company introduced its phase locked loop synthesizer ("PLL") in
1993. The PLL is a device made up of several of the Company's components,
including a VCO and an integrated circuit. PLLs are utilized in both
transmitting and receiving equipment. The PLL's function is to lock onto
stable reference signals and convert them into stable frequencies which
may be detected and utilized by the communications equipment. This
function is essential in communications equipment. For example,
transmitted signals become less defined as they travel through space,
causing the signal to become noisy. Therefore, in equipment that receives
signals (a receiver) a PLL will, in essence, tune out the noise, thereby
enabling the receiver to effectively utilize the signal.
As compared to its competitors, the Company's PLLs are one-half the
size, use approximately 20% of the power, operate with an extended life
and are competitively priced. The Company's low-cost PLL-200 was
recognized as one of the twelve best new products introduced in 1993 by
MICROWAVES & RF MAGAZINE. The Company's PLL-200 and low-cost VCOs are
designed for use in applications such as cellular telephones and cellular
telephone base stations, personal communications networks, personal
communication systems, local area computer networks, satellite communica-
tions, global positioning systems, and direct broadcast systems. The
Company's various VCO and PLL products comprise its Signal Source
Components product line.
SIGNAL PROCESSING COMPONENTS
The Company also produces a line of RF and microwave signal
processing components which are primarily used in military and space
applications. Among these products are power dividers and combiners which
are used for directing RF and microwave signals, solid state switches
which are used to change the direction or timing of RF and microwave
signals, and transformers which are used to convert high-power signals to
lower-powered signals. The Company produces mixers and phase detectors
which are used to convert RF and microwave signals into usable information
and data. The Company's products also include frequency doublers and
frequency synthesizers which are used as sources for RF and microwave
signals.
Military and space applications of these products, as well as the
Company's wide-band VCOs, described above, include the radar systems of
military aircraft, the guidance systems of anti-aircraft and anti-missile
missiles, and military and commercial satellites. The military programs
using these products include the Patriot missile, AMRAAM missile, Harm
missile, PRC104 Man-Pac radio, F14, F15 and F18 fire control systems,
Phoenix missile, F16 radar systems (tail warning) and the Standard Missile
II. These components, together with the wide-band VCOs, formed the
original product lines of the Company and continue to be the Company's
most technically advanced products, often utilizing technologies developed
by the Company. They are typically high reliability, high performance,
custom designed components. The production of custom designed components
usually entails the modification of existing products to meet the specific
performance criteria of the customer, but may, in certain instances,
require the design of an entirely new product. In this area, because the
components are manufactured by the Company to its customers'
specifications, the Company can often be a sole source supplier. In 1995,
the Company developed several new signal processing products for use by
commercial customers, resulting in a significant increase in both firm
orders and sales for these components in 1996.
MANUFACTURING
The Company's surface mount products are manufactured with automated
assembly equipment by third-party contract manufacturers in the United
States. The length of the production process for these products is
generally two to three weeks. Manufacturing of the Company's other
products, which involves less automated assembly equipment, takes place at
one of its three Denver facilities. The length of the production process
for these other products ranges from one to twenty-four weeks. The
Company may maintain inventory of the raw materials required for
production of its products for a period of up to one year or more.
The Company has, in the past, manufactured some of its products
outside of the United States and plans to do so again in the future. The
Company has recently entered into an agreement to produce commercial VCOs
and PLLs at a facility in Beijing in the Peoples Republic of China. Under
the joint venture agreement, the Company will own approximately 51% of the
Chinese manufacturing company, which is expected to supply products to the
Chinese market as well as to other markets in the Pacific Rim and
elsewhere. The Company currently plans to begin production in the summer
of 1997.
SUPPLIERS
The Company has approximately 800 suppliers, several of which are a
sole source for some raw materials. Over its 44 years of operations, the
Company has not experienced any unusual supply problems. In recent years,
however, as the Company's size and sales volume have increased and various
changes have occurred in the telecommunications parts industry, the
Company has noted an increasing number of supplier and supply quality
problems. The Company believes that obtaining a secure and competitively
priced supply of the components needed to meet anticipated increases in
sales is one of its most important challenges over the next several years.
Because the Company uses a significant amount of gold in its high
reliability product line, the Company's costs of production may be
affected by the sometimes volatile market price of gold. Accordingly, in
December 1993, the Company made a $203,000 purchase of gold bullion as a
hedge against future increases in the price of gold. This purchase, which
is roughly equivalent to the amount of gold used by the Company for
manufacturing in one year, is still held by the Company as of the date
hereof.
SALES AND MARKETING
In the past, the Company's primary business was to engineer,
manufacture and market high performance, high reliability microwave signal
processing components used in military applications like missile guidance
systems, advanced navigational systems and advanced radar systems. In
recent years, the Company has expanded its focus to include the commercial
marketplace to lessen the Company's susceptibility to trends in defense
spending. As a result of this shift, the Company believes that variances
in its business will now be more dependent on general business cycles,
changes in market demand for the commercial products built with the
Company's components, and on technological innovations. In 1991, the
approximate mix of customer orders was 25% for commercial applications and
75% for military applications, while by 1993 this mix was approximately
50% for commercial applications and 50% for military applications. In
1996, this mix was approximately 72% for commercial applications and 28%
for military applications.
In 1996, the Company continued to derive a substantial portion of its
bookings from its international marketing efforts. Firm orders from non-
U.S. customers represented 51% of total firm orders in 1996, or
$6,308,000, as compared to 39%, or $6,900,000, in 1995. The 51% of firm
international orders for 1996 represented 95% for commercial applications
and 5% for military applications. The Company's 1996 international
business included orders from customers in Sweden, Germany, France, Japan,
England and other countries. Also, in 1996, besides the initiation of the
joint venture in China, the Company's international business also included
orders from customers in India, China and South Korea.
The following table lists the Company's sales revenues for each of
the past five years according to the Company's product lines:
<TABLE>
<CAPTION>
Sales Revenues
(In thousands)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Signal Processing $ 1,738 $ 2,345 $ 1,542 $ 2,394 $ 2,453
Components
Wide-Band VCOs 3,825 3,829 4,363 4,032 3,351
Signal Processing
Components Combined
with Wide-Band VCOs 1,025 776 194 283 611
Commercial Signal Source
Components 5,622 2,518 1,128 218 -
------- ------- ------- ------- -------
$12,210 $ 9,468 $ 7,227 $ 6,927 $ 6,415
======= ======= ======= ======= =======
</TABLE>
The Company's sales are made primarily through independent sales
representatives who promote and solicit orders for the Company's products
on a commission basis in exclusive marketing territories. The Company
selects its sales representatives on the basis of technical and marketing
expertise, reputation within the industry, and financial stability. These
sales representatives also represent other manufacturers with products
complementary to, rather than competitive with, the Company's products.
The Company normally engages 15 to 20 sales representative firms in the
U.S. and also has 15 sales representatives covering 25 foreign countries.
The Company normally employs an East Coast Sales Manager, a West Coast
Sales Manager, a Military/Aerospace Sales Manager, an International Sales
Manager and a Vice-President of Sales, who work together to coordinate the
activities of the sales representatives.
In addition to the efforts of its independent sales representatives,
the Company uses various methods to directly promote its products,
including field visits to customers, telephone solicitation, direct
mailing campaigns, advertising in trade journals, authoring technical
articles for publication in trade journals and participation in trade
shows.
CUSTOMERS
The Company sells primarily to original equipment manufacturers of
communications equipment in either the commercial or military marketplace.
Many of those customers are prime contractors for military work or larger
Fortune 500 companies with world-wide operations. Management believes it
has a strong reputation with these and other customers for high
performance products.
Key customers of the Company include IBM, Motorola, Westinghouse,
Harris Corporation, EF Data, Steinbrecher and AT&T in the commercial
market, E-Systems, Hughes Aircraft Company, Rockwell, Lockheed and
Raytheon Co. in the military market, as well as Celestica, Ericsson,
Motorola, Nokia, Northern Telecom, ABB and Normarc in the international
commercial market. While no customer accounted for 10% or more of the
Company's sales in 1995, the Company's largest customer in 1995 was
Raytheon Co. with 8.9% of total sales. In 1996, Ericsson accounted for
11% of the Company's total sales, followed by Raytheon at 8%. The Company
does not believe that its business is dependent on any one of its
customers.
While the Company's customers have historically bought products from
the Company on the basis of purchase orders, rather than long-term supply
contracts, the Company has begun to enter into long term purchase
agreements with some of its larger commercial customers which establish
preferred vendor status for the Company and, in certain cases, set minimum
amounts which will be purchased by the customer over the term of the
agreement.
