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
June 30, 1998
VARI-L COMPANY, INC.
(Exact name of Registrant as specified in its charter.)
Colorado 06-0679347
----------------------- -----------------------------------
(State of Incorporation) (I.R.S. Employer identification No.)
4895 Peoria Street
Denver, Colorado 80239
----------------------------------------
(Address of principal executive offices)
(303) 371-1560
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of each of the issuer's classes of
common stock, as of June 30, 1998:
Class of Securities Outstanding Securities
------------------- ----------------------
$0.01 par value 5,459,484 shares
Common shares
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VARI-L COMPANY, INC.
BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
6/30/1998 12/31/1997
Assets (Unaudited) (Audited)
- ------ ------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 6,575,612 $ 5,970,582
Trade receivables, less $18,000
allowance for doubtful accounts 4,875,161 5,172,874
Inventories 7,590,178 6,936,890
Prepaid expenses and other 1,701,420 887,272
------------ ------------
Total Current Assets 20,742,371 18,967,618
------------ ------------
Property and Equipment:
Machinery and equipment 18,164,056 15,730,870
Furniture and fixtures 1,355,744 1,200,453
Leasehold improvements 6,563,614 4,707,324
------------ ------------
26,083,414 21,638,647
Less accumulated depreciation
and amortization (3,830,139) (3,313,483)
------------ ------------
Net Property and Equipment 22,253,275 18,325,164
------------ ------------
Other Assets:
Long-term inventories 375,000 375,000
Covenant not to compete 49,793 66,389
Patents, net of accumulated
amortization of $114,610 and $88,210 531,944 504,895
Other 1,322,325 1,317,238
------------ ------------
Total Other Assets 2,279,062 2,263,522
------------ ------------
TOTAL ASSETS $ 45,274,708 $ 39,556,304
============ ============
(Continued)
</TABLE>
See Accompanying Notes to Financial Statements.
VARI-L COMPANY, INC.
BALANCE SHEETS, CONTINUED
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
6/30/1998 12/31/1997
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) (Audited)
- ------------------------------------ ------------ ------------
<S> <C> <C>
Current Liabilities:
Current installments of long-term debt $ 746,110 $ 596,645
Financed insurance premiums 155,446 23,730
Trade accounts payable 1,557,578 1,851,057
Accrued expenses 523,044 628,718
Income taxes payable 821,020 0
------------ ------------
Total Current Liabilities 3,803,198 3,100,150
Bank line of credit 3,348,909 1,813,409
Long-term debt 4,919,629 4,464,021
Deferred income taxes 2,259,874 2,343,654
------------ ------------
Total Liabilities 14,331,610 11,721,234
------------ ------------
Stockholders' Equity:
Common stock, $.01 par value,
50,000,000 shares authorized;
5,459,484 and 5,251,288 shares
outstanding, respectively 54,595 52,513
Paid-in capital 22,086,006 20,211,589
Retained earnings 8,821,197 7,589,668
Less loans for purchase of stock (18,700) (18,700)
------------ ------------
Total Stockholders' Equity 30,943,098 27,835,070
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 45,274,708 $ 39,556,304
============ ============
</TABLE>
See Accompanying Notes to Financial Statements.
VARI-L COMPANY, INC.
STATEMENTS OF INCOME
FOR THE THREE MONTH PERIODS ENDED
JUNE 30, 1998 AND JUNE 30, 1997
AND
FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1998 AND JUNE 30, 1997
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
6/30/1998 6/30/1997 6/30/1998 6/30/1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $4,331,439 $4,005,162 $8,376,287 $7,304,895
Cost of products sold 1,934,338 2,055,452 3,777,551 3,723,237
---------- ---------- ---------- ----------
Gross profit 2,397,101 1,949,710 4,598,736 3,581,658
---------- ---------- ---------- ----------
Other costs and expenses:
General and
administrative 498,328 403,098 969,380 775,699
Engineering 282,424 219,236 547,163 428,420
Selling 463,476 450,234 939,725 900,456
Interest expense 131,376 206,028 205,521 380,638
Interest income (82,404) (35,243) (158,530) (59,366)
Other 16,801 16,220 42,928 45,322
---------- ---------- ---------- ----------
1,310,001 1,259,573 2,546,187 2,471,169
---------- ---------- ---------- ----------
Income before taxes 1,087,100 690,137 2,052,549 1,110,489
Income taxes 434,840 289,857 821,020 466,405
---------- ---------- ---------- ----------
NET INCOME $652,260 $400,280 $1,231,529 $644,084
- ---------- ========== ========== ========== ==========
Basic earnings per share $0.12 $0.10 $0.23 $0.16
========== ========== ========== ==========
Basic weighted average
shares outstanding 5,409,085 4,072,992 5,342,860 3,930,000
========== ========== ========== ==========
Diluted earnings
per share $0.11 $0.09 $0.21 $0.16
========== ========== ========== ==========
Diluted weighted average
shares outstanding 6,166,399 4,701,632 5,846,138 4,245,327
========== ========== ========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
VARI-L COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1998 AND JUNE 30, 1997
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
6/30/1998 6/30/1997
(Unaudited) (Unaudited)
---------- ----------
<S> <C> <C>
Net cash provided by ( used in)
operating activities (Note 8) $ 1,532,133 $ (988,400)
------------ ------------
Cash flows from investing activities:
Net purchases of property and equipment (4,444,767) (2,122,497)
------------ ------------
Net cash used in investing
activities (4,444,767) (2,122,497)
------------ ------------
Cash flows from financing activities:
Lease acquisition costs reimbursed (advanced) 0 45,232
Net increase (repayments) in long-term debt 605,073 (285,178)
Net repayments of
capital lease obligations 0 (8,237)
Net borrowings (repayments) under
bank line of credit 1,535,500 (247,000)
Net proceeds under
insurance financing 131,716 29,718
Net proceeds from warrant conversion 807,500 4,562,500
Loans for purchase of stock 0 (123,710)
