U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1998
Commission File No. 0-23866
VARI-L COMPANY, INC.
(Name of Small Business Issuer in its Charter)
Colorado 06-0679347
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification No. )
4895 Peoria Street
Denver, Colorado 80239
(303) 371-1560
(Address and Telephone Number of Principal Executive Offices)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
TITLE OF CLASS
Common Stock, $.01 Par Value
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
[X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will
be contained, to the best of issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for the fiscal year ended December 31, 1998:
$18,063,254.
At March 8, 1999, 5,477,347 shares of Common Stock were outstanding.
The aggregate market value of the Common Stock held by non-affiliates on
March 8, 1999 was approximately $31,549,936 based on the closing price on
the Nasdaq National Market System on that date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's definitive proxy statement to be filed
pursuant to Regulation 14A not later than 120 days after the end of the
fiscal year are incorporated by reference in Part III.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Vari-L Company, Inc. (the "Company") designs, manufactures and
markets a wide range of signal source and signal processing components and
devices which are used in communications equipment and systems, such as
cellular telephones and base stations, local area computer networks, and
satellite communications equipment, as well as military and aerospace
applications, such as advanced radar systems, missile guidance systems,
and navigational systems. The Company sells its products primarily to
original equipment manufacturers of communications systems.
The Company was founded in 1953 in Stamford, Connecticut and
relocated to Denver, Colorado in 1969. The Company's corporate
headquarters is located at 4895 Peoria Street, Denver, Colorado 80239, and
its telephone number is 303/371-1560. The Company also conducts certain
portions of its operations at three other buildings within a five-mile
radius of its Denver headquarters building.
OVERVIEW
The Company's products are used in wireless communications equipment.
Wireless communication is the transmission of voice and data signals
through the air, without a physical connection, such as a metal wire or
fiber-optic cable. Information transmitted through wireless
communications equipment is transmitted by electromagnetic waves, also
known as signals. Electromagnetic waves vary in length, or frequency, and
intensity. The range of electromagnetic waves is called the spectrum,
which encompasses sound near the low end and light toward the higher end.
In between is the radio spectrum which is used in all wireless
communications. Radio Frequency ("RF") indicates lower frequencies while
"microwave" refers to relatively higher frequencies in the spectrum.
Different types of wireless communications systems utilize different
frequencies in the spectrum. Frequency is measured in cycles per second,
or Hertz. The spectrum currently in use by the various types of wireless
communications equipment ranges from 1 kiloHertz (1 thousand cycles per
second) to 20 gigaHertz (20 billion cycles per second). In the United
States, the Federal Communications Commission allocates portions of the
spectrum for different types of wireless communication systems. Wireless
communications systems currently in use include cellular telephones and
base stations, wireless cable (LMDS), satellite communications, global
positioning systems, local area networks, as well as radar systems,
missile guidance systems and navigational systems. Communications systems
recently launched at the lower end of the spectrum include personal
communications systems, or PCS, and direct broadcast satellites. The
Company's products are designed for use in all of these applications.
PRODUCTS
The Company produces a wide range of products which are, in essence,
basic building blocks used in many wireless communications systems, and
they perform a wide variety of RF and microwave signal processing
functions. The Company's products and technologies are also integrated
vertically by the Company into specialized assemblies which perform multi-
function microwave signal source and signal processing, as in the
Company's phase locked loop synthesizer, described below. The Company
produces both standard catalog and custom-designed products.
SIGNAL SOURCE COMPONENTS
One of the Company's major product lines is based on its patented
design of the voltage controlled oscillator ("VCO"). Oscillators are
components which provide a precise signal source within a frequency range.
They are widely used in transmitting and receiving equipment. The
Company's patented technology enables its VCOs to operate with
approximately 20% of the input power requirements of most of its
competitors. This unique feature, combined with the VCO's high quality,
low phase-noise characteristics, allows the Company's VCOs to be utilized
in battery-operated and other low-power applications, such as cellular
telephones, with better performance than competing products.
MILITARY/AEROSPACE SIGNAL SOURCE COMPONENTS
The Company produces several types of VCOs. The Company's
Military/Aerospace Signal Source Components are wide-band VCOs which are
sophisticated, high reliability components manufactured in a clean-room
environment and hermetically-sealed. They are sold for use in both
military/aerospace and high-end commercial applications.