COMPETITION
The Company is subject to active competition in the sale of virtually
all of its products. Its competitors, including divisions of major
corporations, have significantly greater resources than those currently
available to the Company. Additionally, some of the Company's customers
compete directly by manufacturing certain components themselves, rather
than purchasing them from the Company. While some large foreign firms,
principally Japanese, have the ability to manufacture competitive products
in much larger production runs than the Company, the Company believes that
its planned production in China will materially increase its own mass
production capabilities.
The Company believes that its surface mount products for commercial
applications compete with other manufacturers' products on the basis of
their unique features, price and performance. The Company believes that
its products manufactured for military applications, including the Signal
Processing Components and wide-band VCOs, compete primarily on the basis
of quality. These products are typically high performance, high
reliability components which are required to meet high quality standards.
The Company believes Merrimac and Remec are its largest competitors
in the Signal Processing Components market. Murata, Fujitsu, ALPS and Z-
Comm compete in the lower-priced VCO marketplace. Remec/Magnum, Avantek
and Ma/Com compete with the Company primarily in the wide-band,
hermetically-sealed VCO marketplace. PLL competitors include ALPS,
Panasonic and Synergy. While most of these competitors have significantly
greater financial and other resources than the Company, the Company
believes that it will continue to be able to successfully compete in these
markets because of the strength of its existing technology and its ongoing
commitment to technological innovation.
RESEARCH AND DEVELOPMENT
The Company's products are marketed in a highly competitive and
rapidly changing technological environment. Consequently, the Company has
historically invested heavily in its research and development programs.
For the years ended December 31, 1996 and 1995, the Company expended
approximately $695,000 and $569,000, respectively, on such programs.
Joseph H. Kiser, Chief Scientific Officer, directs the research and
development efforts of the Company. Mr. Kiser has been largely
responsible for many of the technological successes and innovations of the
Company over the past 37 years and is the author of the Company's VCO
patent. He heads up a 40-member team of engineers and other technically
trained personnel who perform research and development in addition to
providing sales support and process and production assistance to other
parts of the Company.
PATENTS
The patent on the Company's VCO was issued in the U.S. on November 4,
1986, in Canada on April 17, 1990 and by the European Patent Office on
April 3, 1992. The U.S. patent will expire in 2006. The Company owns
three additional U.S. patents for (i) a Frequency Translator, expiring
1998, (ii) Broadband High Frequency Baluns and Mixer, expiring 1998, and
(iii) Broadband Mixer with Coplanar Balun, expiring in 2002. To the
Company's knowledge, there are no asserted claims by other parties to the
Company's products or patents.
The Company believes that Vari-L technology remains on the leading
edge of high-performance, low-cost, and low-power consuming products for
the emerging personal communications services (PCS) industry and other
wireless communications markets. The Company has applied for several new
patents, including a new 1.2 volt VCO operating at .0035 watts and a new
high impedance ratio, wide-band transformer that is intended for fiber
optic applications. The Company is also applying for two separate patents
on a multiple-function, single-layer capacitor and associated method.
In the absence of patents, the Company relies upon nondisclosure
agreements and trade secret laws to protect its confidential and
proprietary information. Due to the rapid rate of technological change in
its markets, the Company believes that the ability to innovate is of
greater importance to its business than availability of patents and
proprietary rights. Barriers to competitor entry include the time and
expense of new competitors to design and manufacture components and the
difficulty of selling to those customers who have already designed the
Company's components into their equipment.
Under its newly signed joint venture agreement in China, Vari-L will
contribute a license of its proprietary processes along with its
manufacturing, marketing and business expertise, but it is under no
obligation to do so until its Chinese partner obtains all necessary
government approvals, including satisfactory assurances of patent and
trade secret protection.
GOVERNMENT REGULATION
In many instances, the Company has been required to obtain export
licenses before filling foreign orders. United States Export
Administration regulations control high tech exports like the Company's
products for reasons of national security and compliance with foreign
policy, to guarantee domestic reserves of products in short supply and,
under certain circumstances, for the security of a destination country.
Thus, any foreign sales of the Company's products requiring export
licenses must comply with these general policies. Although the Company
has not experienced any significant export licensing problems to date,
such problems may arise in the future, since many of the Company's
products have military and other governmental applications.
EMPLOYEES
As of December 31, 1996, the Company had 209 full-time employees and
one part-time employee, including 33 engaged in management and
administration, 40 in engineering, 127 in production and testing, and 10
in sales. The Company believes that its employee relations are good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its principal office and production facility in
Denver, Colorado. The facility has approximately 20,200 square feet,
consisting of space for administrative, inside sales, production for its
VCO and Signal Processing Components product lines and VCO engineering
functions. The lease expires on June 30, 2002, and provides for a monthly
base rental of $9,590 through June 30, 1997 and increases each year up to
$10,920 per month during the final year. The Company is also obligated to
pay taxes, insurance, maintenance and other expenses. The lease may be
extended at the option of the Company for two additional terms of two
years each.
The Company leases a second facility in Denver, Colorado of
approximately 13,650 square feet ("Building 2") which currently houses all
of the Company's engineering, purchasing and production facilities for its
commercial, surface mount line of products. The lease expires on October
24, 2000, and provides for a monthly base rental of $6,634 through
September 30, 1998, and $4,000 per month thereafter for the remainder of
the lease term. The Company is also obligated to pay taxes, insurance,
maintenance and other expenses. The facility is leased from a partnership
in which an executive officer of the Company, Joseph H. Kiser, is a
partner.
The Company leases a third facility in Denver, Colorado which houses
the Company's machine shop, Signal Processing Components engineering and
archival storage. This facility has approximately 8,836 square feet. The
lease expires August 1, 1998 and provides for a monthly base rental of
$3,279. The Company is also obligated to pay taxes, insurance,
maintenance and other expenses. The facility is leased from Joseph H.
Kiser, an executive officer of the Company.
The Company has agreed to lease a fourth building ("Building 4")
being built to the Company's specifications near the Company's existing
facilities to house administration and inside sales. The space currently
occupied by those functions will be remodeled to bring all aspects of the
wide-band VCO and Signal Processing Components manufacturing under one
roof, similar to the arrangement in Building 2 for its surface mount
products. The Company expects Building 4 to be completed by the late
summer or early fall of 1997.
As part of its severance arrangements with a former officer, the
Company rents residential properties in Colorado and Mexico from the
former officer. The Company has not exercised its tenancy rights on those
properties and does not intend to do so in the future.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings to which the Company is a party or to
which the property of the Company is subject are pending and no such
proceedings are known by the Company to be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the
Company during the fiscal quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET
The Company's Common Stock was traded over-the-counter on the Nasdaq
SmallCap Market under the symbol "VARL" from the Company's initial public
offering in April, 1994 until April 18, 1995 when it began trading on the
Nasdaq National Market. The following table sets forth the high and low
prices for the Common Stock for the periods indicated:
<TABLE>
<CAPTION>
High Low
----- -----
1995
- ----
<S> <C> <C>
Fiscal quarter ended March 31, 1995 $11-5/8 $4-1/2
Fiscal quarter ended June 30, 1995 $13-3/4 $9-1/2
Fiscal quarter ended September 30, 1995 $17-1/2 $11-1/4
Fiscal quarter ended December 31, 1995 $14-1/2 $10-5/8
1996
- ----
Fiscal quarter ended March 31, 1996 $17-1/2 $12-1/4
Fiscal quarter ended June 30, 1996 $15-3/4 $10-1/2
Fiscal quarter ended September 30, 1996 $12-1/4 $6-1/4
Fiscal quarter ended December 31, 1996 $10-7/8 $7-5/8
</TABLE>
HOLDERS
As of December 31, 1996 there were approximately 146 holders of
record and in excess of 1,000 beneficial owners of the Company's Common
Stock.
DIVIDENDS
The Company has never declared or paid a cash dividend on its Common
Stock. The Board of Directors presently intends to retain all earnings
for use in the Company's 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 the Company's
results of operations, financial condition, capital needs, and any
contractual or other restrictions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
Sales of the Company's products increased approximately $2.7 million,
or 29%, from 1995 to 1996. The significant growth in demand for the
Company's commercial products continued during 1996, as evidenced by an
increase in revenues from commercial sales of approximately 123%, from
$2.5 million in 1995 to $5.6 million in 1996. This increase was offset by
a slight decline of approximately 5% in the military sales from the prior
year. Military sales, for purposes of this discussion, represent the sum
of the sales from Signal Processing Components, wide-band VCOs, and sales
of products that combine the Company's Signal Processing Components and
wide-band VCOs. During the last five years, military business has tended
to remain relatively stable in total sales volume, reflecting the
Company's ability to hold its market shares of that business segment.