Net proceeds from stock issuances 437,875 137,600
------------ ------------
Net cash provided by
financing activities 3,517,664 4,110,925
------------ ------------
Net increase in cash 605,030 1,000,028
Beginning cash 5,970,582 1,224,727
------------ ------------
ENDING CASH $ 6,575,612 $ 2,224,755
============ ============
Supplemental disclosure of cash flows
information:
Cash paid for interest $ 206,365 $ 340,580
============ ============
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 communication 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, 1997 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 June 30, 1998, and the
results of its operations, and its cash flows for the three-month and six-
month periods ended June 30, 1998 and June 30, 1997. All adjustments made
are of a normal recurring nature.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
6/30/1998 12/31/1997
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
Finished goods $ 1,152,906 $ 1,173,847
Work in process 2,403,806 2,405,396
Raw materials 3,875,528 3,202,454
Gold bullion 157,938 155,193
----------- -----------
$ 7,590,178 $ 6,936,890
=========== ===========
Long-term inventories $ 375,000 $ 375,000
=========== ===========
</TABLE>
NOTE 3 - INCOME TAXES
Income tax expense reflects effective tax rates of 40% for 1998 and 42%
for 1997.
NOTE 4 - CREDIT FACILITY
The Company has two credit facilities. The first consists of a line of
credit. The second consists of a term loan and a revolving equipment term
loan.
On April 23, 1998, the Company renegotiated its line of credit. The line
of credit now provides for borrowings of up to $5.0 million. Interest is
payable monthly, calculated at prime. The line of credit matures April
30, 2000. At June 30, 1998, the outstanding balance due under the line of
credit was $3,348,909.
Interest accrues on the outstanding principal balance of the term loan at
8.01% and monthly principal and interest payments of $73,279 are required.
The term loan matures February 13, 2001. At June 30, 1998, the balance
due under the term loan was $4,273,189.
The revolving equipment term loan provides for borrowings up to $2.5
million. Interest accrues on the outstanding principal balance of the
revolving equipment term loan at prime plus .25% when advances are made
under the revolver. These borrowings can be converted to term notes at
rates which adjust to the 3-year treasury note rate plus 1.95%. When
converted, the term debt requires monthly principal and interest payments
calculated on a seven-year amortization basis with a 42 month maturity.
The revolving loan matures on August 13, 1998. As of June 30, 1998, the
balance of the five advances under the revolving loan that had been
converted to term notes totaled $1,351,821. Interest accrues on the
outstanding principal balances of these term notes at rates ranging from
7.3% to 7.72% and monthly principal and interest payments totalling
$21,552 are required.
Continued
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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 consisted 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. All of the debentures
plus accrued interest were converted into common stock during 1997. As
of June 30, 1998, 85,000 of the warrants had been exercised and 665,000
warrants were still outstanding.
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 April 1998, the Company granted 262,500 options pursuant to the plan.
39,066 options were exercised and 1,740 options were cancelled in the
quarter.
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
1997, a total of 13,530 shares were issued in January 1998 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 second quarter of 1998, the nonmanagement members of the Compensation
Committee received grants totalling 300 shares and key officers received
grants totalling 25,000 shares. Compensation cost was measured by the
fair market value of the stock on the date of the grants and is being
charged to operations over the period of service.
Continued
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE 7 - EARNINGS PER SHARE
The following is a reconciliation of the net income (numerator) and number
of shares (denominator) for the computations of basic and diluted earnings
per shares:
<TABLE>
<CAPTION>
For the quarter ended June 30, 1997 Income Shares Per Share
- ----------------------------------- (Numerator) (Denominator) Amount
---------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share $ 400,280 4,072,992 $0.10
==========
Effect of dilutive stock options,
and debentures 39,235 628,640
---------- ----------
Diluted earnings per share $ 439,515 4,701,632 $0.09
========== ========== ==========
For the quarter ended June 30, 1998 Income Shares Per Share
- ----------------------------------- (Numerator) (Denominator) Amount
---------- ---------- ----------
Basic earnings per share $ 652,260 5,409,085 $0.12
==========
Effect of dilutive stock options
and warrants 0 757,314
---------- ----------
Diluted earnings per share $ 652,260 6,166,399 $0.11
========== ========== ==========
For the six months ended June 30, 1997 Income Shares Per Share
- -------------------------------------(Numerator)(Denominator) Amount
---------- ---------- ----------
Basic earnings per share $ 644,084 3,930,000 $0.16
==========
Effect of dilutive stock options
and debentures 52,583 315,327
---------- ----------
Diluted earnings per share $ 696,667 4,245,327 $0.16
========== ========== ==========
For the six months ended June 30, 1998 Income Shares Per Share
- --------------------------------------(Numerator)(Denominator) Amount
---------- ---------- ----------
Basic earnings per share $ 1,231,529 5,342,860 $0.23
==========
Effect of dilutive stock options
and warrants 0 503,278
---------- ----------
Diluted earnings per share $ 1,231,529 5,846,138 $0.21
========== ========== ==========
</TABLE>
At June 30, 1998, the Company had 5,459,484 common shares outstanding.