COMMERCIAL SIGNAL SOURCE COMPONENT VCO'S
One of the Company's Commercial Signal Source Component products, the
low-cost VCO, was introduced in 1994 into the cellular base-station
market. A higher-volume production version of this VCO was introduced in
1998 into the subscriber market for cellular phones and pagers. These
products are designed to perform at high levels of efficiency while being
priced competitively for commercial applications.
Most of the increase in the Company's sales over the past four years
is attributable to the low-cost VCO. During 1997 and 1998, the Company
made significant investments in automatic manufacturing and test equipment
to manufacture low-cost VCOs in house, whereas formerly they had been
manufactured for the Company by subcontractors. In 1998, the Company
finished the second floor of its new corporate headquarters facility to
produce products for the subscriber marketplace, augmenting the Company's
manufacturing capacity and providing room for further expansion.
SUBSCRIBER SIGNAL SOURCE COMPONENTS
Also in 1998, the Company installed a high-speed, automated
production on the second floor of its corporate headquarters, allowing the
Company to compete for new business in expanding subscriber applications
markets. The new line gives the Company the ability to produce an
additional 8 million units annually and the facility can accommodate
several additional lines as demand grows. This installation was
substantially completed as of December 31, 1998 and will be in full
production in 1999.
Besides direct sales to original equipment manufacturers and
component suppliers to such manufacturers, the Company's low-cost VCOs are
also utilized by the Company as components in its phase locked loop
synthesizers, discussed below.
PHASE LOCKED LOOP SYNTHESIZERS
The Company introduced its first Commercial Signal Source Component
product, the phase locked loop synthesizer ("PLL"), in 1993. The PLL is a
device made up of a VCO, a loop filter, and integrated circuits. PLLs are
utilized in both transmitting and receiving equipment. The PLL's function
is to lock onto stable reference signals and convert them into stable
frequencies which may be detected and utilized by the communications
equipment. This function is essential in communications equipment.
As compared to its competitors, the Company's PLL exhibits superior
phase noise performance and uses approximately 20% of the power, operates
with an extended life, and is competitively priced. The Company's PLL-
300/400 series and low-cost VCOs are designed for use in applications such
as cellular telephones and cellular telephone base stations, personal
communications networks, personal communication systems, local area
computer networks, satellite communications, global positioning systems,
and direct broadcast systems.
SIGNAL PROCESSING COMPONENTS
MILITARY/AEROSPACE SIGNAL PROCESSING COMPONENTS
The Company also produces a line of RF and microwave signal
processing components which are primarily used in military and space
applications. Among these products are power dividers and combiners used
for directing RF and microwave signals, solid state switches used to
change the routing of RF and microwave signals, and transformers used to
convert signals between different impedances. The Company also produces
mixers and phase detectors which are used to convert the frequency of RF
and microwave signals into usable information and data.
Military and space applications of these products, as well as the
Company's wide-band VCOs, described above, include the radar systems of
military aircraft, the guidance systems of anti-aircraft and anti-missile
missiles, and military and commercial satellites. The military programs
using these products include the Patriot missile, AMRAAM missile, Harm
missile, PRC104 Man-Pac radio, F14, F15 and F18 fire control systems,
Phoenix missile, F16 radar systems (tail warning) and the Standard Missile
II. These components, together with the wide- band VCOs, formed the
original product lines of the Company and continue to be the Company's
most technically advanced products, often utilizing technologies developed
by the Company. They are typically very high reliability, high
performance, custom designed components. The production of custom
designed components usually entails the modification of existing products
to meet the specific performance criteria of the customer, but may, in
certain instances, require the design of an entirely new product. In this
area, because the components are manufactured to its customers'
specifications, the Company is often a sole source supplier.
COMMERCIAL SIGNAL PROCESSING COMPONENTS
Through its Signal Processing Components engineering group, the
Company patented technology for a high-impedance ratio, wide-band
transformer circuit used in the conversion of light wave signals to and
from radio frequency signals. This patent was approved in April 1997 by
the U.S. Patent and Trademark Office. A 1998 patent was awarded for a
design improvement to this product. Demand for the "fiber-optic"
transformer circuit comes from a variety of applications, including cable
access television ("CATV").
MANUFACTURING
The Company's Commercial Signal Source Components products are
manufactured with automated "pick and place" assembly equipment. Until
1997, these products were manufactured by third-party contract
manufacturers in the United States. In 1997, the Company brought this
process in-house with the acquisition of two automated assembly lines. In
1998, additional equipment was purchased to automate other steps in the
production and testing processes. In addition, in 1998, the Company
initiated the installation of a high-speed, automated production line in
its state-of-the-art manufacturing facility on the second floor of its
corporate headquarters, allowing the Company to compete for new business
in expanding subscriber applications markets. The new line gives the
Company the ability to produce an additional 8 million units annually and
the facility can accommodate several additional lines as demand grows.
