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, 1999
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, 1999:
Class of Securities Outstanding Securities
------------------- ----------------------
$0.01 par value 5,517,308 shares
Common shares
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
VARI-L COMPANY, INC.
BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(000's Omitted)
<TABLE>
<CAPTION>
6/30/99 12/31/98
Assets (Unaudited) (Audited)
- ------ ---------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,118 $ 6,515
Trade receivables, less $23
allowance for doubtful accounts 4,236 4,417
Inventories 8,780 7,901
Prepaid expenses and other 2,096 1,235
-------- --------
Total Current Assets 19,230 20,068
-------- --------
Property and Equipment:
Machinery and equipment 25,259 22,299
Furniture and fixtures 1,656 1,499
Leasehold improvements 8,248 7,797
-------- --------
35,163 31,595
Less accumulated depreciation
and amortization (5,241) (4,444)
-------- --------
Net Property and Equipment 29,922 27,151
-------- --------
Other Assets:
Long-term inventories 475 475
Covenant not to compete 17 33
Patents, net of accumulated
amortization of $192 and $141 1,811 1,173
ISO registration costs and other,
net of accumulated amortization
of $85 and $57 1,608 1,771
-------- --------
Total Other Assets 3,911 3,452
-------- --------
TOTAL ASSETS $ 53,063 $ 50,671
======== ========
</TABLE>
(Continued)
See Accompanying Notes to Financial Statements.
VARI-L COMPANY, INC.
BALANCE SHEETS, CONTINUED
JUNE 30, 1999 AND DECEMBER 31, 1998
(000's Omitted)
<TABLE>
<CAPTION>
6/30/99 12/31/98
Liabilities and Stockholders' Equity (Unaudited) (Audited)
- ------------------------------------ ---------- ---------
<S> <C> <C>
Current Liabilities:
Current installments of long-term debt $ 993 $ 832
Financed insurance premiums 32 22
Trade accounts payable 2,290 2,147
Accrued expenses 452 684
Income taxes payable 925 0
-------- --------
Total Current Liabilities 4,692 3,685
Bank line of credit 3,861 4,756
Long-term debt 6,327 5,901
Deferred income taxes 3,904 3,904
-------- --------
Total Liabilities 18,784 18,246
-------- --------
Stockholders' Equity:
Common stock, $.01 par value,
50,000 shares authorized;
5,517 and 5,464 shares
outstanding, respectively 55 54
Paid-in capital 22,455 22,103
Retained earnings 11,787 10,286
Less loans for purchase of stock (18) (18)
-------- --------
Total Stockholders' Equity 34,279 32,425
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 53,063 $ 50,671
======== ========
</TABLE>
See Accompanying Notes to Financial Statements.
VARI-L COMPANY, INC.
STATEMENTS OF INCOME
FOR THE THREE MONTH PERIODS ENDED
JUNE 30, 1999 AND JUNE 30, 1998
AND
FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1999 AND JUNE 30, 1998
(000's omitted, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
6/30/99 6/30/98 6/30/99 6/30/98
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 5,460 $ 4,331 $ 10,773 $ 8,376
Cost of products
sold 2,448 1,934 4,814 3,778
-------- -------- -------- --------
Gross profit 3,012 2,397 5,959 4,598
-------- -------- -------- --------
Other costs and
expenses:
General and
administrative 585 498 1,062 969
Engineering 384 282 718 547
Selling 655 464 1,273 940
Interest
expense 221 131 464 206
Interest
income (49) (82) (117) (159)
Profit sharing
plan
contribution 1 0 109 0
Other 8 17 24 43
-------- -------- -------- --------
1,805 1,310 3,533 2,546
-------- -------- -------- --------
Income before
taxes 1,207 1,087 2,426 2,052
Income taxes 460 435 925 821
-------- -------- -------- --------
NET INCOME $ 747 $ 652 $ 1,501 $ 1,231
- ---------- ======== ======== ======== ========
Basic earnings
per share $ 0.14 $ 0.12 $ 0.27 $ 0.23
======== ======== ======== ========
Basic weighted
average shares
outstanding 5,510 5,409 5,499 5,343
======== ======== ======== ========
Diluted earnings
per share $ 0.13 $ 0.11 $ 0.27 $ 0.21
======== ======== ======== ========
Diluted weighted
average shares
outstanding 5,660 6,166 5,618 5,846
======== ======== ======== ========
</TABLE>
See Accompanying Notes to Financial Statements.