During the six months ended June 30, 1998, the Company issued 208,196
shares. For purposes of computing earnings per share, the shares issued
during the period were weighted for the period of time they were
outstanding.
Continued
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
NOTE 8 - RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
The reconciliation of net income to net cash provided by (used in)
operating activities for the six-month periods ended June 30, 1998 and
June 39, 1997 is as follows:
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
6/30/1998 6/30/1997
(Unaudited) (Unaudited)
---------- ----------
<S> <C> <C>
Net Income $ 1,231,529 $ 644,084
------------ ------------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 516,656 324,270
Amortization of covenant
not to compete 16,596 16,596
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable 297,713 (941,871)
Increase in inventories (653,288) (500,082)
Increase in prepaid expenses
and other current assets (266,804) (290,247)
Increase in patents and other assets (32,136) (307,437)
Decrease in accounts payable (293,479) (149,006)
Decrease in accrued expenses (105,674) (210,663)
Decrease in amounts due to
related parties 0 (40,449)
Increase in income taxes payable 821,020 466,405
---------- ----------
Total adjustments 300,604 (1,632,484)
---------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 1,532,133 $ (988,400)
========== ==========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
The Company achieved record financial results in the three-month period
ended June 30, 1998. Net sales were up 8%, to $4.3 million, over the
same quarter last year. Net income was up 63%, to $652,000, over the same
quarter last year. Basic and diluted earnings per share were 12 cents and
11 cents per share, respectively, versus 10 cents and 9 cents per share,
respectively, for the same quarter last year, notwithstanding an increase
in weighted average shares outstanding of more than 30% from the prior
year.
Bookings for the six months ended June 30, 1998 and 1997 were $6.1 million
and $6.3 million, respectively. The Company received $2.2 million in firm
customer orders during the second quarter, down 31% from the second
quarter of 1997, when the Company received two large, multi-year orders
which caused a spike in bookings, balancing a weaker first quarter in
1997. Commercial orders continued to drive growth during the period,
accounting for $1.4 million in the quarter, while military/aerospace
orders totaled $800,000. Domestic orders were $1.5 million and
international orders accounted for $700,000 in the three-month period.
During the quarter, the Company completed the process of preparing a
production facility for its new line of products being developed for the
subscriber (pagers and handsets) marketplace. These subscriber products
are expected to carry a lower profit margin but have the potential for
much higher volumes. In anticipation of this new business area, the
Company has been installing high-speed, automated assembly equipment on
the second floor of its corporate headquarters facility. The Company
plans to commence production in the third quarter and hopes to have full
utilization of the new production line by year end.
During the quarter, the Company was awarded a patent for an "Unbalanced to
Balanced High Impedance Ratio Wideband Transformer Circuit". The patent
represents an improvement to a transformer circuit design originally
patented by the Company in 1997. The transformer circuit provides for
enhanced system performance of a wide variety of RF and fiberoptic
applications, including CATV platforms.
RESULTS OF OPERATIONS
Three months ended
- ------------------
June 30, 1998 and June 30, 1997
- -------------------------------
and the Six months ended
- ------------------------
June 30, 1998 and June 30, 1997
- -------------------------------
TOTAL REVENUES
Sales revenues increased approximately $326,000 (8%) in the three months
ended June 30, 1998 as compared with the three months ended June 30, 1997,
from $4,005,162 to $4,331,439. Sales revenues increased approximately
$1,071,000 (15%) in the six months ended June 30, 1998 as compared with
the six months ended June 30, 1997, from $7,304,895 to $8,376,287. The
growth in sales revenues continues to reflect the Company's ongoing
success in selling to the commercial marketplace with its narrow-band VCOs
and PLLs while maintaining its existing markets in military products.
The Company has six major product lines, including the new subscriber line
which is currently expected to begin production during the third quarter
of 1998:
1. Discrete signal processing components for industrial, military and
aerospace.
2. Hybrid signal source components, primarily wide-band VCOs, for
industrial, military and aerospace.
3. Assemblies that combine Discrete signal processing and Hybrid signal
source components.
4. Commercial signal source components including PLLs and narrow-band
VCOs.
5. Optoelectronic components and subassemblies used in magnetic and
fiberoptic products for CATV applications.
6. Subscriber products components used in hand-held telephone sets,
pagers and other consumer-oriented products. This line is currently
expected to commence production in the third quarter of 1998.
In the first six months of 1998, the composition of sales revenues was 11%
Discrete, 25% wide-band VCOs, 1% "Combination" sales of wide-band VCO and
Discrete products, 54% narrow-band VCOs, 5% PLL and 4% Optoelectronic
products. In the first six months of 1997, the composition of sales
revenues was 18% Discrete, 31% wide-band VCOs, 0% "Combination" sales of
wide-band VCO and Discrete products, 41% narrow-band VCOs, 5% PLLs and 5%
Optoelectronic products.