Revenues from military sales during that period have ranged from
approximately $6.5 million in 1992 to a high of $6.9 million in 1995 to
$6.5 million in 1996. Revenues from military sales are expected to
increase slightly again in 1997.
The Company's sales volume also increased in the international
marketplace, where demand for commercial-use products continues to exceed
expectations. As reflected in customer ordering activity, approximately
51% of orders are being placed by non-U.S. companies and approximately 49%
of orders are being placed domestically. During 1996, the Company focused
on expanding the marketing of the Company's products into the Pacific Rim
and Asia, including Korea, India, China and Japan. This marketing effort
has resulted in new or increased ordering activity from those countries as
well as a manufacturing joint venture in the People's Republic of China.
The Company considers the potential sales growth from these efforts to be
substantial.
During 1996, the Company's completed the remodeling of Building 2,
its commercial, surface mount production facility, and continued to
upgrade its management information systems infrastructure with updated
systems, software and hardware. Various manufacturing processes that were
previously performed by outside contractors have been brought in-house,
such as "tape and reel" and various testing procedures. An Engineering
Services group was established within the Company's Engineering Department
to design, build and support engineering and manufacturing with test
fixtures and automated test equipment. These enhancements have produced
significant improvements in manufacturing throughput times and quality
production.
New products and expanded product lines have been one of the
important focuses of the Engineering Department in 1996. The immediate
results include several new patent applications, as described above, and
the Company believes that this ongoing emphasis will result in even more
technological advances in the future. These new developments encompass
every area of the Company's product lines, including military and
commercial and signal processing and signal sources.
While the Company was disappointed that the development of the PCS
communications services market in the United States was still lagging in
1996, management was gratified that the shortfall in anticipated domestic
orders was largely offset by continuing increases in international orders,
particularly in the fourth quarter of the year.
RESULTS OF OPERATIONS
OPERATING REVENUES
Sales revenues increased by approximately $2.7 million, or 29%, in
1996, from $9.5 million in 1995 to $12.2 million in 1996, reflecting a
slight decrease (-5%) in military shipments and a dramatic increase (123%)
in commercial shipments. Revenues from sales of the Company's commercial
products (PLLs and narrow-band VCOs) were approximately $5.6 million, or
46% of total revenues, in 1996 as compared to $2.5 million, or 27%, in
1995. Revenues from sales of the Company's Signal Processing Components
products were approximately $1.7 million, or 14%, in 1996 as compared to
$2.4 million, or 25% of total revenues, in 1995. Revenues from sales of
the Company's wide-band VCOs were approximately $3.8 million, or 31%, in
1996 as compared to $3.8 million, or 40% in 1995. Revenues from sales of
products that combine the Company's Signal Processing Components with
wide-band VCOs were approximately $1.1 million, or 9%, in 1996 as compared
to $0.8, or 8% in 1995.
COST OF GOODS SOLD
Cost of goods sold as a percent of revenues was 51% in 1996 and 49%
in 1995. Gross profit margins were 49% for 1996 and 51% for 1995. The
increase in the cost of goods sold in 1996 primarily reflects the increase
in depreciation expense on the significant capital improvements which were
begun in 1995 and are ongoing to improve production processes and
facilities.
GENERAL AND ADMINISTRATIVE EXPENSES AND OTHER
General and administrative expenses increased approximately $197,000,
or 19%, from $1,040,804 in 1995 to $1,237,526 in 1996. The increase
reflects increased staffing in the personnel and accounting departments,
in line with the growth of the Company. As a percent of net sales,
general and administrative expenses were 10% and 11%, respectively.
ENGINEERING EXPENSES
Engineering expenses increased approximately $126,000, or 22%, from
$569,308 in 1995 to $695,222 in 1996. The increase reflects additional
engineering staff, expenses and equipment costs to support development of
the Company's product lines, including high-volume commercial products,
military products, and space products. As a percent of net sales,
engineering expenses were approximately 6% in 1996 and 1995.
SELLING EXPENSES
Selling expenses increased approximately $186,000, or 14%, from
$1,286,602 in 1995 to $1,472,543 in 1996. As a percent of net sales,
selling expenses were 12% for 1996 and 14% for 1995. The change reflects
increased commission expense on the higher level of 1996 revenues.
INTEREST INCOME AND EXPENSE
The Company manages its credit facility and interest bearing
investments in tandem.
Interest expense increased approximately $101,000, or 28%, from
$367,210 in 1995 to $468,259 in 1996. The increase in interest expense
was due to increased borrowings under the Company's credit facility.
Interest income decreased approximately $73,000, or 33%, from
$219,070 in 1995 to $146,102 in 1996. The Company's investment in a
mutual fund of U.S. Government securities, from which interest income is
earned, was approximately $1.18 million and $5.63 million at December 31,
1996 and 1995, respectively.
The increase in borrowings under the credit facility and the decrease
in the mutual find investment were due principally to the Company's
ongoing capital improvement projects.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased approximately $264,000, or
96%, from $275,031 in 1995 to $539,468 in 1996. The increase reflects
depreciation on increased investments in property, equipment and leasehold
improvements. Depreciation and amortization expense is expected to
continue to increase as a result of these and future capital investments.
OTHER EXPENSES
Other expenses remained relatively constant, decreasing by
approximately $57,000, from $280,159 in 1995 to $222,785 in 1996.
NET INCOME
Net income increased $318,910, or 37%, from $859,561 in 1995 to
$1,178,471 in 1996. The increase in net income was due principally to the
growth in net sales from 1995 to 1996.
EARNINGS PER SHARE
Earnings per share increased $0.03, or 11%, from $0.27 per share in
1995 to $0.30 per share in 1996. The number of weighted average shares
outstanding, on which earnings per share is computed, increased from
3,195,570 shares in 1995 to 3,912,027 in 1996. The increase in the number
of weighted average shares outstanding reflects stock options granted and
exercised during 1996.
FINANCIAL CONDITION
ASSETS
Total assets increased $5.875 million during 1996. The increase
primarily resulted from the Company's capital investments in its
infrastructure, including improved processes, new and expanded facilities,
equipment and patents, and was offset by a corresponding utilization of
its cash investments.
Property and equipment increased approximately $6.5 million for
capital improvements, including but not limited to retooling and
remodeling of the commercial products manufacturing facility, test and lab
setups for engineering staff additions, the addition of high-speed test
equipment, new phone systems, equipment and software for the management
information systems upgrade, and the acquisition of equipment to perform
machining, packaging, and testing that had previously been purchased
outside.
Trade accounts receivable increased $452,000, or 20%, at December 31,
1996 as compared to December 31, 1995. The increase was due principally
to the increase in fourth quarter revenues from 1995 to 1996 of
approximately $1.44 million.
Lease acquisition costs of approximately $641,000 were advanced in an
agreement with a local construction company whereby the contractor is to
build an office and manufacturing facility which the Company will
subsequently lease. These advances will be reimbursed to the Company
during 1997 from the contractors construction financing.
Inventories increased approximately $2.16 million, or 39%, from 1995
to 1996. Components of the increase were approximately $980,000 in raw
materials, $790,000 in work in process, and $390,000 in finished goods.
As the market for the Company's commercial, high-volume, products
continues to increase, the Company plans to maintain levels of inventory
necessary to meet customer demands for delivery of products. The Company
anticipates that the inventory quantities will level off or decrease as
the management information systems currently being implemented are
completed, since they will allow for improved lead time planning and just-
in-time management of inventories.
LIABILITIES
Total liabilities increased $4.1 million during 1996. The increase
was due primarily to increased borrowing under the Company's credit
facility ($2.8 million), and increased deferred income taxes ($853,000).
The increased borrowings were made in connection with the Company's
ongoing capital improvement projects. Trade accounts payable increased
approximately $287,000 during 1996, in line with the increase in inventory
levels. Deferred income taxes increased by the amount of the provision
for 1996 taxes.
STOCKHOLDERS' EQUITY
Common stock and paid-in capital increased $576,000 during 1996 due
principally to the exercise of stock options and the issuance of shares
under the employee stock purchase plan. Also during 1996, the underwriter
of the Company's 1994 public offering exercised the remaining warrants it
had been issued in that offering.
LIQUIDITY
At December 31, 1996, the Company's working capital was $8.4 million
compared to $10.4 million at December 31, 1995. The Company's current
ratio was 2.7 to 1 at December 31, 1996 compared to 3.6 to 1 at December
31, 1995. This decrease in working capital was due to several factors.