This installation was substantially completed as of December 31, 1998 and
will be capable of full production in 1999.
The length of the production process for products manufactured
through the Company's automated assembly lines is one to three weeks.
Manufacturing of the Company's other products, which involves less
automated assembly, takes from one to fifty-two weeks. The Company may
maintain inventory of the raw materials required for production of its
products for a period of up to one year or more.
At the present time, the majority of the Company's products are
manufactured at the Company's various facilities in Denver, Colorado. The
Company assembles portions of certain commercial signal processing
components at contract manufacturers outside of the United States to
benefit from reduced labor costs on certain labor-intensive builds. All
of these assemblies are completed and tested in Denver, Colorado.
In December 1998, the Company received patent protection from the
Chinese government for its products, which clears the way for the Company
to proceed with a sales and distribution joint venture with a State-run
company in China. Pursuant to a 1996 joint venture agreement, the Company
invested significant resources to obtain this patent protection with a
strategy of developing a manufacturing facility in China. While the time-
consuming patent process was ongoing, the Company installed its new,
automated production facility in Denver. The Company is currently
focused on sales and distribution in China, although it has not ruled out
a Chinese manufacturing facility.
SUPPLIERS
The Company currently has approximately 250 suppliers and
historically has not experienced any unusual supply problems.
SALES AND MARKETING
Originally, the Company's primary business was to engineer,
manufacture and market high performance, high reliability, RF and
microwave signal source and signal processing components used in military
applications, such as missile guidance systems, advanced navigational
systems and advanced radar systems. In 1993, the Company expanded its
focus to the commercial marketplace to lessen the Company's susceptibility
to trends in defense spending and to seek a share of the dramatic growth
anticipated for commercial wireless communications. As a result of this
shift, fluctuations in the Company's business are now more dependent on
general business cycles, changes in market demand for the commercial
products built with the Company's components, and on technological
innovations. In 1991, the approximate mix of customer orders was 25% for
commercial applications and 75% for military applications. In 1998, this
mix was approximately 87% for commercial applications and 13% for military
applications.
While the Company continued to derive a substantial portion of
bookings from its international marketing in 1998, firm customer orders
from U.S. companies rose a dramatic 70%, increasing from $9,957,000 in
1997 to $16,227,000 in 1998 and representing 72% of new customer orders in
1998. Like the Company's overall mix of commercial and military business,
1998 domestic orders were comprised of 87% for commercial applications and
13% for military applications. These orders evidence the long-awaited PCS
rollout in the U.S.
The following table lists the Company's sales revenues for each of
the past five years according to the Company's product lines:
<TABLE>
<CAPTION>
Sales Revenues
(In thousands)
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Mil/Aero Signal
Processing Components $ 2,118 $ 1,897 $ 1,738 $ 2,345 $ 1,542
Commercial Signal
Processing Components 1,060 1,392 -0- -0- -0-
Mil/Aero Signal
Source Components 3,211 4,957 3,825 3,829 4,363
Signal Processing
Components Special 185 262 1,025 776 194
Assemblies
Commercial Signal
Source Components 11,489 8,877 5,622 2,518 1,128
------- ------- ------- ------- -------
$18,063 $17,385 $12,210 $ 9,468 $ 7,227
======= ======= ======= ======= =======
</TABLE>
The Company's sales are made primarily through independent sales
representatives who promote and solicit orders for the Company's products
on a commission basis in exclusive marketing territories. The Company
selects its sales representatives on the basis of technical and marketing
expertise, reputation within the industry, and financial stability. These
sales representatives also represent other manufacturers with products
complementary to, rather than competitive with, the Company's products.
The Company normally engages 15 to 20 sales representative firms in the
U.S. and also has 17 sales representatives covering 28 foreign countries.
The Company now employs an East Coast Regional Sales Manager, a West Coast
Regional Sales Manager, a Director of Military/Aerospace Sales, an
International Sales Manager, a Director of Program Management and a Vice-
President of Sales and Marketing, all of whom work together to manage and
coordinate the activities of the sales representatives.
In addition to the efforts of its independent sales representatives,
the Company uses various methods to directly promote its products,
including field visits to customers, advertising in trade journals,
authoring technical articles for publication in trade journals, and trade
show product seminars and exhibitions.