COST OF GOODS SOLD
Cost of goods sold, as a percent of sales revenues, was 45% and 51% in the
three months ended June 30, 1998 and 1997, respectively. Cost of goods
sold, as a percent of sales revenues, was 45% in the six months ended June
30, 1998 and 51% in the six months ended June 30, 1997. The improvement
in these ratios for the three and six month periods ended June 30, 1998
resulted from the Company's continuing efforts to streamline its processes
and automate production.
SELLING AND ENGINEERING EXPENSE
Selling expenses increased approximately $13,000, or 3%, for the three
months ended June 30, 1998 as compared to the three months ended June 30,
1997. Selling expenses increased approximately $39,000, or 4%, for the
six months ended June 30, 1998 as compared to the six months ended June
30, 1997. These increases primarily reflect commissions paid on increased
sales revenues. The Company continues to actively advertise and travel
to promote its product lines; however, these expenses have increased at a
rate less than the increase in revenues.
Engineering expenses increased approximately $63,000, or 29%, for the
three months ended June 30, 1998 as compared to the three months ended
June 30, 1997. Engineering expenses increased approximately $119,000, or
28%, for the six months ended June 30, 1998 as compared to the six months
ended June 30, 1997. These increases reflect ongoing improvements to the
engineering department, and related equipment costs and expenses, to
support new product development and expansion of existing product lines.
GENERAL AND ADMINISTRATIVE AND OTHER EXPENSES
General and administrative expenses increased approximately $95,000, or
24%, for the three months ended June 30, 1998 as compared to the three
months ended June 30, 1997. General and administrative expenses increased
approximately $194,000, or 25%, in the six months ended June 30, 1998 as
compared with the six months ended June 30, 1997. Increases to G&A
primarily reflect increased staffing costs in the personnel and accounting
departments, as well as increasing shareholder and other expenses related
to being a public company.
Other expenses were approximately $16,000 in the three months ended June
30, 1998 and the three months ended June 30, 1997. Other expenses
decreased approximately $2,000 (5%) in the six months ended June 30, 1998
as compared with the six months ended June 30, 1997.
INTEREST INCOME AND EXPENSE
The Company manages its credit facility and mutual fund in tandem.
Interest income is earned on the Company's short-term investments in a
U.S. government securities mutual fund purchased with proceeds from the
March 1997 convertible debenture and warrant offering. Interest income
increased approximately $47,000, to approximately $82,000, in the three
months ended June 30, 1998 compared to the three months ended June 30,
1997. Interest income increased approximately $99,000, to approximately
$159,000, in the six months ended June 30, 1998 compared to the six months
ended June 30, 1997. This increase reflects higher levels of these mutual
fund investments during 1998.
Interest expense decreased approximately $75,000 (36%) for the three
months ended June 30, 1998 as compared with the three months ended June
30, 1997. Interest expense decreased approximately $175,000 (46%) for the
six months ended June 30, 1998 as compared with the six months ended June
30, 1997. The decrease is primarily attributable to the elimination of
interest expense on $5,000,000 in subordinated debentures that were
converted to common stock during 1997.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased approximately $192,000 (59%) for
the six months ended June 30, 1998 as compared with the six months ended
June 30, 1997. 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 June 30, 1998, the Company's working capital was $16.9 million compared
to $15.9 million at December 31, 1997. The Company's current ratio was
5.5 to 1 as of June 30, 1998 and 6.1 to 1 at December 31, 1997. The
reduction in the Company's current ratio from December 31, 1997 to June
30, 1998 is primarily attributable to the current provision in the period
for corporate income taxes.
CAPITAL RESOURCES
On August 13, 1997, the Company restructured its credit facilities,
renewing its line of credit agreement, which is secured by accounts
receivable, inventory and general intangibles, with its present banking
institution and taking its existing term loan, plus increasing its credit
facility, which is secured by all of the Company's fixed assets, to a
second banking institution. In April 1998, the Company renegotiated its
line of credit agreement increasing the available line and extending the
maturity date.
The line of credit provides for borrowings of up to $5 million and matures
April 30, 2000. Interest is payable monthly, calculated at prime. At
June 30, 1998, the outstanding balance of the line of credit was
$3,348,909.
The Company has two separate loans under its term loan agreement. The
first loan is a conventional term loan. Interest accrues on the
outstanding principal balance of the term loan at 8.01 percent and monthly
principal and interest payments of $73,279 are required. Unpaid principal
and accrued interest are due February 13, 2001. The balance on the term
loan at June 30, 1998 was $4,273,189.
The second loan is a revolving equipment loan which provides for
borrowings up to $2,500,000. Interest accrues on the outstanding
principal balance of the revolving line at prime plus .25%. Borrowings
can be converted to term notes which bear interest at a rate which adjusts
to the 3-year treasury note rate plus 1.95%. When converted, the term
debt requires monthly principal and interest payments calculated on a
seven-year amortization basis with a 42 month maturity. The revolving
loan matures on August 13, 1998. As of June 30, 1998, the balance of the
five advances under the revolving loan that had been converted to term
notes totaled $1,351,821. Interest accrues on the outstanding principal
balances of these term notes at rates ranging from 7.3% to 7.72% and
monthly principal and interest payments totaling $21,552 are required.