VARI-L COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1999 AND JUNE 30, 1998
(000's Omitted)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
6/30/99 6/30/98
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Net cash provided by
operating activities (Note 8) $ 1,292 $ 1,532
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (3,568) (4,445)
- -------- --------
Net cash used in investing
activities (3,568) (4,445)
-------- --------
Cash flows from financing activities:
Increases in long-term debt 1,064 935
Repayments of long-term debt (477) (330)
Borrowings under bank line of credit 1,100 2,886
Repayments under bank line of credit (1,995) (1,350)
Net proceeds under insurance financing 10 132
Net proceeds from warrant conversions 0 807
Treasury stock purchase (22) 0
Net proceeds from stock issuances 199 438
-------- --------
Net cash (used in) provided by
financing activities (121) 3,518
-------- --------
Net (decrease) increase in cash (2,397) 605
Beginning cash 6,515 5,971
-------- --------
Ending Cash $ 4,118 $ 6,576
- ----------- ======== ========
Supplemental disclosure of cash flows
information:
Cash paid for interest $ 497 $ 206
======== ========
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, 1998 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, 1999, and the
results of its operations, and its cash flows for the three-month and six-
month periods ended June 30, 1999 and June 30, 1998. All adjustments made
are of a normal recurring nature.
NOTE 2 - INVENTORIES
- --------------------
Inventories consist of the following:
<TABLE>
<CAPTION>
(000's Omitted)
-----------------------
6/30/99 12/31/98
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
Finished goods $ 3,406 $ 2,174
Work in process 2,979 3,365
Raw materials 2,244 2,211
Gold bullion 151 151
-------- --------
$ 8,780 $ 7,901
======== ========
Long-term inventories $ 475 $ 475
======== ========
</TABLE>
NOTE 3 - INCOME TAXES
- ---------------------
Income tax expense reflects effective tax rates of 38.13% for 1999 and 40%
for 1998.
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 May 18, 1999, the Company renegotiated its line of credit. The line
now provides for borrowings of up to $6.0 million. Interest is payable
monthly, calculated at prime. The line of credit matures April 30, 2001.
At June 30, 1999, the outstanding balances due under the line of credit
was approximately $3.9 million.
On August 21, 1998, the Company renegotiated its term loan and revolving
equipment term loan. The Company extended its term loan for an additional
year and converted the loan to a floating rate of Libor plus 1.50% and
obtained fixed rate protection by executing an interest rate swap which
resulted in an all-in fixed rate of 7.75% through the maturity date of
February 24, 2002. Monthly principal and interest payments of
approximately $65,000 are required. At June 30, 1999, the balance due
under the term loan was approximately $3.8 million.
The revolving equipment term loan provides for borrowings up to $4.0
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, 1999. As of June 30, 1999, the
balance of the advances under the revolving loan that had been converted
to term notes totaled approximately $3.4 million. Interest accrues on the
outstanding principal balances of these term notes at rates ranging from
6.108% to 7.72% and monthly principal and interest payments totaling
$52,890 are required.
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
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, 1999, 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 3,270,000 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 the quarter ended June 30, 1999, the Company granted 1,500 options
pursuant to the plan. 18,000 options were exercised and 5,372 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, of which 43,136 have
been issued during prior years. The remaining maximum number of shares to
be issued is 189,216 per year. For the plan year 1998, a total of 12,851
shares were issued in January 1999 at $6.43 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 non-management members of
the Company's Board of Directors. During the second quarter of 1999,
those members received grants for 450 shares. Compensation cost charged
to operations was measured by the fair market value of the stock on the
date of the grants.
In connection with certain executive employment agreements, the
Compensation Committee granted stock bonuses of 25,000 shares to each of
the Company's two senior officers. The grants are subject to a vesting
schedule whereby one-half of the shares were vested during 1997 and 1998.