Cash and cash equivalents decreased approximately $4.64 million,
reflecting the expenditure of the proceeds from 1995 exercise of stock
warrants that were issued in the 1994 initial public offering. Trade
accounts receivable increased approximately $452,000, reflecting the
higher sales volume at year end. Inventories increased approximately
$2.16 million, reflecting increases in raw materials, work in process and
finished goods to support increasing levels of sales. Prepaid expenses
and other current assets increased approximately $253,000, reflecting
increases in the cash surrender values of key-man life insurance and
increases in advertising and related materials and supplies. The decrease
in working capital was also due to increases in the liability components
of working capital, including an increase of approximately $278,000 in the
Company's liability under its line of credit, and increases of
approximately $287,000 and $196,000 in trade payables and accrued
expenses, respectively.
CAPITAL RESOURCES
The Company's credit facility consists of a line of credit and a term
loan. The Company and the bank amended the credit facility in May of 1996
to renew and increase the amount of the line of credit, and to refinance
the former credit facility.
The line of credit provides for borrowings of up to the lesser of
$3.5 million or a borrowing base limit calculated by reference to levels
of inventory and accounts receivable.
Interest accrues on the outstanding principal balance of the term
loan at 8.75 percent and monthly principal and interest payments of
$79,812 are required. Unpaid principal and accrued interest are due May
17, 1999. Under the terms of the Credit Agreement, the Company must
maintain certain financial ratios and obtain the bank's approval prior to
entering into various transactions, including the payment of dividends,
acquisitions of treasury stock, disposal of significant assets, changing
its executive management, or entering into direct borrowing arrangements
or contingent liabilities. The Company is in full compliance with the
terms of the Credit Agreement.
During 1993, the Company financed the acquisition of capital
equipment through the execution of capital leases having maturity dates
through 1998. At December 31, 1996, the balance of these capital lease
liabilities was $16,266.
The Company has financed the purchase of vehicles with promissory
notes bearing interest rates ranging from 7.20 percent to 9.25 percent.
Monthly principal and interest payments totalling $1,879 are required.
The notes mature from 1998 through 2,000. The outstanding balance of
these notes at December 31, 1996 was $49,748.
On March 4, 1997, the Company agreed to sell up to an aggregate of
$7.5 million in four year, 7% convertible debentures together with 750,000
non-redeemable common stock purchase warrants exercisable at $9.50 per
share for a period of three years. The unpaid principal balance and
accrued interest of the debentures may be converted into shares of the
Company's common stock at the election of the holder thereof at $9.50 per
share or 84% of the 10-day average closing bid price prior to the date of
receipt by the Company of the holder's written request.
The Company believes that it has sufficient financial resources
available to meet its short term working capital needs through cash flows
generated by operating activities and through the management of its
sources of financing. By virtue of the March 4, 1997 sale of convertible
debentures and warrants, the Company also has the capital resources to
continue its growth plans.
BACKLOG
Total backlog of unfilled firm customer orders ("backlog") at
December 31, 1996 was approximately $14.4 million, compared to $14.1
million at December 31, 1995. Backlog at December 31, 1996 did not
increase significantly from December 31, 1995 due to the delay in rollout
of the domestic PCS market and the various types of wireless
communications included therein.
Some of the statements contained in this document are forward-looking
statements. The accuracy of these statements cannot be guaranteed as they
are subject to a variety of risks including, but not limited to, future
economic conditions, the timely development of the domestic PCS market,
obtaining satisfactory assurances of trade secret and patent protection in
China and other overseas markets, the quality and type of competitive
products offered and their pricing, the success of the Company's new
product development efforts, the grant of patents and other protections
for intellectual property, the delivery of products under existing and
future contracts, the pricing and availability of parts and raw materials,
and other various factors which may not be within the Company's control.
Item 7. Financial Statements.
See pages F-1 through F-22 for this information.
<TABLE>
<CAPTION>
Index to Financial Statements
Vari-L Company, Inc.
December 31, 1996 and 1995
<S> <C>
Independent Auditor's Report F-1
Balance Sheets F-2 - F-3
Statements of Income F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7 - F-24
</TABLE>
<PAGE>
HAUGEN, SPRINGER & CO.
Certified Public Accountants
9250 East Costilla Avenue Robert S. Haugen, C.P.A.
Suite 150 Charles K. Springer, C.P.A.
Englewood, Colorado 80012
(303) 799-6969
FAX (303) 799-6974
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Vari-L Company, Inc.
We have audited the accompanying balance sheets of Vari-L Company,
Inc. as of December 31, 1996 and 1995, and the related statements of
income, stockholders' equity, and cash flows for the years then ended.
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 generally accepted
auditing standards. 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 December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/Haugen, Springer & Co.
HAUGEN, SPRINGER & CO.
February 5, 1997
Denver, Colorado
F-1
<PAGE>
VARI-L COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
----------- -----------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,224,727 $ 5,868,210
Accounts receivable:
Trade, less $4,000 and $10,000
allowance for doubtful accounts 2,744,180 2,292,168
Lease acquisition costs 641,486 -
Inventories 7,740,976 5,580,984
Prepaid expenses and other 990,130 737,083
----------- -----------
Total Current Assets 13,341,499 14,478,445
----------- -----------
Property and Equipment:
Machinery and equipment 11,772,250 7,053,052
Furniture and fixtures 993,822 857,644
Leasehold improvements 2,993,081 1,366,977
----------- -----------
15,759,153 9,277,673
Less accumulated depreciation
and amortization (2,654,405) (2,229,593)
----------- -----------
Net Property and Equipment 13,104,748 7,048,080
----------- -----------
Other Assets:
Long-term inventories 332,000 307,000
Covenant not to compete (Note 8) 99,581 114,656
Patents, net of accumulated
amortization of $31,010 and $29,154 337,963 42,475
Other 899,572 249,778
----------- -----------
Total Other Assets 1,669,116 713,909
----------- -----------
TOTAL ASSETS $28,115,363 $22,240,434
============ =========== ===========
(Continued)
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-2
VARI-L COMPANY, INC.
BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' December 31,
EQUITY -------------------------
- ----------------------------- 1996 1995
----------- -----------
<S> <C> <C>
Current Liabilities:
Bank line of credit $ 2,125,409 $ 1,847,302
Current installments of:
Long-term debt 588,934 480,253
Obligations under capital leases 10,135 20,193
Subordinated debentures - 112,500
Financed insurance premiums 33,652 -
Trade accounts payable 1,499,992 1,212,942
Accrued expenses and other 584,938 389,129
Due to related party 77,774 -
----------- -----------
Total Current Liabilities 4,920,834 4,062,319
Long-term debt 4,155,121 1,730,275
Obligations under capital leases 6,131 22,563
Deferred income taxes 1,036,865 183,823
----------- -----------
Total Liabilities 10,118,951 5,998,980
----------- -----------
Commitments and Contingencies (Note 11)
Stockholders' Equity:
Common stock-$0.01 par value, 50,000,000
and 10,000,000 shares authorized;
3,806,138 and 3,624,977 shares issued
and outstanding, respectively 40,291 38,479
Paid-in capital 12,420,002 11,845,327
Retained earnings 5,554,819 4,376,348
Less loans for purchase of stock (18,700) (18,700)
----------- -----------
Total Stockholders' Equity 17,996,412 16,241,454
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $28,115,363 $22,240,434
=========================================== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
VARI-L COMPANY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net sales $12,210,517 $ 9,468,206
Cost of products sold 6,226,755 4,658,132
----------- -----------
Gross profit 5,983,762 4,810,074
----------- -----------
Other income and expenses
General and administrative expenses 1,237,526 1,040,804
Engineering expenses 695,222 569,308
Selling expenses 1,472,543 1,286,602
Profit sharing plan contribution 1,758 2,500
Interest expense 468,259 367,210
Interest income (146,102) (219,070)
Other expenses 222,785 280,159
----------- -----------
3,951,991 3,327,513
----------- -----------
Income before income taxes 2,031,771 1,482,561
Income taxes 853,300 623,000
----------- -----------
NET INCOME $ 1,178,471 $ 859,561
========== =========== ==========
Primary and fully-diluted earnings
per common share and common share
equivalents $ .30 $ .27
=========== ==========
Weighted average shares outstanding 3,912,027 3,195,570
=========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
<TABLE>
<CAPTION>
VARI-L COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
TOTAL
LOANS FOR STOCK-
COMMON PAID-IN RETAINED PURCHASE HOLDERS'
STOCK CAPITAL EARNINGS OF STOCK EQUITY
------ ------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balances
12/31/94 $ 26,470 $ 3,967,767 $3,516,787 $ (18,700) $7,492,324
Stock
options
exercised 2,100 1,225,772 - - 1,227,872
Warrants
and units
exercised 9,909 6,651,788 - - 6,661,697
Net income - - 859,561 - 859,561
---------- ---------- ----------- ---------- ----------
Balances
12/31/95 38,479 11,845,327 4,376,348 (18,700) 16,241,454
Stock
options
exercised 1,128 95,497 - - 96,625
Warrants
and units
exercised 570 398,430 - - 399,000
Issued under
employee
stock
purchase
plan 94 60,785 - - 60,879
Issued under
stock grant
plan 20 19,963 - - 19,983
Net income - - 1,178,471 - 1,178,471
----------- ----------- ----------- ---------- -----------
Balances
12/31/96 $ 40,291 $12,420,002 $5,554,819 $ (18,700) $17,996,412
======== =========== ========== ========= ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
VARI-L COMPANY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net cash (used in) provided by operating
activities (Note 17) $ (803,300) $ (268,887)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (6,481,480) (3,514,079)
----------- -----------
Net cash (used in) provided by
investing activities (6,481,480) (3,514,079)
----------- -----------
Cash flows from financing activities:
Lease acquisition costs advanced (641,486) -
Net increase in long-term debt 2,533,527 566,566
Repayments of capital lease obligations (26,490) (23,292)
Net borrowings under bank line of credit 278,107 740,148
Net borrowings for insurance financing 33,652 -
Repayments of debentures (112,500) (12,500)
Net proceeds from stock issuances 576,487 6,921,046
----------- -----------
Net cash provided by financing
activities 2,641,297 8,191,968
----------- -----------
Net (decrease) increase in cash (4,643,483) 4,409,002
Cash and cash equivalents at beginning
of year 5,868,210 1,459,208
----------- -----------
Cash and cash equivalents at end of year $ 1,224,727 $ 5,868,210
=========== ===========
Supplemental disclosure of cash flows
information:
Cash paid for interest $ 470,004 $ 361,071
=========== ===========
Cash paid for income taxes $ 0 $ 25,743
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Vari-L Company, Inc. is a manufacturer of electronic components
and was founded in 1953. The Company's business is the design,
manufacture, and marketing of microwave signal processing
components and devices used in the communications industry. The
Company's products are sold to original equipment manufacturers
of communication equipment, either in the military or commercial
marketplace in the United States and internationally.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include a mutual fund which is
convertible to a known amount of cash.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and
amortization for the principal components of property and
equipment are computed using straight-line and accelerated
methods over 1 to 12 year estimated useful lives. Other
components of property and equipment are depreciated using
units-of-production methods which recognize the productive lives
of the underlying assets.
STOCK COMPENSATION PLANS
The Company applies APB Opinion 25 in accounting for its stock
compensation plans.
F-7
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company uses the asset and liability method as identified in
Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes.
EARNINGS PER SHARE
Primary and fully diluted earnings per share of common stock are
computed on the basis of the weighted average shares of common
stock outstanding plus equivalent common shares arising from the
effect of stock options, using the treasury stock method.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense when
incurred. Research and development expense for the years 1996
and 1995 totalled $695,222 and $569,308, respectively.
RECLASSIFICATIONS
Certain 1995 amounts have been reclassified so as to conform
with 1996 presentation.
NOTE 2 - LEASE ACQUISITION COSTS
During 1996, the Company entered into an agreement with a local
construction contractor whereby the contractor is to build an
office and manufacturing facility which the Company would
subsequently lease. In connection with the agreement, the
Company advanced $641,486 to the contractor for land acquisition
and other costs. The contractor is to reimburse these funds to
the Company once it has arranged permanent construction
financing.
F-8
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Finished goods $1,353,584 $ 963,556
Work in process 3,189,200 2,397,774
Raw materials 2,995,138 2,016,600
Gold bullion 203,054 203,054
---------- ----------
$7,740,976 $5,580,984
========== ==========
Long-term
inventories $ 332,000 $ 307,000
========== ==========
</TABLE>
The gold bullion was purchased for purposes of managing the cost of
gold consumed in the company's manufacturing process.
The Company's normal operating cycle for certain products may be in
excess of one year, and the Company occasionally takes advantage of
quantity discounts for raw materials. Also, the Company manufactures
some finished goods in anticipation of customer demands. As a result
of these factors, the Company maintains certain inventory quantities
in excess of one year's supply which are accordingly classified as
long-term.
NOTE 4 - PROPERTY, EQUIPMENT, AND OTHER ASSETS
During 1996 and 1995, the Company invested significant amounts in the
remodeling of its leased facilities and a management information
system including digital communication and computer network systems.
The Company has capitalized certain direct and overhead costs related
to these projects.
Patents are carried at cost less accumulated amortization which is
calculated on a straight-line basis over the estimated useful lives,
which is generally 17 years.
Other assets at December 31, 1996 and 1995 included approximately
$428,000 and $228,000, respectively, of costs related to the
Company's efforts to obtain ISO 9001 registration. These costs
consist of wages, travel, training, and related overhead costs.
These costs will be amortized commencing with the date of successful
registration.
F-9
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - PROPERTY, EQUIPMENT, AND OTHER ASSETS (CONTINUED)
Other assets at December 31, 1996 include approximately $159,000 of
costs associated with a joint venture agreement with the Chinese
government; see Note 18. These costs will be accounted for as an
investment in the joint venture company once that entity has been
formally organized.
NOTE 5 - BANK LINE OF CREDIT AND LONG-TERM DEBT
The Company's credit facility consists of a line of credit and a term
loan. The Company and the bank amended the credit facility in May of
1996 to renew and increase the amount of the line of credit, and to
refinance the former credit facility.
The line of credit provides for borrowings of up to the lesser of
$3.5 million or a borrowing base limit calculated by reference to
levels of inventory and accounts receivable. At December 31, 1996,
the outstanding principal balance was $2,125,409 and available credit
was $1,374,591. Interest is payable monthly at the bank's prime
rate. The prime rate at December 31, 1996 was 8.25 percent. Amounts
borrowed under the line of credit are due April 30, 1997. The
Company can make voluntary repayments of borrowed amounts prior to
the due date.
Interest accrues on the outstanding principal balance of the term
loan at 8.75 percent and monthly principal and interest payments of
$79,812 are required. Unpaid principal and accrued interest are due
May 17, 1999.
Proceeds of the $5 million term loan were used to repay the former
line of credit and consolidate the two existing term loans.
Additionally, approximately $1.069 million of proceeds were invested
in a U.S. Government securities mutual fund.
Substantially all of the Company's assets are pledged as security for
the credit facility. The Company has also assigned a $750,000 life
insurance policy on a senior officer to further secure the
borrowings.
The Company must maintain certain financial ratios and obtain the
bank's approval prior to entering into various transactions,
including the payment of dividends, disposal of significant assets,
changing its executive management, or entering into direct borrowing
arrangements or contingent liabilities.
F-10
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - BANK LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)
The Company has financed the purchase of vehicles with promissory
notes bearing interest at rates ranging from 7.20 to 9.25 percent.
Monthly principal and interest payments totalling $1,879 are
required. The notes mature from 1998 through 2000.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Term loan $4,694,307 $2,177,886
Vehicle notes 49,748 32,642
---------- ----------
4,744,055 2,210,528
Less current
installments 588,934 480,253
---------- ----------
Long-term portion $4,155,121 $1,730,275
========== ==========
</TABLE>
Scheduled annual principal payments on long-term debt at December 31,
1996 were as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 588,934
1998 639,923
1999 3,513,090
2000 2,108
2001 -
----------
$4,744,055
==========
</TABLE>
NOTE 6 - CAPITAL LEASES
At December 31, 1996 and 1995, the gross amount of equipment recorded
under capital leases was $84,631. These amounts are classified as
machinery and equipment in the accompanying balance sheets.
Accumulated amortization at December 31, 1996 was $14,000.
F-11
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - CAPITAL LEASES (CONTINUED)
Future minimum lease payments at December 31, 1996 were:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 19,193
1998 5,174
--------
Total minimum payments 24,367
Less amounts representing
interest 8,101
--------
Present value of net future
lease payments 16,266
Less current portion 10,135
--------
Long-term obligations $ 6,131
========
</TABLE>
The present value of minimum lease payments was calculated using
interest rates with an average of approximately 11 percent.
NOTE 7 - DEBENTURES
The Company issued debentures in connection with a December 30, 1993
private placement of its common stock. Debentures outstanding on
December 31, 1995 were redeemed January 1996.