The Company finances certain of its annual insurance premiums through a
financing company. The amounts due under these loans totaled $155,446 as
of June 30, 1998 and are paid in monthly installments of $16,781 with
interest rates of 6.86% and 8.41%.
On March 4, 1997, the Company entered into an agreement to sell up to 75
units of debentures and warrants. The units consisted of an aggregate of
$7.5 million in four year, 7% convertible debentures and 750,000 non-
redeemable common stock purchase warrants exercisable at $9.50 per share
for a period of three years. All of the debentures plus accrued interest
were converted into common stock during 1997. During April 1998, 85,000
warrants were exercised. 665,000 warrants remained outstanding as of
June 30, 1998.
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. The Company also believes that, as the result of the sales of
the convertible debentures, it has adequate capital resources to continue
its growth plans.
BACKLOG
Total backlog of unfilled firm customer orders ("backlog") at June 30,
1998 was $14.4 million compared with $13.4 million at June 30, 1997.
Backlog at December 31, 1997 was $16.6 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 the
success of the products into which the Company's products are integrated,
governmental action relating to wireless communications licensing and
regulation, internal projections as to the demand for certain types of
technological innovation, competitive products and pricing, the success of
new product development efforts, the timely release for production and the
delivery of products under existing contracts, future economic conditions
generally, as well as other factors.
VARI-L COMPANY, INC.
PART II--OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
-----------------
None
ITEM 2 CHANGES IN SECURITIES
---------------------
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company's annual meeting of shareholders was held on
June 19, 1998. At the meeting Joseph H. Kiser, David G.
Sherman, Sarah L. Booher, David A. Lisowski and Anthony B.
Petrelli were elected as directors. The shareholders also
ratified the appointment of Haugen, Springer & Co. as the
Company's independent public accountants for the year
ending December 31, 1998.
The number of votes cast for, withheld or broker nonvotes
for each director nominee was as follows:
Broker
Nominee For Against Nonvotes
------- --- ------- --------
Joseph H. Kiser 4,868,098 19,079 0
David G. Sherman 4,868,098 19,079 0
Sarah L. Booher 4,840,838 46,339 0
David A. Lisowski 4,842,598 44,579 0
Anthony B. Petrelli 4,867,898 19,279 0
The number of votes cast for, against, abstentions and
broker nonvotes for ratification of auditors was as
follows:
For Against Abstain Broker Nonvotes
--- ------- ------- ---------------
4,839,250 33,680 14,247 0
Because the election of directors and ratification of
auditors were considered routine under applicable stock
exchange rules, all proxy shares held in the names of
brokers as nominees which were not voted at the meeting by
the shareholders were voted by the brokers at their
discretion.
ITEM 5 OTHER INFORMATION
-----------------
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Exhibit 10 Letter Agreement between the Company and
Norwest Bank, Colorado, N.A., dated April
30, 1998.
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: July 31, 1998 By:/s/Jon L. Clark
------------- Jon L. Clark, V.P. Finance
and Principal Financial Officer
EXHIBIT INDEX
-------------
EXHIBIT METHOD OF FILING
- ------- ----------------
10 Letter Agreement between the
Company and Norwest Bank, Colorado,
N.A., dated April 30, 1998. Filed herewith electronically
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 JUNE 30, 1998 AND FOR THE
SIX-MONTH PERIOD THEN ENDED, INCLUDED WITH ITS 10-QSB FILING WITH THE SECURITIES
AND EXCHANGE COMMISSION FOR THE QUARTER ENDED JUNE 30, 1998, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,576
<SECURITIES> 0
<RECEIVABLES> 4,893
<ALLOWANCES> 18
<INVENTORY> 7,590
<CURRENT-ASSETS> 20,742
<PP&E> 26,083
<DEPRECIATION> 3,830
<TOTAL-ASSETS> 45,275
<CURRENT-LIABILITIES> 3,803
<BONDS> 0
0
0
<COMMON> 55
<OTHER-SE> 30,888
<TOTAL-LIABILITY-AND-EQUITY> 45,275
<SALES> 8,376
<TOTAL-REVENUES> 8,535
<CGS> 3,778
<TOTAL-COSTS> 3,778
<OTHER-EXPENSES> 2,498
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 206
<INCOME-PRETAX> 2,053
<INCOME-TAX> 821
<INCOME-CONTINUING> 1,232
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,232
<EPS-PRIMARY> .23
<EPS-DILUTED> .21
</TABLE>
NORWEST BANKS
April 30, 1998
Mr. David Sherman
President
Vari-L Company, Inc.