Shares are granted only as earned pursuant to the vesting schedule in the
employment agreements. 6,250 shares vested in March 1999 and the
remaining shares are scheduled to vest in 2000. Additionally, the Company
is liable for income and payroll taxes attributable to the stock bonuses.
The grants are subject to forfeiture provisions related to fulfillment of
various terms of the employment agreements. Accordingly, the Company is
amortizing the cost of the stock bonuses over the term of the employment
agreements. As of June 30, 1999, the value of the vested stock bonuses,
and the related income and payroll taxes, totaled approximately $698,000
and the unamortized, prepaid portion of this cost was approximately
$538,000.
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
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 share:
<TABLE>
<CAPTION>
(000's Omitted)
-------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
For the quarter ended June 30, 1998
Basic earnings per share $ 652 5,409 $0.12
Effect of dilutive stock options
and warrants 0 757
------- -----
Diluted earnings per share $ 652 6,166 $0.11
======= =====
For the quarter ended June 30, 1999
Basic earnings per share $ 747 5,510 $0.14
Effect of dilutive stock options
and warrants 0 150
------- -----
Diluted earnings per share $ 747 5,660 $0.13
======= =====
For the six months ended June 30, 1998
Basic earnings per share $ 1,231 5,343 $0.23
Effect of dilutive stock options
and warrants 0 503
------- -----
Diluted earnings per share $ 1,231 5,846 $0.21
======= =====
For the six months ended June 30, 1999
Basic earnings per share $ 1,501 5,499 $0.27
Effect of dilutive stock options
and warrants 0 119
------- -----
Diluted earnings per share $ 1,501 5,618 $0.27
======= =====
</TABLE>
At June 30, 1999, the Company had 5,517,308 common shares outstanding.
During the six months ended June 30, 1999, the Company issued 57,024
shares and repurchased 3,850. For purposes of computing earnings per
share, the shares issued and repurchased during the period were weighted
for the period of time they were outstanding.
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
The reconciliation of net income to net cash provided by operating
activities for the six-month periods ended June 30, 1999 and June 30, 1998
is as follows:
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
6/30/99 6/30/98
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Net Income $ 1,501 $ 1,231
------- -------
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 877 517
Amortization of covenant
not to compete 16 16
Stock contribution to profit sharing plan 101 0
Changes in assets and liabilities:
Decrease in accounts receivable 181 298
Increase in inventories (879) (653)
Increase in prepaid expenses
and other current assets (786) (267)
Increase in patents and other assets (555) (32)
Increase (decrease) in accounts payable 143 (293)
Decrease in accrued expenses (232) (106)
Increase in income taxes payable 925 821
------- -------
Total adjustments (209) 301
------- -------
Net cash provided by operating activities $ 1,292 $ 1,532
- ----------------------------------------- ======= =======
</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- and six-month
periods ended June 30, 1999. In the quarter, net sales were up 26%, to
$5.5 million, over the same quarter last year. Net income was up 14%, to
$747,000, over the same quarter last year. Basic and diluted earnings per
share were 14 cents and 13 cents per share, respectively, versus 12 cents
and 11 cents per share, respectively, for the same quarter last year. For
the six month period, net sales were up 29%, to $10.8 million and net
income was up 22%, to $1.5 million, over the same period last year. Both
basic and diluted earnings per share were 27 cents per share for the first
six months of 1999, versus 23 cents and 21 cents per share, respectively,
for the same period last year
The Company also achieved a record level of new firm customer orders for
the three- and six-month periods ended June 30, 1999. In the quarter,
bookings of new orders were up 75%, to $3.9 million, compared to $2.2
million for the same quarter in 1998. In the six-month period, bookings
were up 29%, to $7.9 million, compared to $6.1 million for the same period
in 1998.
RESULTS OF OPERATIONS
- ---------------------
Three months ended
- ------------------
June 30, 1999 and June 30, 1998
- -------------------------------
and the Six months ended
- ------------------------
June 30, 1999 and June 30, 1998
- -------------------------------
Total Revenues
- --------------
Sales revenue increased approximately $1,129,000 (26%) in the three months
ended June 30, 1999 as compared with the three months ended June 30, 1998,
from $4,331,000 to $5,460,000. Sales revenue increased approximately
$2,397,000 (29%) in the six months ended June 30, 1999 as compared with
the six months ended June 30, 1998, from $8,376,000 to $10,773,000. The
growth in sales revenue continues to reflect the Company's ongoing success
in selling to the commercial infrastructure marketplace, and entry into
the subscriber handset marketplace, with its narrow-band VCOs and PLLs,
while maintaining its existing markets in military products.