NOTE 8 - AGREEMENT WITH FORMER OFFICERS
The Company is party to agreements with two of its former officers.
Among other items, both agreements provided for a severance package,
a consulting agreement, and a covenant not to compete against the
Company.
The first agreement was dated in 1992. The covenant not to compete
provided by this agreement expired during 1996. The Company had
capitalized $572,067 as the cost of the covenant, which was fully
amortized at December 31, 1996.
Amounts payable under the severance provision of the first agreement
are expensed by the Company when those amounts become due. As of
December 31, 1996, the total amount of these future costs was
$55,250, payable as follows: 1997 - $39,382, and 1998 - $15,868.
These future costs include amounts described in the agreement as rent
on properties owned by the former officer payable $25,290 in 1997,
and $8,595 in 1998.
F-12
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - AGREEMENT WITH FORMER OFFICERS (CONTINUED)
The second agreement was dated November 1996 and was entered into in
connection with the employment agreements described in Note 13. The
Company capitalized $99,581 as the cost of the covenant not to
compete, which represented the total amount of severance pay due the
former officer. The covenant will be amortized using the straight-
line method over the three year life of the covenant. Amounts due
this officer at December 31, 1996 totalled $77,774.
NOTE 9 - STOCK COMPENSATION PLANS
The Company has three stock-based compensation plans which are
described below. The Company applies APB Opinion 25 in accounting
for its stock compensation plans. During 1996, approximately
$190,000 of compensation cost was charged to operations. This cost
related to exercises under the stock option plan and issuances under
the stock grant plan.
Had compensation cost been determined on the basis of fair value
pursuant to FASB Statement 123, net income and earnings per share
would have been reduced to the following proforma amounts:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C> <C>
Net income As reported $1,178,471 $ 859,561
========== ==========
Pro forma $ 776,052 $ 250,685
========== ==========
Primary and fully
diluted earnings
per share As reported $ .30 $ .27
========== ==========
Pro forma $ .19 $ .07
========== ==========
</TABLE>
STOCK OPTION PLAN
During 1987, the Company established a nonqualified tandem stock
option/stock appreciation rights plan for key employees. The plan,
which was amended in 1990, 1994 and 1996, 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.
F-13
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - STOCK COMPENSATION PLANS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
The Company has reserved 3,000,000 shares of its common stock for
issuance upon exercise of rights and options under the plan.
Typically, rights and options have been granted subject to a vesting
schedule, vesting at the rate of 20 percent per year, becoming fully
vested upon the change of control of the Company, and expiring 10
years from the date of issuance. Certain options granted to senior
management are fully vested upon issuance.
Prior to the Company's public offering in 1994, exercise prices were
based on the net book value of the Company at the date of grant,
which was estimated to be the fair market value by the Company's
Board of Directors. Since the public offering and the 1994
amendments to the Plan, fair market value has been defined as the
closing price on the date of grant on the stock exchange or quotation
service on which the Company's stock is traded.
For purposes of the FASB Statement 123 computations, the fair value
of each option grant is estimated on the grant date using a binomial
option-pricing model with certain weighted-average assumptions.
These assumptions included expected volatility of 40 percent and 47
percent for 1996 and 1995, respectively. For both 1996 and 1995,
assumptions included risk-free interest rates of six percent,
expected option lives of two years for grants to senior management
and five years for all other grants, and zero dividend yields.
F-14
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - STOCK COMPENSATION PLANS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
Following is a summary of the status of the stock option plan during
1996 and 1995:
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise
of Options Price
------------- -----------
<S> <C> <C>
Outstanding at January 1, 1995 481,250 $ 1.81
Granted 419,500 10.40
Exercised (210,000) 2.21
----------
Outstanding at December 31, 1995 690,750 6.90
==========
Options exercisable at
December 31, 1995 479,250 7.13
==========
Weighted average fair value of
options granted during 1995 $ 3.67
==========
Outstanding at January 1, 1996 690,750 6.90
Granted 298,502 8.39
Exercised (140,000) 0.83
Forfeited (17,712) 10.42
----------
Outstanding at December 31, 1996 831,540 7.30
==========
Options exercisable at
December 31, 1996 496,950 7.51
==========
Weighted average fair value of
options granted during 1996 $ 2.67
==========
</TABLE>
F-15
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - STOCK COMPENSATION PLANS (CONTINUED)
Stock Option Plan (Continued)
Following is a summary of the status of stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Exercisable
Outstanding Options Options
--------------------- -------------------
Weighted
Average Weighted Weighted
Exercise Remaining Average Average
Price Contractual Exercise Exercise
Range Number Life Price Number Price
------ ------- ---------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$2.21 131,250 6.9 years $ 2.21 61,250 $ 2.21
4.23-5.50 7,000 8.1 4.65 7,000 4.65
7.75-10.75 688,790 8.7 8.25 424,200 8.26
11.75-17.25 4,500 9.0 13.89 4,500 13.89
------- -------
831,540 496,950
======= =======
</TABLE>
Effective October 1, 1996, the Compensation Committee of the
Company's Board of Directors modified the exercise price of certain
stock options to $8.25 per share, which was the closing market price
of the Company's common stock on that date. This modification
applied to substantially all options that had previously been granted
at exercise prices in excess of $8.25 per share.
The Company obtained an income tax deduction for the difference
between the market value of the shares issued and exercise prices of
options exercised during 1996 and 1995. This deduction resulted in
income tax benefits to the Company which have been credited to common
stock and paid-in capital.
EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an employee stock purchase plan during 1995.
Eligible employees may contribute up to 10 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 stock on specified dates. A total of 800,000
common shares has been reserved under the plan, and the maximum
number of shares to be issued is 200,000 per year. Since the plan is
noncompensatory, no charges to operations are recorded.
F-16
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - STOCK COMPENSATION PLANS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
Employee withholdings during 1995 were approximately $61,000 and were
used to purchase 9,366 shares which were issued January 1996.
Withholdings during 1996 were approximately $52,000. During January
1997, these withholdings were used to purchase 7,467 shares.
Compensation cost for the FASB Statement 123 pro forma amounts was
estimated using a binomial option-pricing model with certain
assumptions. These assumptions included expected volatility of 40
percent and 47 percent for 1996 and 1995, respectively. For both
1996 and 1995, assumptions included risk-free interest rates of six
percent, expected lives of one year, and zero dividend yields. The
weighted-average fair value of those purchase rights granted in 1996
and 1995 was $1.24 and $1.37 per share, respectively.
STOCK GRANT PLAN
During 1996, the Company adopted a stock grant plan under which stock
grants can be made 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 grant plan. The plan
provides for automatic grants of 50 shares per month to nonmanagement
members of the Compensation Committee of the Company's Board of
Directors. During 1996, those members received grants for 1,950
common shares. Compensation cost charged to operations was measured
by the fair market value of the stock on the date of the grants.
NOTE 10 - STOCKHOLDERS' EQUITY
In their annual meeting held on June 26, 1996, the stockholders
approved an amendment to the Company's Articles of Incorporation
increasing the authorized number of the Company's $.01 par value
Common Stock to 50 million shares.
Substantially all of the 879,000 warrants issued to the public in the
Company's 1994 initial offering were exercised during 1995. In
connection with the offering, the Company sold the underwriter units
and warrants entitling the underwriter or its designee to purchase up
to 85,000 shares at $6.50 per share and 85,000 shares at $7.50 per
share. The underwriter and its designees exercised 56,500 units and
warrants during 1995, and the remainder during 1996.
F-17
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)
The following is an analysis of the changes in the number of common
shares for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
<S> <C>
Number of shares at December 31, 1994 2,424,007
Shares issued on exercise of stock
options 210,000
Shares issued on exercise of warrants
and units 990,970
---------
Number of shares at December 31, 1995 3,624,977
Shares issued on exercise of stock
options 112,845
Shares issued on exercise of warrants
and units 57,000
Shares issued under employee stock
purchase plan 9,366
Shares issued under stock grant plan 1,950
---------
Number of shares at December 31, 1996 3,806,138
=========
</TABLE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Nonrelated Party Leases
The Company leases certain facilities under long-term operating
leases. Minimum future annual lease payments over the next five
years are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 113,244
1998 116,982
1999 120,840
2000 124,824
2001 128,946
---------
$ 604,836
=========
</TABLE>
F-18
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
NONRELATED PARTY LEASES (CONTINUED)
Rent expense on these leases was $109,626 and $106,122 for
1996 and 1995, respectively.
RELATED PARTY LEASES
Certain facilities are leased under long-term operating leases from
the Company's chairman and a partnership in which he is a partner.