CUSTOMERS
The Company sells primarily to original equipment manufacturers of
communications equipment in either the commercial or military marketplace.
Many of those customers are larger Fortune 500 companies with world-wide
operations or prime contractors for military work. Management believes it
has a strong reputation with these and other customers for high
performance products and solutions.
Key customers of the Company include Motorola, Nokia, Ericsson,
Lucent Technologies, Samsung, Uniden, Hughes Network Systems, Stanford
Telecom, Wireless Access, and Siemens in the commercial market, and
Raytheon Systems Co., Hughes Space/Com., Lockheed Martin, L3
Communications, Rockwell, Northrup Grumann, NEC, Saab Ericsson, and Matra
Defense in the military and aerospace market. In 1997, Motorola and Nokia
each accounted for 12% of sales revenues. The Company's two largest
customers in 1998 were also Motorola and Nokia, with 16% and 11% of sales
revenues, respectively. The Company does not believe that its business is
dependent on any one of its customers.
The Company's customers have historically bought products from the
Company on the basis of purchase orders, rather than long-term supply
contracts. The Company enters into long term purchase agreements with some
of its larger commercial customers. These agreements establish preferred
vendor status for the Company and, in certain cases, set minimum amounts
which will be purchased by the customer over the term of the agreement.
COMPETITION
The Company is subject to active competition in the sale of virtually
all of its products. Many of its competitors, including divisions of major
corporations, have significantly greater resources than those currently
available to the Company. Additionally, some of the Company's customers
compete with the Company by manufacturing certain components themselves,
rather than purchasing them from the Company. While some large foreign
firms, principally Japanese, still have the ability to manufacture
competitive products in larger production runs than the Company, the
Company's expanded capacity has materially increased its own mass
production capabilities.
The Company believes that its surface mount products for commercial
applications compete with other manufacturers' products on the basis of
their unique features, price and performance. The Company believes that
its products manufactured for military applications, including the Signal
Processing Components and Wide-Band VCOs, compete on the basis of quality
and performance. These products are typically high performance, high
reliability components which are required to meet high quality system
standards.
The Company believes Merrimac and Remec are its largest competitors
in the Signal Processing Components market. Murata, Fujitsu, ALPS and Z-
Comm compete in the lower- priced commercial VCO marketplace.
Remec/Magnum competes with the Company primarily in the wide-band,
hermetically-sealed VCO marketplace. PLL competitors include ALPS,
Panasonic, Ma/Com and Synergy. While most of these competitors have
significantly greater financial and other resources than the Company, the
Company believes that it will continue to be able to successfully compete
in these markets because of the strength of its existing technology and
its ongoing commitment to technological innovation.
RESEARCH AND DEVELOPMENT
The Company's products are marketed in a highly competitive and
rapidly changing technological environment. Consequently, the Company has
historically invested heavily in its research and development programs.
For the years ended December 31, 1998 and 1997, the Company expended
approximately $1,155,000 and $1,026,000, respectively, on such programs.
Joseph H. Kiser, Chief Scientific Officer, directs the research and
development efforts of the Company. Mr. Kiser has been largely
responsible for many of the technological successes and innovations of the
Company over the past 40 years and is the author of the Company's VCO
patent. He heads up a 36 member team of engineers and other technically
trained personnel who perform research and development in addition to
providing process and production assistance to other departments.
PATENTS
The patent on the Company's VCO was issued in the U.S. on November 4,
1986, in Canada on April 17, 1990, and by the European Patent Office on
April 3, 1992. The U.S. patent will expire in 2005. The Canadian patent
will expire in 2007 and the European patents will expire in 2006. The
Company also owns U.S. patents for (i) a Broadband Mixer with Coplanar
Balun, expiring in 2000, (ii) a High Impedance Ratio Wideband Transformer
Circuit expiring in 2015, and (iii) a 1.2 Volt Voltage Controlled
Oscillator expiring in 2016. During 1998, the Company received approval
from the U.S. Patent and Trademark Office on three new patents. In early
1998, the Company's Unbalanced to Balanced High Impedance Ratio Wide-Band
Transformer Circuit, an improvement to the 1997 patented design used in
the conversion of light wave signals to and from radio frequency signals,
was approved. This patent will expire in 2015. In late 1998, the Company
was awarded two patents entitled "Orthoganal Mounted Substrate Resonator"
and "Continually Adjustable Resonator." The development for these patents
was announced in the third quarter of 1997. The technology under these two
patents allows the Company to manufacture high frequency RF components, in
the range of three to six gigahertz, using low-cost, commercial materials
and processes while maintaining excellent performance. The two patents
will both expire in 2017.