The Company produces seven major product lines:
1. Signal Processing components for industrial, military and
aerospace (Military/Aerospace Signal Processing, or MSP).
2. Signal Source components, primarily wide-band VCOs, for
industrial, military and aerospace (Military/Aerospace Signal
Source, or MSS).
3. Special Assemblies that combine MSP and MSS components
(Military/Aerospace Special Assemblies, or MSA).
4. Commercial Signal Source components including PLLs and narrow-
band VCOs (Commercial Signal Source, or CSS).
5. Commercial Signal Processing components, including
optoelectronic components and subassemblies used in magnetic and
fiberoptic products for CATV applications (Commercial Signal
Processing, or CSP).
6. Subscriber product components used in hand-held telephone sets,
pagers and other consumer-oriented products (Subscriber Signal
Source, or SSS).
7. Commercial Special Assemblies (CSA).
In the first six months of 1999, the composition of sales revenue was 6%
MSP, 9% MSS, less than 1% MSA, 70% CSS, 7% CSP, 6% SSS and less than 1%
CSA. In the first six months of 1998, the composition of sales revenue
was 11% MSP, 25% MSS, 1% MSA, 59% CSS, 4 % CSP, 0% SSS and 0% CSA.
Cost of Goods Sold
------------------
Cost of goods sold, as a percent of sales revenues, was 45% in the three
months and six months ended June 30, 1999 and 1998. Margins are
anticipated to decrease as the subscriber products sales increase, because
of the lower, competitive pricing of these high volume products, while
earnings are expected to be stable or improve from these types of sales.
Selling and Engineering Expense
-------------------------------
Selling expenses increased approximately $191,000, or 41%, for the three
months ended June 30, 1999 as compared to the three months ended June 30,
1998. Selling expenses increased approximately $333,000, or 35%, for the
six months ended June 30, 1999 as compared to the six months ended June
30, 1998. Sales commissions, a significant component of selling expenses,
increase ratably with the increase of sales revenues, which increased 26%
and 29% in the periods, respectively. Additional increases in the
periods reflect increased travel, personnel expenses and other selling
expenses.
Engineering expenses increased approximately $102,000, or 36%, for the
three months ended June 30, 1999 as compared to the three months ended
June 30, 1998. Engineering expenses increased approximately $171,000, or
31%, for the six months ended June 30, 1999 as compared to the six months
ended June 30, 1998. These increases reflect ongoing improvements to the
engineering department, including costs to hire and retain exceptional
personnel, 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 $87,000, or
17%, for the three months ended June 30, 1999 as compared to the three
months ended June 30, 1998. General and administrative expenses increased
approximately $93,000, or 10%, in the six months ended June 30, 1999 as
compared with the six months ended June 30, 1998. Increases to G&A
primarily reflect higher management compensation, increased shareholder
relations expense and other similar expenses.
Other expenses were approximately $8,000 in the three months ended June
30, 1999 and $17,000 and the three months ended June 30, 1998. Other
expenses decreased approximately $19,000 (44%) in the six months ended
June 30, 1999 as compared with the six months ended June 30, 1998.
Interest Income and Expense
---------------------------
The Company manages its credit facilities and money fund in tandem.
Interest income is earned on the Company's short-term investments in a
U.S. government securities money fund purchased with proceeds from its
March 1997 convertible debenture and warrant offering. Interest income
decreased approximately $33,000, to approximately $49,000, in the three
months ended June 30, 1999 compared to the three months ended June 30,
1998. Interest income decreased approximately $42,000, to approximately
$117,000, in the six months ended June 30, 1999 compared to the six months
ended June 30, 1998. These decreases reflect the Company's use of a
portion of its cash during these periods for expansion of its production
facilities.