Minimum future annual lease payments over the next five years are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 105,513
1998 89,451
1999 48,000
2000 40,000
2001 0
---------
$ 282,964
=========
</TABLE>
Rent expense on these leases was $105,513 for 1996 and $79,608 for
1995.
CONTINGENCIES
The Company is contingently liable for guarantees of indebtedness
owed by senior officers to the former officer referred to in Note 8.
The amount of this contingent liability at December 31, 1996 was
approximately $335,000.
The Company is also contingently liable as guarantor of the mortgage
on the facility it leases from the above-described partnership. The
amount of this mortgage at December 31, 1996 was approximately
$335,000.
NOTE 12 - RELATED PARTY TRANSACTIONS
As disclosed in Note 8, certain amounts required to be paid to a
former officer as part of her severance agreement are described in
the agreement as rent on properties owned by the former officer.
These payments totalled $25,290 and $25,290 for both 1996 and 1995.
F-19
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - EMPLOYMENT AGREEMENTS
During November 1992, the Company entered into four-year employment
agreements with its three senior officers. These agreements were
amended during 1995 to provide for automatic annual renewals of their
full terms. The agreements provide for minimum annual base salaries
during the officers' employment with the Company, and for severance
pay after employment. Severance pay will be equal to two times the
annual base salary in event of termination of employment by the
Company, or one-third of the annual base salary in the case of
voluntary resignation. In the event of an officer's death, the
Company will be obligated to pay the officer's estate an amount equal
to the annual base salary for the greater of one year or the
remaining term of the agreement. 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 severance allowance,
whichever is greater. The Company's Board of Directors has
determined that amounts payable to the officers under the severance
pay provisions of the agreements is adequate consideration for the
officers' covenants not to compete.
As described in Note 8, one of the senior officers retired during
November of 1996. The Company and the retiring officer entered into
a consulting and severance agreement providing for nine months salary
payable over the first year of a three year consulting relationship
in lieu of the benefits provided by the senior officer's employment
agreement.
NOTE 14 - FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Financial
Accounting Standards No. 105, consist primarily of trade accounts
receivable. The Company's products are sold to original equipment
manufacturers of communications equipment, either in the military or
commercial marketplace. In 1996 and 1995, the Company's two largest
customers accounted for approximately 19 percent and 15 percent,
respectively, of total sales. Approximately 33 percent of the
Company's 1996 sales were to foreign customers. The Company performs
credit evaluations of its customers but generally does not require
collateral.
F-20
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - FINANCIAL INSTRUMENTS AND
CONCENTRATIONS OF CREDIT RISK (CONTINUED)
At December 31, 1996, the Company had $1,176,000 invested in a mutual
fund and a $203,054 gold bullion investment. The mutual fund invests
in United States government securities, but is not otherwise
federally insured. The gold bullion investment is held in street
name by a national broker and is not federally insured.
Disclosure of fair value information about certain financial
instruments, whether or not recognized in the balance sheet, is
required by SFAS No. 107. The carrying amounts of cash and cash
equivalents and gold bullion approximate fair value.
The Company estimates the fair value of short- and long-term debt
using discounted cash flow analysis, based on the Company's current
incremental borrowing rates for similar arrangements. The fair value
of contingent liabilities is based on the amount of the underlying
instruments.
As disclosed in Note 11, the Company is contingently liable on
certain debt which is not carried on the balance sheet. Otherwise,
the carrying amounts and fair values of the Company's financial
instruments at December 31, 1996 approximate their fair values.
NOTE 15 - INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, which
requires the use of an asset and liability approach for financial
accounting and reporting for income taxes.
The provisions for income taxes consisted of:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C> <C>
Current: Federal $ - $ -
State - -
-------- --------
- -
-------- --------
Deferred: Federal 751,700 543,000
State 101,600 80,000
-------- --------
853,300 623,000
-------- --------
Total tax provisions $853,300 $623,000
======== ========
</TABLE>
F-21
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 15 - INCOME TAXES (CONTINUED)
Significant components of deferred tax balances as of December 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $1,401,805 $ 491,000
Other, net - 12,089
---------- ----------
Total deferred tax
liabilities 1,401,805 503,089
---------- ----------
Deferred tax assets:
Carryover tax benefit of
stock option exercises 288,145 319,266
Other, net 76,795 -
---------- ----------
Total deferred tax assets 364,940 319,266
---------- ----------
Net deferred tax
liabilities $1,036,865 $ 183,823
========== ==========
</TABLE>
The Company generated net operating losses during 1996 and 1995 as a
result of the exercise of stock options. The portion of the losses
available for carryover should be fully utilized in 1997.
The differences between the U.S. federal statutory rate and the
Company's effective rate are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
U.S. federal statutory tax rate 34.0% 34.0%
State income tax rate 5.0 5.0
Officer's life insurance
and other 3.0 3.0
--------- ---------
Effective tax rate 42.0% 42.0%
========= =========
</TABLE>
F-22
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 16 - PROFIT SHARING PLAN
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 stock, are determined by the
Board of Directors at its sole discretion. During 1996 and 1995,
$1,758 and $2,500, respectively, was contributed to the plan.
NOTE 17 - RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
The reconciliation of net income to net cash (used in) provided by
operating activities for the years ended December 31, 1996 and 1995
is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net income $ 1,178,471 $ 859,561
----------- -----------
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization 424,812 173,191
Deferred income taxes 853,042 623,000
Amortization of covenant not
to compete 114,656 101,840
Changes in assets and
liabilities:
(Increase) in trade
accounts receivable (452,012) (575,394)
(Increase) in inventories (2,184,992) (1,581,491)
(Increase) in prepaid
expenses and other
current assets (253,047) (279,916)
(Increase) patents and other
assets (967,089) (195,718)
Increase in accounts payable 287,050 513,005
Increase in accrued expenses
and other 195,809 118,778
(Decrease) in income taxes
payable - (25,743)
----------- -----------
Total adjustments (1,981,771) (1,128,448)
----------- -----------
Net cash (used in) provided by
operating activities $ (803,300) $ (268,887)
=========== ===========
</TABLE>
F-23
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 18 - CHINA JOINT VENTURE
During 1996, the Company entered into a joint venture agreement with
Chen-Hui Company, a governmental corporation of the People's Republic
of China, whereby the Company and Chen-Hui are to form a private
joint venture company. The joint venture will be owned 51 percent by
the Company and 49 percent by Chen-Hui. In exchange for these
ownership interests, the Company is to contribute a license of its
proprietary processes and manufacturing, marketing, and business
expertise, while Chen-Hui is to contribute the lease of a
manufacturing facility in Beijing and necessary government approvals.
The joint venture company will manufacture wireless communications
components for distribution to Chinese and other markets. The
Company will sell equipment and inventory to the joint venture
necessary for its operations, as well as provide training for the
joint venture's employees.
F-24
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on any
matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure during the period of this
report.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 1997 annual meeting of
shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 1997 annual meeting of
shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 1997 annual meeting of
shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 1997 annual meeting of
shareholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1a Restated Articles of Incorporation, as Amended, filed as
Exhibit 4.1 to the Registrant's Form S-8 Registration
Statement (No. 33-88666) and incorporated herein by
reference.
3.1b Articles of Amendment to the Articles of Incorporation.