In December of 1998, the Company received Chinese patent approval on
components used in base stations, handsets and pagers.
To the Company's knowledge, there are no asserted claims by other
parties to the Company's products or patents.
In the absence of patents, the Company relies upon nondisclosure
agreements and trade secret laws to protect its confidential and
proprietary information. Due to the rapid rate of technological change in
its markets, the Company believes that the ability to innovate is of
greater importance to its business than availability of patents and
proprietary rights. Barriers to competitor entry include the time and
expense to design and manufacture components and the difficulty of selling
to those customers who have already designed the Company's components into
their equipment.
GOVERNMENT REGULATION
In many instances, the Company has been required to obtain export
licenses before filling foreign orders. United States Export
Administration regulations control high technology exports like the
Company's products for reasons of national security, compliance with U.S.
foreign policy, protection of domestic reserves of products in short
supply and, under certain circumstances, for the security of a destination
country. Any foreign sales of the Company's products requiring export
licenses must comply with these general policies. During 1998, the U.S.
State Department restricted certain exports, including many of the
Company's products, to Pakistan and India due to nuclear testing by, and
resulting tensions between, the two countries. The Company estimates that
this restriction reduced the Company's 1998 military/aerospace sales
revenues by approximately $1 million.
EMPLOYEES
As of December 31, 1998, the Company had 192 full-time employees and
11 part-time employees, including 30 engaged in management and
administration, 36 in engineering, 125 in production and testing, and 12
in sales. The Company believes that its employee relations are good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company began leasing its new corporate headquarters (Building 4)
in Denver, Colorado during November 1997. Building 4 has approximately
30,800 square feet and houses, on the first floor, the Company's
administration, sales, personnel, quality assurance, finance, and
management information systems departments. The second floor is the site
of the Company's new, highly-automated pick and place assembly line for
products aimed at the subscriber market. The lease expires on September
1, 2013, and provides for a monthly base rental of $43,203, which includes
a $2,000 per month property tax and insurance accrual, through August 31,
2003 with possible increases each year thereafter. The Company is also
obligated to pay maintenance and other expenses on the facility for the
term of the lease. The lease may be extended at the option of the Company
for two additional terms of five years each.
The Company remodeled its former headquarters building, an
approximately 20,200 square foot facility in Denver, Colorado (Building
1). This building houses all aspects of the Company's military/aerospace
signal processing components and signal source components operations and
commercial signal processing components operations in a single facility.
The Building 1 lease, which expires on June 30, 2002, provides for a
monthly base rental of $9,907 through June 30, 1999 with increases each
year thereafter up to $10,920 per month during the final year. The
Company is obligated to pay taxes, insurance, maintenance and other
expenses for the term of the lease. After 2002, the lease may be extended
at the option of the Company for two additional terms of two years each.
The Company leases another facility in Denver of approximately 13,650
square feet (Building 2) which currently houses all of the Company's
engineering, purchasing and production operations for its commercial
signal source component products. The Company's two pick and place
assembly lines for the commercial infrastructure market, including VCOs
used in cellular and PCS base stations, are in Building 2. The lease, as
amended during 1998 to current market levels, expires on October 31, 2005,
and provides for a monthly base rental of $10,801 per month. Prior to
being amended effective November 1, 1998, the lease provided for a monthly
base rental of $6,634 through October 31, 1998, and $4,000 per month
thereafter for the remainder of the lease term which was to expire on
October 24, 2000. The Company is responsible for payment of taxes,
insurance, maintenance and other expenses. The facility is leased from a
partnership in which an executive officer of the Company, Joseph H. Kiser,
is a partner. The amended terms are substantially similar to leases of
comparable commercial properties in the same area. The Company believes
that that the amounts to be paid to the partnership under the new lease
are no greater than would be paid in an arms-length transaction.
The Company leases a fourth facility (Building 3) in Denver which
houses the Company's machine shop and advanced products engineering.
Building 3 has approximately 8,800 square feet and the lease, as amended,
expires August 1, 2003. The monthly base rental is $3,279 plus taxes,
insurance, maintenance and other expenses. The facility is leased from
Joseph H. Kiser, an executive officer of the Company.
