SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No. 0-23866
March 31, 1997
VARI-L COMPANY, INC.
(Exact name of Registrant as specified in its charter.)
Colorado 06-0679347
(State of Incorporation) (I.R.S. Employer
identification No.)
11101 E. 51st Avenue
Denver, Colorado 80239
(Address of principal executive offices)
(303) 371-1560
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes ____X____ No ________
The number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 1997:
Class of Securities Outstanding Securities
-------------------- ----------------------
$0.01 par value 3,826,840 shares
Common shares
PART 1-FINANCIAL INFORMATION
Item 1. Financial Statements
VARI-L COMPANY, INC.
BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
3/31/97 12/31/96
ASSETS (UNAUDITED) (AUDITED)
---------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,547,007 $ 1,224,727
Receivables:
Trade, less $4,000 allowance
for doubtful accounts 3,084,731 2,744,180
Lease acquisition costs 641,486 641,486
Inventories 8,427,855 7,740,976
Prepaid expenses and other 1,320,922 990,130
----------- -----------
Total Current Assets 17,022,001 13,341,499
----------- -----------
Property and Equipment:
Machinery and equipment 12,291,004 11,772,250
Furniture and fixtures 997,041 993,822
Leasehold improvements 3,094,914 2,993,081
----------- -----------
16,382,959 15,759,153
Less accumulated depreciation
and amortization (2,812,771) (2,654,405)
----------- -----------
Net Property and Equipment 13,570,188 13,104,748
----------- -----------
Other Assets:
Long-term inventories 332,000 332,000
Covenant not to compete 91,283 99,581
Patents, net of accumulated
amortization of $43,510 and $31,010 355,464 337,963
Other 1,438,906 899,572
----------- -----------
Total Other Assets 2,217,653 1,669,116
----------- -----------
TOTAL ASSETS $32,809,842 $28,115,363
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
VARI-L COMPANY, INC.
BALANCE SHEETS, CONTINUED
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
3/31/97 12/31/96
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) (AUDITED)
---------- --------
<S> <C> <C>
Current Liabilities:
Bank line of credit $1,878,409 $2,125,409
Current installments of:
Long-term debt 588,934 588,934
Obligations under capital leases 10,135 10,135
Financed insurance premiums 87,582 33,652
Trade accounts payable 1,438,535 1,499,992
Accrued expenses and other 188,523 584,938
Due to related party 52,227 77,774
Income taxes payable 176,548 0
----------- -----------
Total Current Liabilities 4,420,893 4,920,834
Long-term debt 4,012,994 4,155,121
Obligations under capital leases 5,164 6,131
Subordinated debentures 5,000,000 0
Deferred income taxes 1,036,865 1,036,865
----------- -----------
Total Liabilities 14,475,916 10,118,951
----------- -----------
Stockholders' Equity:
Common stock, $.01 par value,
50,000,000 shares authorized;
3,826,840 and 3,806,138 shares
outstanding, respectively 40,498 40,291
Paid-in capital 12,513,505 12,420,002
Retained earnings 5,798,623 5,554,819
Less:
Loans for purchase of stock (18,700) (18,700)
----------- -----------
Total Stockholders' Equity 18,333,926 17,996,412
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $32,809,842 $28,115,363
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
VARI-L COMPANY, INC.
STATEMENTS OF INCOME
FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND MARCH 31, 1996
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
3/31/97 3/31/96
(UNAUDITED) (UNAUDITED)
---------- ----------
<S> <C> <C>
Net sales $ 3,299,733 $ 2,618,096
Cost of products sold 1,667,785 1,282,577
----------- -----------
Gross profit 1,631,948 1,335,519
----------- -----------
Other costs and expenses:
General and administrative 372,601 294,000
Engineering 209,184 163,310
Selling 450,222 367,742
Interest expense 174,610 99,533
Interest income (24,123) (62,908)
Other 29,102 56,469
----------- -----------
1,211,596 918,146
----------- -----------
Income before taxes 420,352 417,373
Income taxes 176,548 175,297
----------- -----------
NET INCOME $ 243,804 $ 242,076
=========== ===========
Primary and fully-diluted earnings
per common share and common share
equivalents $ 0.06 $ 0.06
=========== ===========
Weighted average shares outstanding 3,934,127 3,920,883
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
VARI-L COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND MARCH 31, 1996
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
3/31/97 3/31/96
(UNAUDITED) (UNAUDITED)
---------- ----------
<S> <C> <C>
Net cash (used in) operating
activities (Note 7) $(1,373,960) $ (852,504)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (623,806) (1,572,991)
----------- -----------
Net cash used in investing
activities (623,806) (1,572,991)
----------- -----------
Cash flows from financing activities:
Lease acquisition costs advanced 0 (569,254)
Net (decrease) in long-term debt (142,127) (114,101)
Repayments of capital lease obligations (967) (6,202)
Redemptions of subordinated debentures 0 (112,500)
Net repayments under bank line of credit (247,000) 0
Net borrowings for insurance
financing activities 53,930 44,870
Net proceeds from debenture offering 4,562,500 0
Proceeds from stock issuances 93,710 459,880
----------- -----------
Net cash provided by (used in)
financing activities 4,320,046 (297,307)
----------- -----------
Net increase (decrease) in cash 2,322,280 (2,722,802)
Beginning cash 1,224,727 5,868,210
----------- -----------
Ending cash $ 3,547,007 $ 3,145,408
=========== ===========
Supplemental disclosure of cash flows
information:
Cash paid for interest $ 151,610 $ 103,706
=========== ===========
Cash paid for income taxes $ 0 $ 0
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Vari-L Company, Inc. (the Company) was founded in 1953 and is a
manufacturer of electronic components. The Company's products are used in
commercial and military communications systems where electrical processing
of radio frequency signals is required.