Interest expense increased approximately $90,000 (69%) for the three
months ended June 30, 1999 as compared with the three months ended June
30, 1998. Interest expense increased approximately $258,000 (125%) for
the six months ended June 30, 1999 as compared with the six months ended
June 30, 1998. The increases are attributable to interest on increased
borrowings during the year to support facilities improvements and
equipment for expanded and improved production facilities. In addition,
the first quarter of 1998 included an interest accrual adjustment, which
was not applicable to 1999.
Depreciation and Amortization
-----------------------------
Depreciation and amortization increased approximately $360,000 (70%) for
the six months ended June 30, 1999 as compared with the six months ended
June 30, 1998. The increase reflects depreciation and amortization on
increased investments in property, equipment, leasehold improvements,
patents and ISO registrations. 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, 1999, the Company's working capital was $14.5 million compared
to $16.4 million at December 31, 1998. The Company's current ratio was
4.1 to 1 as of June 30, 1999 and 5.4 to 1 at December 31, 1998. The
reduction in the Company's current ratio from December 31, 1998 to June
30, 1999 is primarily attributable to the consumption of cash for the
expansion of the Company's production facilities and the current provision
in the period for corporate income taxes, partially offset by increases in
inventory and prepaid expenses.
Capital Resources
-----------------
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 May 18, 1999, the Company renegotiated its line of credit. The line
now provides for borrowings of up to $6.0 million. Interest is payable
monthly, calculated at prime. The line of credit matures April 30, 2001.
At June 30, 1999, the outstanding balances due under the line of credit
was approximately $3.9 million.
On August 21, 1998, the Company renegotiated its term loan and revolving
equipment term loan. The Company extended its term loan for an additional
year and converted the loan to a floating rate of Libor plus 1.50% and
obtained fixed rate protection by executing an interest rate swap which
resulted in an all-in fixed rate of 7.75% through the maturity date of
February 24, 2002. Monthly principal and interest payments of
approximately $65,000 are required. At June 30, 1999, the balance due
under the term loan was approximately $3.8 million.
The revolving equipment term loan provides for borrowings up to $4.0
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, 1999. As of June 30, 1999, the
balance of the advances under the revolving loan that had been converted
to term notes totaled approximately $3.4 million. Interest accrues on the
outstanding principal balances of these term notes at rates ranging from
6.108% to 7.72% and monthly principal and interest payments totaling
$52,890 are required.
The Company finances certain of its annual insurance premiums through a
financing company. The amounts due under these loans totaled
approximately $32,000 as of June 30, 1999 and are paid in monthly
installments of $11,581 with interest at 6.21%.
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, 1999.
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,
1999 was $15.2 million compared with $14.4 million at June 30, 1998.
Backlog at December 31, 1998 was $18.1 million.
Year 2000 Issues
----------------
The Company has given serious attention to the potential problems that
could arise from the rollover of computer clocks with two-digit year
fields when the year 2000 arrives. Assessment of the affect on both IT
(information technology) and non-IT issues is progressing rapidly. IT
assessment is substantially complete. Non-IT assessment is also
substantially complete, including our suppliers, for which we have had an
85% response rate to date with no significant deficiencies noted. The
Company currently expects to have all assessment, remediation and testing
completed by the end of August 1999.
In the area of business and operations, the Company has completed most of
its automation in recent years. Accordingly, the computers and software
that have been acquired during those years incorporated Year 2000
compliant technology. This compliance is being continuously confirmed in
the Company's various business applications as a byproduct of another
technology project the Company initiated early this year, a licensing
audit designed to ensure that all software utilized by Company personnel
is properly licensed by the software provider. The same software used to
verify the software installed on each PC also verifies Year 2000
readiness. The Company has also instituted a policy prohibiting the
purchase of any new computers or other devices that have clocks without
empirical proof that they can recognize the year 2000 without
malfunctioning.
In the non-IT area, which includes test equipment, the Company's principal
hardware vendor has provided certification and warranty as to Year 2000
compliance. In addition, as routine, scheduled maintenance and
calibration is performed on this equipment, veracity of that certification
is tested and confirmed. To address the other non-IT issues, such as
elevators, heating systems, utilities, etc., an outside consultant will be
brought in by the Company to run independent tests of these systems and
the various vendors will be providing certification as to Year 2000
compliance.