4895 Peoria
Denver, Colorado 80239
Dear David:
This letter agreement (the "Agreement") is made as of April 30, 1998
between NORWEST BANK COLORADO, NATIONAL ASSOCIATION (the "Bank") and VARI-
L COMPANY, INC. (the "Borrower"). The Bank and the Borrower hereby enter
into a Credit Agreement providing for a revolving line of credit in the
amount of $5,000,000 (the "Credit") to expire April 30, 2000. The Bank is
willing to take such action upon and subject to the following terms and
commitments:
Maximum Amount $5,000,000 or the Borrowing Base, if less. The Borrowing
Base shall mean the sum of 75% of Borrower's eligible
accounts receivable and 50% of Borrower's eligible
inventory, provided that eligible inventory may not exceed
50% of the total Borrowing Base, as set forth and
calculated in a monthly Borrowing Base Certificate
delivered to Bank in connection herewith. The form of such
Certificate is attached as Exhibit A. Ineligible account
receivable includes those over 90 days old from invoice
date, disputed accounts, accounts subject to offset,
federal government accounts, foreign accounts unless
insured by the Export-Import Bank of the United States
under a Multi-Buyer Export Credit Insurance Policy or
secured by a letter of credit benefiting Borrower,
affiliate accounts, accounts covering booked but unfilled
orders, contra accounts, credit balances over 90 days,
doubtful accounts, and accounts in which Bank does not have
a perfected first priority security interest. Ineligible
inventory includes inventory which is work in process,
obsolete, damaged, defective, classified by Borrower as
long term inventory, or in which Bank does not have a
perfected first priority security interest.
Purpose: Finance accounts receivable and inventory.
Interest Rate: Base Rate, floating. Base Rate shall mean the "base" or
"prime" rate of interest as announced by Bank as in effect
from time to time.
Fee: $13,000 payable at closing.
Compensation
Balance: None.
Repayment Terms: Accrued interest payable monthly and at Final
Maturity, principal payable at Final Maturity, subject to
acceleration upon default. Principal may be repaid and
reborrowed prior to Final Maturity.
Final Maturity: April 30, 2000.
Guarantors: None.
Security: First priority security interests in all accounts, general
intangibles, and inventory, now owned or hereafter acquired
by Borrower and in all proceeds thereof ("Collateral").
Documentation/
Conditions to
Effectiveness: The commitment of Bank to make any advance under this
Credit is subject to the satisfaction of the following
conditions:
a) Borrower will execute and deliver to Bank a Credit
promissory note ("Note") and the security agreements, UCC
filing forms, and other collateral documents deemed
necessary by Bank ("Collateral Documents"), each on Bank's
forms;
b) Bank will have received (1) a certified corporate
resolution authorizing Borrower to borrow on these terms
and to grant security; (2) a Secretary of State's
certificate of good standing; (3) a current Borrowing Base
Certificate; (4) evidence of Life Insurance as defined
below; and
c) Bank will have received Borrower's payment of the Fee.
Affirmative
Covenants: So long as any indebtedness of Borrower to Bank remains
unpaid or Bank has any commitment to lend hereunder,
Borrower will:
a) deliver to Bank
(1) annually, within 90 days of Borrower's
fiscal year end, annual financial statements
audited by a certified public accountant ("CPA")
approved by Bank, copy of CPA management report,
and copy of Borrower's 10K report;
(2) annually, within 90 days of Borrower's
fiscal year end, accounts payable aging, accounts
receivable aging, and inventory listing;
(3) quarterly, within 45 days of quarter
end, internally prepared financial statements and
compliance certificate in the form of Exhibit B
attached hereto,
(4) monthly, within 45 days of month end,
Borrowing Base Certificate and accounts
receivable aging summary page;
(5) such other information as Bank may
reasonably request;
b) maintain adequate hazard insurance;
c) maintain its properties in good repair and
working order;
d) comply with all applicable statutes, ordinances
and regulations, including, without limit, any
relating to taxation and environmental protection;
e) at all reasonable times permit Bank to examine
books, records, properties of Borrower, including
accounts receivable and inventory collateral audits to
be paid by Borrower;
f) comply with all terms of all Collateral
Documents;
g) maintain present executive management of
Borrower;
h) maintain primary deposit accounts at the Bank;
and
i) maintain Borrower's financial condition so that
it meets the following requirements at all times,
determined in accordance with GAAP;
(1) a minimum tangible net worth ("Minimum
Adjusted TNW") of not less than $25,500,000;
(2) a maximum ratio of debt to tangible net
worth ("Maximum Leverage") of not more than 1.0
to 1.0. The ratio shall be calculated by
dividing Borrower's liabilities, by Borrower's
tangible net worth plus debt subordinated to
Bank;
(3) a minimum ratio of current assets less
officer and employee receivables and prepaid
expenses to current liabilities ("Minimum Current
Ratio") of 1.5 to 1.0;
(4) a minimum ratio ("Minimum Quick Ratio")
of .5 to 1.0.
Negative
Covenants: Without consent of Bank, Borrower will not:
a) incur any debt except debt to Bank, trade debt,
equipment debt to Bank One, debt subordinated to bank,
and debt under existing capital leases;
b) create or permit any lien or encumbrance against
Borrower's property except those created under the
Collateral Documents, equipment liens created under
equipment debt to Bank One, liens for existing capital
leases;
c) guarantee, indorse, or become surety for the
obligations of others;
d) make loans or advances to any person or entity
except temporary advances in the ordinary course of
business;
e) declare or pay any dividends or distributions, or
redeem, acquire, or retire any of its capital stock;
f) distribute any death benefits from Life
Insurance; or
g) merge or consolidate or sell, lease or dispose of
substantially all of Borrower's assets other than
sales of inventory in the ordinary course of business.