NOTE 1 - Financial presentation
These financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 1996 and notes
thereto.
In the opinion of management, the accompanying interim, unaudited
financial statements contain all the adjustments necessary to present
fairly the financial position of the Company as of March 31, 1997, and the
results of its operations, and its cash flows for the three months ended
March 31, 1997 and March 31, 1996. All adjustments made are of a normal
recurring nature.
NOTE 2 - Inventories
<TABLE>
<CAPTION>
Inventories consist of the following:
3/31/97 12/31/96
(UNAUDITED) (AUDITED)
---------- --------
<S> <C> <C>
Finished goods $ 1,389,081 $ 1,353,584
Work in process 3,832,686 3,189,200
Raw materials 3,003,034 2,995,138
Gold bullion 203,054 203,054
----------- -----------
$ 8,427,855 $ 7,740,976
=========== ===========
Long-term inventories $ 332,000 $ 332,000
=========== ===========
</TABLE>
NOTE 3 - Income taxes
Income tax expense reflects effective tax rates of 42%.
NOTE 4 - Credit facility
The Company's credit facility consists of a line of credit and a term
loan. The line of credit provides for borrowings of up to of $3.5
million. Interest is payable monthly, calculated at prime. The line
matures April 30, 1997 and the Company is in the process of renewing this
line. At March 31, 1997, the outstanding balance due to the Bank under
the line of credit was $1,878,409. Interest accrues on the outstanding
principal balance of the term loan at 8.75% and monthly principal and
interest payments of $79,812 are required. The term loan matures May 17,
1999. At March 31, 1997, the balance due to the Bank under the term loan
was $4,556,792.
NOTE 5 - Securities purchase agreement
On March 4, 1997, the Company entered into an agreement to sell up to 75
units of debentures and warrants. The units consist of an aggregate of
$7,500,000 in 4-year, 7%, subordinated, convertible debentures and 750,000
non-redeemable warrants to purchase common stock at a price of $9.50 per
share, exercisable for a period of three years. Under the agreement, the
unpaid principal balance of the debentures plus accrued interest may be
converted into common stock at the election of the holder thereof at 84%
of the 10-day average closing bid price prior to receipt of written
request for conversion, or at $9.50, whichever is less.
(Continued)
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE 5 - Securities purchase agreement, continued
As of March 31, 1997, the Company had sold 50 units for $5,000,000 and
received proceeds of $4,562,500, net of commissions and fees. As of that
date, proceeds had been used to pay down the line of credit ($1,242,000),
invest in marketable securities ($3,020,000), and as additional working
capital ($300,500). As required by the agreement, the common stock
issuable upon conversion and/or exercise of the Debenture and Warrants
have been registered with the Securities and Exchange Commission.
NOTE 6 - Stock compensation plans
The Company has three stock-based compensations plans: a stock option
plan, an employee stock purchase plan and a stock grant plan.
STOCK OPTION PLAN
The Company has reserved 3,000,000 shares of its common stock for issuance
upon exercise of rights and options under the stock option 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.
In January 1997, the Company granted 314,524 options pursuant to the plan.
During January and February, 12,935 options were exercised at prices
ranging from $2.21 to $8.25 per share.
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's employee stock purchase plan, 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 value of the stock on specified dates. A
total of 800,000 shares were reserved under the plan and the maximum
number of shares to be issued is 200,000 per year. For the plan year
1996, a total of 7,467 shares were issued in January 1997 at $6.91 per
share.
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
the first quarter of 1997, those members received grants for 300 shares.
Compensation cost charged to operations was measured by the fair market
value of the stock on the date of the grants.