The Company will continue to investigate whether its customers and vendors
are also becoming Year 2000 compliant. Like other businesses, the Company
has been providing information to its customers, upon their request,
concerning the Company's efforts in this matter.
To date, the costs that the Company has incurred which are specific to the
assessment and remediation of Year 2000 issues have not been material. No
special expenditures have been required in the area of software or
hardware. Some legal fees and educational expenses have been incurred to
heighten awareness and to help organize business activities to incorporate
assessment and remediation and the MIS staff was increased to perform and
manage compliance. For the most part, however, Year 2000 issues have been
incorporated into other management routines, thereby minimizing
extraordinary costs. It is presently anticipated that future, separately
identifiable costs of assessment and remediation will also be nominal, and
it is very likely that such costs will be less than $50,000 in 1999.
In order to minimize the impact of any unanticipated Year 2000 "non-
readiness" problems, the Company plans to have manual backup systems in
place to forestall any interruption of operations resulting from the
failure of automated systems. In addition, the data generated and
collected in those systems is continuously being archived as a part of the
Company's existing business practices.
The Company does not foresee any serious Year 2000 problems occurring with
its vendors or customers. While it is not possible to predict what kinds
of minor Year 2000 issues might arise that have not been addressed as a
priority by the Company, or by some other company with which the Company
does business, the Company believes that it has multiple sources for the
vast majority of the raw materials and services that it presently procures
from vendors or third-party contractors. Unless a major problem of a
national or global scope occurs, the Company believes it will be able to
maintain sufficient inventory levels to continue production while it seeks
to rectify any smaller problems that may arise. The Company is continuing
to follow up on Year 2000 compliance with those suppliers who have not yet
responded, as well as those who have indicated that their Year 2000
compliance is not yet complete.
With respect to the Company's customer base, substantially all of the
Company's most significant customers are very large, well-capitalized,
multi-national companies with substantial resources. The Company believes
that these customers are doing everything possible to protect themselves
and, indirectly, the Company, from business losses resulting from Year
2000 issues.
While there is no guarantee that the Company will reach Year 2000
compliance by the necessary deadline, the Company believes that it is
applying the resources and effort sufficient to do so.
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, including any events that result from
the year 2000 computer clock rollover.
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 18, 1999. At the meeting Joseph H. Kiser, David G.
Sherman, Sarah L. Booher, David A. Lisowski, Anthony B.
Petrelli, Jae H. Shim and Derek L. Bailey 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, 1999 and approved
of an amendment to the Company's Tandem Stock Option and Stock
Appreciation Rights Plan to increase the number of shares
reserved under the Plan by 270,000 shares.
The number of votes cast for, withheld or broker nonvotes
for each director nominee was as follows:
<TABLE>
<CAPTION>
Broker
Nominee For Withheld Nonvotes
------------------- --------- -------- --------
<S> <C> <C> <C>
Joseph H. Kiser 4,697,660 420,735 0
David G. Sherman 4,700,340 418,055 0
Sarah L. Booher 4,683,938 434,457 0
David A. Lisowski 4,691,908 426,487 0
Anthony B. Petrelli 4,700,140 418,255 0
Jae H. Shim 4,692,650 425,745 0
Derek L. Bailey 4,696,915 421,480 0
</TABLE>
The number of votes cast for, against, abstentions and
broker nonvotes for ratification of auditors was as follows:
Broker
For Against Abstain Nonvotes
--------- -------- ------- --------
5,006,593 92,726 19,076 0
The number of votes cast for, against, abstentions and
broker nonvotes for approval of the amendment to the Company's
Tandem Plan was as follows:
Broker
For Against Abstain Nonvotes
--------- -------- ------- --------
4,331,691 751,409 55,295 0
Because the election of directors, ratification of auditors
and approval of the increase in the number of shares reserved
under the Tandem Plan 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 May 18,
1999
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: August 16, 1999 By: /s/ Jon L. Clark
-------------------------- ----------------------------
Jon L. Clark, V.P. Finance
and Principal Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VARI-L'S
AUDITED FINANCIAL STATEMENTS PREPARED AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH
PERIOD THEN ENDED, INCLUDED WITH ITS 2ND QUARTER 1999 10-QSB FILING WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,118
<SECURITIES> 0
<RECEIVABLES> 4,259
<ALLOWANCES> 23
<INVENTORY> 8,780
<CURRENT-ASSETS> 19,230
<PP&E> 35,163
<DEPRECIATION> 5,241
<TOTAL-ASSETS> 53,063
<CURRENT-LIABILITIES> 4,692
<BONDS> 0
0
0
<COMMON> 55
<OTHER-SE> 34,224
<TOTAL-LIABILITY-AND-EQUITY> 53,063
<SALES> 10,773
<TOTAL-REVENUES> 10,890
<CGS> 4,814
<TOTAL-COSTS> 4,814
<OTHER-EXPENSES> 3,186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 464
<INCOME-PRETAX> 2,426
<INCOME-TAX> 925
<INCOME-CONTINUING> 1,501
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,501
<EPS-BASIC> .27
<EPS-DILUTED> .27
</TABLE>
NORWEST BANK
Norwest Bank Colorado, N.A.