Conditions
of Default: Upon the occurrence of any of the following events of
default:
a) Default in any payment of interest or principal
on the Note when due and continuance thereof for 15
days; or
b) Default in the observance or performance of any
agreement of the Borrower herein set forth or in an
other agreement between the Bank and the Borrower and
continuance thereof for 20 days after written notice
by Bank to Borrower; or;
c) Default by the Borrower in the payment of any
other indebtedness for borrowed money or in the
observance or performance of any term, covenant,
agreement of the Borrower in any agreement relating to
any indebtedness of the Borrower; the effect of which
default is to permit the holder of such indebtedness
to declare the same due prior to the date fixed for
its payment under the terms thereof and failure to
cure such default within 30 days after written notice
by Bank to Borrower; or
d) Any representation or warranty made by the
Borrower herein in any statement or certificate
furnished by Borrower is untrue in any material
respect;
e) The occurrence of any litigation or governmental
proceeding which is pending or threatened against the
Borrower, which could have a material adverse effect
on the Borrower's financial condition or business and
which is not remedied within a reasonable period of
time after notice thereof to the Borrower; or
f) The occurrence of any extraordinary situation
which gives the Bank reasonable grounds to believe
that Borrower may not be able to perform under the
Note, the Agreement, or any other documents executed
in connection with the Credit.
then, or at any time thereafter, unless such an event of
default is remedied, the Bank may terminate its commitment
to make advance on the Credit and may, by notice in writing
to the Borrower, declare the Note to be due and payable,
whereupon the Note shall immediately become due and
payable.
Upon the occurrence of the following events of default:
The Borrower becomes insolvent or bankrupt, or makes an
appointment for the benefit of creditors or consents to or
is subject to the appointment of a custodian, trustee, or
receiver for itself, or bankruptcy, reorganization, or
liquidation proceedings are instituted by or against the
Borrower and, if instituted against it, are consented to by
it or remain undismissed for 60 days;
then the Bank's commitment to make advances on the Credit
shall be automatically terminated and the Note shall
automatically become due and payable.
Representations: Borrower represents and warrants that a) the person
signing below is authorized to accept this agreement and
execute the Collateral Documents, which will constitute
obligations valid and enforceable against the Borrower, b)
that all balance sheets, profit and loss statements, and
other information furnished to the Bank are true and
correct and fairly reflect the financial condition of
Borrower on their respective dates, including contingent
liabilities of every type, c) that Borrower's financial
statement has not changed materially and adversely since
those dates, and d) that Borrower maintains a minimum of
$1,000,000 life insurance each on David Sherman and Joseph
H. Kiser with Borrower as beneficiary.
Sincerely,
NORWEST BANK COLORADO, NATIONAL ASSOCIATION
By: /s/Rhonda Harper
Its: Assistant Vice President
Accepted and agreed to this 30th day of April, 1998,
VARI-L COMPANY, INC.
By: /s/David G. Sherman
David G. Sherman
Its: President and Chief Executive Officer
By: /s/ Joseph H. Kiser
Joseph H. Kiser
Chairman & Chief Scientific Officer
CONTINUATION
360 Day Promissory Note
NORWEST BANK COLORADO, NATIONAL ASSOCIATION
Bank's Address, City, State & Zip Code
1740 BROADWAY, DENVER, CO 80274
[Shaded area]
FOR BANK USE ONLY Face Amount Rate (% per year) Note Date
Maturity Date
Customer No. Loan No. $5,000,000 ** %
04/23/1998 04/30/2000
[End shaded area]
Maker Home Phone Residence
Phone
VARI-L COMPANY, INC.
Street Address, City, State, Zip Code
11101 E 51ST AVENUE DENVER, CO 80239
Security
ACCOUNTS INVENTORY EQUIPMENT GENERAL INTANGIBLES
CROSS-COLLATERALIZED AND CROSS-DEFAULTED WITH OTHER DEBT
The captions in the boxes above, and the names, dates, amounts and other
information therein, are defined terms and are hereby incorporated in the
note provisions below.
Maker promises to pay to the order of Bank at Bank's address the Face
Amount with interest on the unpaid balance of the Face Amount from the
Note Date at the Rate indicated above (based upon a year of 360 days and
computed for the actual number of days elapsed). Principal and interest
shall be payable as follows:
Interest shall be payable monthly on the 30th day of each month beginning
05/30/1998. The balance of principal plus accrued interest shall be
payable at maturity.
**The interest rate shall be at an annual rate equal to the Norwest Bank
Colorado, National Association Prime Rate effective the same day of its
change. Prime Rate shall mean the interest rate charged by Norwest Bank
Colorado, National Association as announced or published by the Bank form
time to time as its Prime Rate, and may not be the lowest interest rate
charged by the Bank.
THIS NOTE EVIDENCES AN ARRANGEMENT PROVIDING FOR FUTURE ADVANCES THAT IN
AGGREGATE AMOUNT OUTSTANDING SHALL AT NO TIME EXCEED THE FACE AMOUNT.
This note is a continuation and substitution of that promissory note dated
08/13/1997 and represents a continuation of the indebtedness evidenced
thereby.
Overdue principal and (to the extent legally enforceable) overdue
interest, whether caused by acceleration of maturity or otherwise, shall
bear interest at a rate four percentage points above the rate in effect at
the time such principal or interest becomes due.