3.2 Restated Bylaws of the Company as adopted by its Board of
Directors on November 4, 1992 filed as Exhibit 3.2 to the
Registrant's Form SB-2 Registration Statement (No. 33-74704-
D) and incorporated herein by reference
4.1 Specimen Certificate for $.01 par value Common Stock of the
Company filed as Exhibit 4.3 to the Registrant's Form SB-2
Registration Statement (No. 33-74704-D) and incorporated
herein by reference
4.2 Specimen Certificate for Warrant to Purchase Common Stock of
the Company filed as Exhibit 4.4 to the Registrant's Form
SB-2 Registration Statement (No. 33-74704-D) and
incorporated herein by reference
4.3 Rights Agreement with American Securities Transfer, Inc.
dated March 15, 1996 filed as Exhibit 4.2 to Registrant's
Form 8-A/A Registration Statement (No. 0-23866) and
incorporated herein by reference
4.4 Specimen Certificate for Right to Purchase $.01 par value
Common Stock of the Company filed as Exhibit 4.3 to
Registrant's Form 8-A/A Registration Statement (No. 0-23866)
and incorporated herein by reference
10.1 Executive Employment Agreement with Joseph H. Kiser, dated
November 12, 1992, filed as Exhibit 10.1 to the Registrant's
Form SB-2 Registration Statement (No. 33-74704-D) and
incorporated herein by reference
10.2 Executive Employment Agreement with David G. Sherman, dated
November 12, 1992, filed as Exhibit 10.2 to the Registrant's
Form SB-2 Registration Statement (No. 33-74704-D) and
incorporated herein by reference
10.3 Executive Employment Agreement with Alwin E. Branson, dated
November 12, 1992, filed as Exhibit 10.3 to the Registrant's
Form SB-2 Registration Statement (No. 33-74704-D) and
incorporated herein by reference
10.4 Amended and Restated Tandem Stock Option and Stock
Appreciation Rights Plan, effective as of June 26, 1966,
filed as Exhibit 4.3 to the Registrant's Form S-8
Registration Statement (No. 33-88666) and incorporated
herein by reference
10.5 Equipment Lease Agreement dated May 26, 1993 between the
Company and Rossi Hardesty Financial Inc., filed as Exhibit
10.14 to the Registrant's Form SB-2 Registration Statement
(No. 33-74704-D) and incorporated herein by reference
10.6 Lease Agreement dated January 1, 1987, between the Company
and 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 Registrant's
Form SB-2 Registration Statement (No. 33-74704-D) and
incorporated herein by reference
10.7 Amended Lease Agreement dated July 1, 1992 between the
Company and Bello-1 Partnership for the facility located at
11101 East 51st Avenue, Denver Colorado, filed as Exhibit
10.16 to the Registrant's Form SB-2 Registration Statement
(No. 33-74704-D) and incorporated herein by reference
10.8 Consulting Agreement between Carolyn Y. Kiser and the
Company, dated January 31, 1992, as amended March 23, 1993,
filed as Exhibit 10.17 to the Registrant's Form SB-2
Registration Statement (No. 33-74704-D) and incorporated
herein by reference
10.9 Settlement Agreement between the Company, 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 Registrant's Form SB-2 Registration
Statement (No. 33-74704-D) and incorporated herein by
reference
10.10 Warrant Agreement with American Securities Transfer, Inc.,
filed as Exhibit 10.19 to the Registrant's Form SB-2
Registration Statement (No. 33-74704-D) and incorporated
herein by reference
10.11 Consulting Agreement between the Company and the Neidiger/
Tucker/Bruner, Inc. dated April 26, 1994, filed as Exhibit
10.23 to the Registrant's Form SB-2 Registration Statement
(No. 33-74704-D and incorporated herein by reference
10.12 Profit Sharing Plan and Trust Agreement, as amended and
restated effective April 19, 1994 filed as Exhibit 10.16 to
the Registrant's Form 10-KSB for the year ended December 31,
1994 and incorporated herein by reference
10.13 Assignment of Amended Lease Agreement dated July 1, 1992
between the Company and 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 Registrant's Form 10-KSB for the year ended
December 31, 1994 and incorporated herein by reference
10.14 Employee Stock Purchase Plan effective as of March 10, 1995
filed as Exhibit 4.3a to the Registrant's Form S-8
Registration Statement (No. 33-81045) and incorporated
herein by reference
10.15 Stock Grant Plan dated March 15, 1996 filed as Exhibit 4.3b
to the Registrant's Form S-8 Registration Statement (No. 33-
81045) and incorporated herein by reference
10.16 Lease Agreement dated July 14, 1995 between the Company and
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 Registrant's Form 10-
KSB for the year ended December 31, 1995 and incorporated
herein by reference.
10.17 Term Loan and Credit Agreement between the Company and
Norwest Bank Colorado, National Association, dated May 17,
1996 filed as Exhibit 10.1 to the Registrant's Form 10-QSB
for the quarter ended June 30, 1996 and incorporated herein
by reference.
23 Consent of Haugen, Springer & Co. to the incorporation by
reference of their financial statements in the Registrant's
Form S-8 Registration Statements (No. 33-88666) and (No. 33-
81045)
27 Financial Data Schedule
REPORTS ON FORM 8-K
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VARI-L COMPANY, INC.
By:/s/ David G. Sherman
-------------------------------------
David G. Sherman,
President
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.
/s/ Joseph H. Kiser Date: March 28, 1997
- ----------------------------------------- ----------------------
Joseph H. Kiser, Chairman of the Board,
Chief Scientific Officer
and Director
/s/ David G. Sherman Date: March 28, 1997
- ----------------------------------------- ----------------------
David G. Sherman, President,
Chief Executive Officer, Principal
Executive Officer, Principal Financial
Officer and Director
/s/Jon L. Clark Date: March 28, 1997
- ----------------------------------------- ----------------------
Jon L. Clark, Vice President of Finance
and Principal Accounting Officer
/s/ Sarah L. Booher Date: March 28, 1997
- ----------------------------------------- ----------------------
Sarah L. Booher, Director
/s/ David A. Lisowski Date: March 28, 1997
- ----------------------------------------- ----------------------
David A. Lisowski, Director
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Method of Filing
- ---------- ------------
<S> <C> <C>
3.1b Articles of Amendment to the
Articles of Incorporation Filed herewith electronically
23 Consent of Haugen, Springer
& Co. to the incorporation
by reference of their
financial statements in
the Registrant's Form S-8
Registration Statements
(No. 33-88666) and
(No. 33-81045) Filed herewith electronically
27 Financial Data Schedule Filed herewith electronically
</TABLE>
EXHIBIT 23
HAUGEN, SPRINGER & CO.
Certified Public Accountants
9250 East Costilla Avenue Robert S. Haugen, C.P.A.
Suite 150 Charles K. Springer, C.P.A.
Englewood, Colorado 80012
(303) 799-6969
FAX (303) 799-6974
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors and Stockholders
Vari-L Company, Inc.
We consent to the incorporation by reference of our report
on the financial statements of Vari-L Company, Inc. as of
December 31, 1996 and 1995 and for the years then ended in the
Company's Registration Statements on Form S-8 (No. 33-88666 and
No. 33-81045).
/s/Haugen, Springer & Co.
HAUGEN, SPRINGER & CO.
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VARI-L'S
AUDITED FINANCIAL STATEMENTS PREPARED AS OF DECEMBER 31, 1996 AND FOR THE
TWELVE-MONTH PERIOD THEN ENDED, INCLUDED WITH ITS 10-KSB FILING WITH THE
SECURITIES AND EXCHANGE COMMISSION FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,225
<SECURITIES> 0
<RECEIVABLES> 3,386
<ALLOWANCES> 4
<INVENTORY> 7,741
<CURRENT-ASSETS> 13,341
<PP&E> 15,759
<DEPRECIATION> 2,654
<TOTAL-ASSETS> 28,115
<CURRENT-LIABILITIES> 4,921
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 17,956
<TOTAL-LIABILITY-AND-EQUITY> 28,115
<SALES> 12,211
<TOTAL-REVENUES> 12,357
<CGS> 6,227
<TOTAL-COSTS> 6,227
<OTHER-EXPENSES> 3,630
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 468
<INCOME-PRETAX> 2,032
<INCOME-TAX> 854
<INCOME-CONTINUING> 1,178
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,178
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
EXHIBIT 3.1b
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION OF
VARI-L COMPANY, INC.
Pursuant to the provisions of the Colorado Business Corporation
Act, the undersigned Corporation adopts the following Articles of
Amendment to its Articles of Incorporation:
FIRST: The name of the Corporation is Vari-L Company, Inc.
SECOND: The following amendment to the Articles of
Incorporation was adopted on June 26, 1996 by a vote of the shareholders
sufficient for approval as prescribed by the Colorado Business Corporation
Act:
Article IV of the Articles of Incorporation is hereby amended in
its entirety to read as follows:
ARTICLE IV
The total authorized capital of the Corporation shall consist of
50,000,000 shares of Common Stock, which shares shall have a par value of
$.01. Any and all of such shares may be issued for such consideration
expressed in dollars, not less than the par value thereof, as shall be
fixed from time to time by the Board of Directors. The consideration
shall be paid, in whole or in part, in money, in other property, tangible
or intangible, or in labor or services actually performed for the
Corporation. The promise of future services shall not constitute payment
or part payment for such shares. Neither the promissory note of a
subscriber or direct purchaser of shares from the Corporation nor the
unsecured or nonnegotiable promissory note of any other person shall
constitute payment or part payment for such shares.
Upon receipt of the consideration in an amount not less than par
value, such shares shall be issued and deemed fully paid and
nonassessable.
THIRD: This Amendment does not effect any exchange,
reclassification, or cancellation of issued shares.
VARI-L COMPANY, INC.
By: /s/David G. Sherman
David G. Sherman, President