As part of its severance arrangements with a former officer, the
Company rented residential properties in Colorado and Mexico from the
former officer. These leases expired March 31, 1998 and June 30, 1998.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings to which the Company is a party or to
which the property of the Company is subject are pending and no such
proceedings are known by the Company to be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the
Company during the fiscal quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET
The Company's common stock is traded under the symbol "VARL" on the
Nasdaq National Market. The following table sets forth the high and low
prices for the common stock for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ -----
1997
- ----
<S> <C> <C>
Fiscal quarter ended March 31, 1997 $11-7/8 $8
Fiscal quarter ended June 30, 1997 $9 $6-3/4
Fiscal quarter ended September 30, 1997 $11-7/16 $6-7/8
Fiscal quarter ended December 31, 1997 $12-7/8 $7-5/16
1998
- ----
Fiscal quarter ended March 31, 1998 $10-5/8 $7-3/8
Fiscal quarter ended June 30, 1998 $14-3/4 $8
Fiscal quarter ended September 30, 1998 $10-5/8 $5-1/8
Fiscal quarter ended December 31, 1998 $9-3/4 $4-15/16
</TABLE>
HOLDERS
As of December 31, 1998, there were approximately 155 holders of
record and in excess of 1,000 beneficial owners of the Company's common
stock.
DIVIDENDS
The Company has never declared or paid a cash dividend on its common
stock. The Board of Directors presently intends to retain all earnings
for use in the Company's business and, therefore, does not anticipate
paying cash dividends in the foreseeable future. The declaration of cash
dividends, if any, in the future would be subject to the discretion of the
Board of Directors, which may consider such factors as the Company's
results of operations, financial condition, capital needs, and any
contractual or other restrictions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
Net income for 1998 increased 33%, to $2.7 million, or 50 cents per
basic share and 48 cents per diluted share, compared with net income of
$2.0 million, or 45 cents per basic share and 43 cents per diluted share,
for 1997. Sales of the Company's products increased approximately $.7
million, or 4%, from 1997 to 1998. While shipments of commercial products
were up 24% from 1997, that gain was offset by reduced sales of
military/aerospace products, partially due to newly-imposed export
restrictions and softening demand. Commercial shipments are expected to
continue to improve in 1999 as the Company further penetrates the
subscriber applications market. Military/aerospace shipments are also
expected to rebound, irrespective of whether the export restrictions are
lifted in 1999. Manufacturing costs as a percent of sales decreased
approximately 7% from 1997 to 1998, due primarily to continued
improvements in production processing and materials purchasing and
handling costs. Net income, as described above, increased as a result of
these and other improvements from 1997 to 1998.
During 1998, Vari-L had significant successes in its various product
lines, furthering the Company's goals for quality growth and
profitability:
- - The Company's commercial production operation received ISO 9001
certification. This highly visible designation, which assures
customers that Vari-L has acted to ensure consistent levels of
durability and excellence in its commercial components operations,
significantly enhances the Company's reputation and the marketability
of its products.
- - A state-of-the art manufacturing facility was installed on the second
floor of its corporate headquarters, allowing the Company to compete
for new business in the expanding subscriber applications markets.
- - The Company entered into an agreement to be the sole-source provider
with the Wireless Access group of Glenayre Technologies of a minimum
of 840,000 VCOs for use in a new wireless messaging device. This
agreement represents the Company's first significant, high-volume
order from the subscriber marketplace.
- - The Chinese government granted the Company patent protection for its
commercial products, clearing the way for the Company to proceed with
a sales and distribution joint venture with a Chinese, State-run
company.
- - The Company was awarded two U.S. patents covering breakthrough
technology that enables lower-cost, high-volume production of
advanced, high-frequency components formerly manufactured in a high-
cost, labor-intensive environment.
- - The Company was awarded a U.S. patent for a high-impedance, wide-band
transformer circuit, strengthening the Company's technological base
for expanding into the fiber-optic marketplace.
- - The Company entered into an agreement to be the sole-source provider
of VCOs for the construction of base station equipment in two Lucent
Technologies digital wireless communications programs underway in
Europe.
- - The Company retooled and remodeled its former headquarters building
to consolidate all of the manufacturing and engineering operations
for its military/aerospace products and its commercial signal
processing products.