Denver
1740 Broadway
Denver, Colorado 80274
303/861-8811
May 18, 1999
Mr. David Sherman
President and Chief Executive Officer
Vari-L Company, Inc.
4895 Peoria
Denver, Colorado 80239
Dear David:
We are pleased to inform you that Norwest Bank Colorado, National
Association (the "Bank") has approved a revolving line of credit (the
"Line") in the amount not to exceed six million dollars ($6,000,000) for
Vari-L Company Inc. a Colorado corporation, (the "Borrower"). The Line is
subject to the terms and conditions in this letter agreement (the
"Agreement"), as defined below, as well as to those in the promissory note
executed by the Borrower evidencing indebtedness arising under this
Agreement, security agreements and any other documents signed by the
Borrower in connection with the Line (collectively, the "Loan Documents").
This Agreement replaces the Agreement dated April 30, 1998, as amended.
This Agreement shall be retroactive to April 30, 1999.
Until the maturity date (April 30, 2001), and so long as no default
exists, the Borrower may borrow, repay and borrow again under the Line,
provided the outstanding balance at no time exceeds the lesser of a) the
$6,000,000 face amount or b) the following Borrowing Base limitation:
The Borrowing Base shall mean the sum of 80% of Borrower's eligible
accounts receivable and 60% of Borrower's eligible inventory, provided
that eligible inventory may not exceed 50% of the Line commitment, 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 include those over 60 days past
due, disputed accounts, federal government accounts, foreign accounts
unless insured by an export credit insurance policy acceptable to Bank or
secured by a letter of credit benefiting Borrower, affiliate accounts,
accounts covering booked but unfilled orders, contra accounts, 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.
Should the total amount to be drawn on the Line exceed the amount allowed
for in the most recent Borrowing Base Certificate, a new Borrowing Base
Certificate must accompany the draw request to substantiate borrowing base
adequacy. If any Borrowing Base calculation yields a deficiency of
Borrowing Base to loan outstandings, a principal payment in amount
sufficient to cover the deficiency shall accompany the Borrowing Base
Certificate.
In addition to the terms and conditions included in the Loan Documents,
the making of any advance under the Line, shall depend upon compliance
with the following:
1) The Line shall be secured by a first security interest in Borrower's
accounts, inventory, and general intangibles and proceeds thereof,
whether now owned or hereafter acquired.
2) Prior to the making of the first advance under the Line, Borrower
shall sign and return to Bank this Agreement and the Loan Documents.
3) Borrower shall pay to Bank a commitment fee in the amount of $12,000.