(Continued)
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE 7 - Reconciliation of net income to net cash
(used in) operating activities
The reconciliation of net income to net cash (used in) operating
activities for the three months ended March 31, 1997 and March 31, 1996 is
as follows:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
3/31/97 3/31/96
(UNAUDITED) (UNAUDITED)
---------- ----------
<S> <C> <C>
Net Income $ 243,804 $ 242,076
----------- -----------
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization 158,366 83,872
Amortization of covenant
not to compete 8,298 25,460
Changes in assets and liabilities:
(Increase) in accounts
receivable (340,551) (25,832)
(Increase) in inventories (686,879) (734,848)
(Increase) in prepaid
expenses and other (330,792) (354,019)
(Increase) in patents and
other assets (119,335) (97,979)
(Decrease) increase in
accounts payable (61,457) 26,005
(Decrease) in accrued
expenses (396,415) (192,536)
(Decrease) in amount due to
related party (25,547) 0
Increase in income
taxes payable 176,548 175,297
----------- -----------
Total adjustments (1,617,764) (1,094,580)
----------- -----------
Net cash (used in)
operating activities $(1,373,960) $ (852,504)
=========== ===========
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion should be read in conjunction with the Company's
financial statements and notes thereto included herein.
During the first quarter of 1997, the Company continued to expand its
revenue and customer base, both domestically and abroad. The Company
currently believes that its best long-term business prospects are in three
areas--North America, Europe/Scandinavia and the Pacific Rim, which are
three distinctly different market environments, governed by diverse
technology requirements, evolving economies, and varied political and
regulatory systems.
In Scandinavia, the Company is working closely with a large, key customer
on a variety of wireless projects. In China, while the Company is
awaiting issuance of Chinese patents covering its technology for its
planned joint venture, work has already begun on the redesign and build
out of its facility in China with plant startup now expected in the second
half of 1997. And in the United States, the Company continues to serve
its existing customers in the wireless industry and to position itself to
take advantage of anticipated business opportunities arising from the
eventual rollout of the personal communications services (PCS) industry.
The Company closed on a $5 million private placement of convertible
debentures and warrants during the first quarter of 1997, the proceeds of
which are being deployed to enhance technology, strengthen infrastructure
and support its Chinese and Pacific Rim initiatives.
RESULTS OF OPERATIONS
Three Months Ended
March 31, 1997 and March 31, 1996
TOTAL REVENUES
Sales revenues increased approximately $682,000 (26%) in the three months
ended March 31, 1997 as compared with the three months ended March 31,
1996, from $2,618,096 to $3,299,733. The increase reflects the continued
success of the Company in marketing its commercial lines of products and
increased military product shipments.
In the first three months of 1997, sales revenues were comprised of 10%
Discrete Signal Processing Components, 40% wide-band VCOs, 44% narrow-band
VCOs, 6% PLL, and less than 1% sales of "combination" VCO and Discrete
products. In the first three months of 1996, the sales revenues were
comprised of 14% Discrete Signal Processing Components, 33% wide-band
VCOs, 47% narrow-band VCOs, 5% PLL, and 1% sales of "combination" VCO and
Discrete products.
COST OF GOODS SOLD
Cost of goods sold, as a percent of sales revenues, was 51% in the three
months ended March 31, 1997 and 49% in the three months ended March 31,
1996. The increase in the percent of cost of goods sold in the first
quarter of 1997 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.
SELLING AND ENGINEERING EXPENSES
Selling expenses increased approximately $82,000, or 14%, for the three
months ended March 31, 1997 as compared to the three months ended March
31, 1996. This increase primarily reflects increased commissions expense
for sales outside of the United States, which are paid at a higher rate
than domestic sales, on a higher level of sales ($3.3 million for the
first three months of 1997 as compared to $2.6 million for the first three
months of 1996), plus increased travel domestically and internationally.
Engineering expenses increased approximately $46,000, or 28%, for the
three months ended March 31, 1997 as compared to the three months ended
March 31, 1996. This increase reflects added staffing and equipment
costs, such as depreciation, to support new product development and
expansion of existing product lines, particularly in the commercial area.
GENERAL AND ADMINISTRATIVE AND OTHER EXPENSES
General and administrative expenses ("G&A") increased approximately
$79,000 (27%) in the three months ended March 31, 1997 as compared with
the three months ended March 31, 1996. Increases to G&A primarily reflect
increased staffing in Personnel and Accounting in line with the growth of
the Company.
Other expenses decreased approximately $27,000 (-48%) in the three months
ended March 31, 1997 as compared with the same period in 1996, due
primarily to the full amortization in 1996 of costs related to a 1991
covenant not to compete with a former officer, which decrease was
partially offset by the amortization of a new, 1996 covenant not to
complete with a former officer.