RESULTS OF OPERATIONS
OPERATING REVENUES
Sales revenues increased approximately $.7 million (4%) in 1998, from
$17.4 million in 1997 to $18.1 million in 1998. Revenues from the
Company's commercial signal source components were approximately $11.5
million, or 64% of revenues, in 1998 as compared to $8.9 million, or 51%,
in 1997. Revenues from sales of the Company's military/aerospace signal
source components products were approximately $3.2 million, or 18% of
revenues, in 1998 as compared to $5.0 million, or 29%, in 1997. Revenues
from the Company's military/aerospace signal processing components
products were approximately $2.1 million, or 12% of revenues, in 1998 as
compared to $1.9 million, or 11%, in 1997. Revenues from the Company's
commercial signal processing components products were approximately $1.0
million, or 6% of revenues, in 1998 as compared to $1.4 million, or 8%, in
1997. Revenues from sales of products that combine the Company's signal
processing components and signal source components were approximately $.2
million in 1998, or 1% of revenues, as compared to $.3 million, or 2% of
revenues, in 1997.
COST OF GOODS SOLD
Cost of goods sold, as a percent of sales revenues, was 45% in 1998
and 48% in 1997. Gross profit margins were 55% for 1998 and 52% for 1997.
The increase in the 1998 gross profit margin reflects on-going
improvements in production processing that have increased personnel
efficiencies and reduced labor and material costs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased approximately $195,000,
or 11%, from $1,761,000 in 1997 to $1,956,000 in 1998. The increase to G
& A primarily resulted from increased travel and expenses to support and
communicate with shareholders and investors during 1998. In 1997, the
Company made a commitment to step up its shareholder and investor
relations effort in 1998, which effort proved to be timely as problems in
the Asian economy caused instability in the U.S. stock market for high
technology stocks.
ENGINEERING EXPENSES
Engineering expenses increased approximately $129,000, or 13%, from
$1,026,000 in 1997 to $1,155,000 in 1998, reflecting increased staffing
and recruiting costs and equipment depreciation costs.
SELLING EXPENSES
Selling expenses were approximately $2,080,000 for both 1997 and
1998. The costs associated with the increase in sales personnel in 1998
was offset by a decrease in 1998 in the amount of travel to the Far East.
INTEREST INCOME AND EXPENSE
The Company manages its credit facility and interest bearing
investments in tandem.
Interest expense decreased approximately $104,000, or 14%, from
$767,000 in 1997 to $663,000 in 1998. The decrease reflects the net of
the decrease in interest paid on debentures which were converted to stock
in mid-1997, and the increase in interest for long-term debt used to
finance capital improvements and fixed assets purchases during 1998.
Interest income increased approximately $143,000, or 77%, from
$185,000 in 1997 to $328,000 in 1998. The Company's investment in a
mutual fund of U.S. Government securities, from which interest income is
earned, was approximately $6.5 million and $5.9 million at December 31,
1998 and 1997, respectively. The level of monies in the fund was in
excess of $5.0 million for all twelve months of 1998, versus three months
in 1997, which resulted in significantly more interest income in 1998.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased approximately $467,000, or
60%, from $773,000 in 1997 to $1,240,000 in 1998. The increase reflects
depreciation on increased investments in property, equipment and leasehold
improvements. Depreciation and amortization expense is expected to
continue to increase as a result of these and future capital investments.
OTHER EXPENSES
Other expenses decreased approximately $86,000, or 55%, from $156,000
in 1997 to $70,000 in 1998, due to the final payment in June 1998 of costs
related to a 1992 covenant not to compete. The decrease was partially
offset by the amortization of a 1997 covenant not to compete.
NET INCOME
Net income increased approximately $662,000, or 33%, from $2,035,000
in 1997 to $2,697,000 in 1998. The increase in net income was due
principally to improvements in the gross margin, increases in interest
income, and decreases in interest and other expenses from 1997 to 1998.
EARNINGS PER SHARE
Basic earnings per share increased 5 cents, or 11%, from $.45 in 1997
to $.50 in 1998 on weighted average outstanding shares that increased
878,719 shares, or 19%, from 4,528,423 shares in 1997 to 5,407,142 shares
in 1998.
Diluted earnings per share increased 5 cents, or 12%, from $.43 in
1997 to $.48 in 1998 on weighted average shares outstanding and dilutive
securities that increased 784,756, or 16%, from 4,825,515 in 1997 to
5,610,271 in 1998.
FINANCIAL CONDITION
ASSETS
Total assets increased approximately $11.1 million during 1998. The
increase resulted primarily from the Company's capital investments in its
infrastructure, patents and ISO 9001 registration, and changes in
inventory management.
Property and equipment increased approximately $10 million as the
result of extensive capital improvements and acquisitions during 1998.
This included the retooling and remodeling of the military/aerospace
manufacturing facility, the tenant finish of the second floor of the
Company's headquarters and the related acquisition of high-speed test and
automated production equipment for the assembly of the Company's newest
line of products being sold into the subscriber marketplace.