At the option of the holder of this note (the "holder") the unpaid
balance of this note plus accrued interest and all other obligations of
Maker to the holder, direct or indirect, absolute or contingent, now
existing or hereafter arising, shall become immediately due and payable
without notice or demand if (a) any payment required by this note is not
made when due, or (b) a default or event of default occurs under any loan
or security agreement or instrument executed as security for or in
connection with this note, or (c) the holder at any time in good faith
believes that the prospect of any payment required by this note is
impaired, whether or not such belief is caused by any act or failure to
act of any Maker or of any endorser, guarantor or accommodation party of
or on this note (hereafter collectively referred to as "any other
signer").
Maker and any other signer (1) waive presentment, notice of dishonor
and protest, (2) assent to any extension of time with respect to any
payment due under this note, to any substitution or release of collateral
and to the addition or release of any party, and (3) agree that Bank may
apply, as Bank elects, any payment received after default to any portion
of Maker's obligations hereunder. No waiver of any payment or other right
under this note shall operate as a waiver of any other payment or right.
Make and any other signer shall pay all reasonable costs of collection,
including attorneys' fees, paid or incurred by the holder in enforcing
this note on default.
This note (a) is secured by the Security indicated above, if any, and
(b) shall be construed under and governed by the laws of Colorado. If
there is more than one Maker, all of the provisions of this note shall
apply to each and any of them.
THE ARBITRATION TERMS AND CONDITIONS ON THE BACK OF THIS PAGE ARE A
PART OF AND INCORPORATED INTO THIS NOTE.
VARI-L COMPANY, INC.
By: /s/Joseph H. Kiser
JOSEPH H KISER
CHAIRMAN & SCIENTIFIC OFFICER
By: /s/David G. Sherman
DAVID G SHERMAN
PRESIDENT & CHIEF EXECUTIVE OFFICER
ARBITRATION
1. Agreement to Arbitration: Subject to the provisions of the next
paragraph below, Bank and Maker agree to submit to binding arbitration any
and all claims, disputes and controversies between or among them, whether
in tort, contract or otherwise (and their respective employees, officers,
directors, attorneys, and other agents) arising out of or relating to in
any way to the loan and related loan documents which are the subject of
this note and its negotiation, execution, collateralization,
administration, repayment, modification, extension, substitution,
formation, inducement, collection, enforcement, default or termination.
Nothing in the preceding paragraph, nor the exercise of any right to
arbitrate thereunder, shall limit the right of any party hereto (1) to
foreclose against any real or personal property collateral by the exercise
of the power of sale under a deed of trust, mortgage, or other security
agreement, or instrument, or applicable law; (2) to exercise self-help
remedies such as setoff or repossession; or (3) to obtain provisional or
ancillary remedies such as replevin, injunctive relief, attachment, or
appointment of a receiver from a court having jurisdiction before, during
or after the pendency of any arbitration proceeding. The institution and
maintenance of any action for such judicial relief, or pursuit to
provisional or ancillary remedies, or exercise of self-help remedies shall
not constitute a waiver of the right or obligation of any party to submit
any claim or dispute to arbitration, including those claims or disputes
arising from exercise of any such judicial relief, or pursuit of
provisional or ancillary remedies, or exercise of self-help remedies.
2. Selection of Arbitrator: If the amount in dispute is $500,000.00 or
more, arbitration hereunder shall be before a three-person panel of
neutral arbitrators, consisting of one person from each of the following
categories: (1) an attorney who has practiced in the area of commercial
law in the State of Colorado for at least eight (8) years or a retired
judge of the district court or appellate court level from the State of
Colorado; (2) a person with at least eight (8) years experience in
commercial lending; and (3) a person with at least eight (8) years
experience in the DESIGN & MANUF SIGNAL PROC COMPONENTS industry. The
parties to the dispute or their representatives shall obtain from AAA a
list of persons meeting the criteria outlined above and the parties shall
select the person in the manner established by the AAA.
If the amount in dispute is less than $500,000.00, the arbitration
shall be conducted before one arbitrator who shall be an attorney who has
practiced in the area of commercial law for at least eight (8) years or a
retired judge at the District Court or an appellate court level. The
parties to the dispute or their representatives shall obtain from AAA a
list of the persons meeting the criteria outlined above and the parties
shall select the person in the manner established by the AAA.
3. Governing Laws and Rules: Such arbitration shall proceed in the
State of Colorado in the city or county (if the Bank is not located in a
city) wherein the Bank is located, shall be governed by Colorado law,
including all applicable statutes of limitations, and shall be conducted
in accordance with the Commercial Arbitration Rules of the American
Arbitration Association ("AAA"). Judgement upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction.
4. Discovery: In any arbitration hereunder: (1) the arbitrator(s)
shall decide (by documents only or with a hearing, at the arbitrators'
discretion) any pre-hearing motions which are substantially similar to pre-
hearing motions to dismiss for failure to state a claim or motions for
summary adjudication; (2) discovery shall be permitted, but shall be
limited as provided by Rule 26.1 (c) of the Colorado Rules of Civil
Procedure, and shall be subject to the scheduling by the arbitrator(s),
and any discovery disputes shall be subject to final determination by the
arbitrator(s); and (3) the arbitrator(s) shall award costs and expenses of
the arbitration proceeding in accordance with the provisions of the loan
agreement, promissory note and/or other loan documents.