INTEREST INCOME AND EXPENSE
The Company manages its credit facility and interest bearing investments
in tandem.
Interest expense increased approximately $75,000, or 4%, in the three
months ended March 31, 1997 as compared with the same period in 1996.
Interest income decreased approximately $39,000, or 2%, in the three
months ended March 31, 1997 as compared with the same period in 1996.
Changes in the amounts of interest income and expense reflect the
underlying amounts of the mutual fund investment and debt outstanding
under the credit facility. The increase in borrowings under the credit
facility and the decrease in the mutual fund investment were due
principally to the Company's ongoing capital improvement projects.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased approximately $74,000 (89%) for
the three months ended March 31, 1997 as compared with the three months
ended March 31, 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.
FINANCIAL CONDITION
LIQUIDITY
At March 31, 1997, the Company's working capital was $12.6 million
compared to $8.4 million at December 31, 1996. The Company's current
ratio was 3.85 to 1 as of March 31, 1997 and 2.7 to 1 at December 31,
1996. The increase in working capital reflects the Company's sale, in
March 1997, of $5,000,000 in 7%, subordinated, convertible debentures and
warrants, partially offset by investments in equipment and facilities.
Such ongoing investments are expected to decrease working capital.
CAPITAL RESOURCES
The Company has a Term Loan and Credit Agreement (the "Credit Agreement")
with a bank (the Bank) consisting of a line of credit and a term loan.
The line of credit provides for borrowings of up to $3.5 million.
Interest is payable monthly, calculated at prime. The line of credit
matures on April 30, 1997 and is in the process of being renewed. At
March 31, 1997, the outstanding balance of the line of credit was
$1,878,409.
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.
The balance on the term loan at March 31, 1997 was $4,556,792.
During 1993, the Company financed the acquisition of capital equipment
through capital leases having maturity dates through 1998. At March 31,
1997, the balance due under these leases was $15,300. The lease payments
are calculated using interest rates with an average of approximately 11%.
The Company finances certain of its annual insurance premiums through a
financing company. The amounts due under these loans totaled $87,582 as
of March 31, 1997 and is paid in monthly installments of $8,051 at the
interest rate of 7.24%.
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 totaling $1,879 are required. The notes
mature from 1998 through 2000. The outstanding balance of these notes at
March 31, 1997 was $45,136.
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, whichever is less. As of
March 31, 1997 the Company had sold $5,000,000 of these debentures and
500,000 in related warrants.
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
The Company's total backlog of unfilled firm customer orders ("Backlog")
at March 31, 1997 was $14.2 million compared with $13.8 million at March
31, 1996. Backlog at December 31, 1995 was $14.4 million.
FORWARD LOOKING STATEMENTS
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, competitive products and pricing, new product
development, the delivery of products under existing contracts and other
factors.
VARI-L COMPANY, INC.
PART II--OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
None
Item 2 CHANGES IN SECURITIES
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. As of March 31, 1997, the Company
had sold $5,000,000 of these debentures and 500,000 in
related warrants. The offering was made to a small group of
accredited investors only, pursuant to S.E.C. Regulation D.
Neidiger, Tucker, Bruner, Inc., a registered broker dealer,
received a commission of 5% of the principal amount of the
debentures sold and a 3% finders fee was paid to an
unregistered person.
Item 3 DEFAULTS UPON SENIOR SECURITIES
None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5 OTHER INFORMATION
None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VARI-L COMPANY, INC.
Date: May 14, 1997 By:/s/ Jon L. Clark
Jon L. Clark, V.P. Finance
and Principal Accounting Officer
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
- ------- ----------------
27 Financial Data Schedule Filed herewith electronically
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Vari-L's
unaudited financial statements prepared as of March 31, 1997 and for the
three-month period then ended, included with its 1st quarter 1997 10QSB filing
with the Securities and Exchange Commission, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,547
<SECURITIES> 0
<RECEIVABLES> 3,730
<ALLOWANCES> 4
<INVENTORY> 8,428
<CURRENT-ASSETS> 17,022
<PP&E> 16,383
<DEPRECIATION> 2,813
<TOTAL-ASSETS> 32,810
<CURRENT-LIABILITIES> 4,421
<BONDS> 5,000
0
0
<COMMON> 40
<OTHER-SE> 18,294
<TOTAL-LIABILITY-AND-EQUITY> 32,810
<SALES> 3,300
<TOTAL-REVENUES> 3,324
<CGS> 1,668
<TOTAL-COSTS> 1,668
<OTHER-EXPENSES> 1,061
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 175
<INCOME-PRETAX> 420
<INCOME-TAX> 177
<INCOME-CONTINUING> 243
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 243
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