4) Borrower shall furnish to Bank:
a) Monthly, within 45 days of each month end (except November),
Borrowing Base Certificate (Exhibit A) and accounts receivable
aging summary page beginning April 30, 1999;
b) Quarterly, within 45 days of each quarter end, Borrower's
company prepared financial statements or a complete Form 10-QSB
Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934 and Compliance certificate (Exhibit B) or
in a form acceptable to Bank beginning June 30, 1999;
c) Annually, within 90 days of Borrower's fiscal year-end,
Borrower's year end accounts receivable aging and accounts
payable aging beginning December 31, 1999;
d) Annually, within 90 days of Borrower's fiscal year-end,
Borrower's audited financial statements by a certified public
accountant acceptable to Bank or a complete Form 10-KSB Annual
Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 beginning December 31, 1999;
e) Annually, within 120 days of Borrower's fiscal year end,
Borrower's forecasted balance sheet and income statement for the
subsequent fiscal year end;
f) Such other financial statements or information as may be
requested for credit underwriting and monitoring purposes.
FINANCIAL COVENANTS: So long as any indebtedness remains outstanding under
the Line, the Borrower will not, without the Bank's prior written consent:
1) Permit Borrower's Tangible Net Worth to be less than $29,000,000
measured quarterly beginning June 30, 1999;
2) Permit Borrower's Debt to Tangible Net Worth to exceed 1.0 to 1.0
measured quarterly beginning June 30, 1999;
3) Permit Borrower's Current Ratio to be less than 2.0 to 1.0 measured
quarterly beginning June 30, 1999;
4) Permit Borrower's Debt Service Coverage to exceed 1.0 to 1.0 measured
at Borrower's fiscal year end.
DEFINITIONS: Generally accepted accounting principles shall determine
the manner of computation unless noted below.
TANGIBLE NET WORTH: Stockholders' equity minus intangible assets.
CURRENT RATIO: Current assets minus current prepaid expenses divided by
current liabilities.
DEBT SERVICE COVERAGE: Earnings before interest, taxes, depreciation, and
amortization ("EBITDA") at Borrower's fiscal year end divided by the sum
of current maturities of long-term debt at year end plus interest expense
at year end plus 20% of property and equipment purchased during the
calendar year.
NEGATIVE COVENANTS: So long as any indebtedness remains outstanding under
the Line, the Borrower will not, without the Bank's prior written consent:
1) Pay dividends or distributions;
2) Liquidate, merge or consolidate;
3) Make loans or advances to officers, directors, or shareholders,
employees;
4) Guarantee or make a pledge of credit on undertakings of another
entity or person;
5) Incur any debt except debt to Bank, trade debt, equipment debt to
Bank One under existing or future credit commitments, debt
subordinated to bank, and debt under existing capital leases;
6) Create or permit any lien or encumbrance against Borrower's property
except those created under the Loan Documents, equipment liens
created under equipment debt to Bank One, and liens for existing
capital leases.
OTHER COVENANTS:
1) Borrower shall maintain all significant depository accounts at
Norwest.
2) Borrower shall maintain a minimum of one million dollars each of life
insurance on Joseph H. Kiser and David G. Sherman with the Borrower
named as the beneficiary.
3) Bank retains the right to conduct annual collateral audits paid by
Borrower. Bank has agreed to pay 100% of the cost for a collateral
audit to be conducted by no later than October 31, 1999.
CONDITIONS OF DEFAULT: Upon the occurrence of any of the following events
of default:
1) Default in any payment of interest or principal on the Line when due
and continuance thereof for 15 days; or
2) 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
3) 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; or
4) Any representation or warranty made by the Borrower herein or in any
statement or certificate furnished by Borrower is untrue in any
material respect;
5) 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
6) 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 advances 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.
Borrower represents that the person signing below is authorized to accept
this Agreement and execute the Loan Documents, which will constitute
obligations valid and enforceable against the Borrower. Borrower further
represents and warrants 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 the Borrower on
their effective dates, including contingent liabilities of every type and
that Borrower's financial condition has not changed materially and
adversely since those dates.
We sincerely thank you for your business and look forward to serving your
financial needs now and in the future.
Sincerely,
Norwest Bank Colorado,
National Association
/s/Derek R. Hewitt
Derek R. Hewett Margaret J. Brown
Business Banking Representative Vice President
Accepted and agreed as of the date first stated above.
Vari-L Company, Inc.
By:/s/David G. Sherman
David G. Sherman
President and Chief Executive Officer
By:/s/Joseph H. Kiser
Joseph H. Kiser
Chairman of the Board and Chief Scientific Officer