Patents increased approximately $.7 million in 1998. The Company
obtained approval for three new patents during the year, in addition to
obtaining patent protection on its products to be distributed in China.
Other assets, which include costs for the Company's registration under ISO
9001, increased approximately $.5 million. The Company received ISO 9001
certification for its commercial operations in January 1998 and began the
process of registration for its military/aerospace operations.
Inventories increased approximately $1.1 million, or 15%, during
1998. Components of the increase were approximately $1.1 million in
finished goods and $1.0 million in work in process, offset by a decrease
in raw materials of approximately $1.0 million. Finished goods and work
in process have increased as a result of the Company's decision to provide
a faster turnaround of products to its customers by shortening the lead
times on deliveries; raw materials have decreased as a result of improved
purchasing procedures, including vendor turnaround and support.
Trade accounts receivable decreased approximately $.8 million, or
15%, from December 31, 1997 to December 31, 1998. This was due
principally to the timing of approximately $4.9 million in fourth quarter
shipments.
Cash and cash equivalents increased approximately $.5 million from
December 31, 1997 to December 31, 1998.
LIABILITIES
Total liabilities increased approximately $6.5 million during 1998,
$4.6 million of which was attributable to the long-term financing of
capital improvements and $1.6 million of which was attributable to an
increase in deferred income taxes.
STOCKHOLDERS' EQUITY
Common stock and paid-in capital increased approximately $1.9 million
during 1998 due to the exercise of stock warrants from the Company's 1997
convertible debenture offering, the exercise of stock options, the
issuance of shares under the employee stock purchase plan, and the
issuance of shares under the Company's stock grant plan.
LIQUIDITY
At December 31, 1998, the Company's working capital was $16.4 million
compared to $15.9 million at December 31, 1997. The Company's current
ratio was 5.4 to 1 at December 31, 1998 and 6.1 to 1 at December 31,
1997.
The increase in working capital was due to several factors.
Inventories increased approximately $1.1 million, cash and cash
equivalents increased approximately $.5 million and prepaid expenses
increased approximately $.3 million. These increases were partially
offset by a decrease in trade accounts receivable ($.8 million), an
increase in current maturities of long-term debt ($.2 million), and an
increase in trade payables ($.3 million.)
CAPITAL RESOURCES
The Company has credit facilities with two banking institutions. The
first consists of a $5.0 million line of credit agreement. The second
consists of two agreements, a $4.1 million term loan agreement and a $4.0
million revolving equipment term loan agreement.
The line of credit was restructured April 1998 to provide for
borrowings of up to $5.0 million. Interest is payable monthly, calculated
at prime. The line of credit matures April 30, 2000. At December 31,
1998, the outstanding balance due under the line of credit was $4,755,909.
The Company's accounts receivable, inventory, and general intangible
assets secure the line of credit.
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
1.5% and then 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 $64,000 are required. At December 31, 1998, the balance due
under the term loan was $4,113,763.
The Company renewed its revolving equipment term loan for one year
and increased the borrowing provision to $4.0 million. Interest accrues
on the outstanding principal balance of the revolving equipment term loan
at prime plus .25 percent when advances are made under the revolver.
These borrowings can be converted to term notes at rates which adjust to
the three-year treasury note rate plus 1.95 percent. 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 December 31, 1998, the balance of
the outstanding advances under the revolving loan that had been converted
to term notes totaled $2,551,815. Interest accrues on the outstanding
principal balances of these term notes at rates ranging from 6.10 percent
to 7.72 percent, and monthly principal and interest payments totaling
$36,671 are required. The Company's property and equipment secure the
term loan and revolving equipment term loan.
The Company has financed the purchase of vehicles with promissory
notes bearing interest at rates ranging from 7.75 percent to 8.50 percent.
Monthly principal and interest payments totaling $2,262 are required. The
notes mature from 1999 through 2002.
The Company finances certain of its annual insurance premiums through
a financing company. The amount due under these loans totaled $21,424 as
of December 31, 1998 and is paid in monthly installments of $7,141 with an
interest rate of 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
December 31, 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
December 31, 1998 was $18.1 million compared with $16.6 million at
December 31, 1997. The increase in firm customer orders reflects the
Company's success in capturing a substantial portion of the market for
cellular infrastructure, purchased-VCOs in Western Europe, and increases
in commercial domestic markets.
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 except for suppliers, for which we have had a 52%
response rate to date. The Company currently expects to have all
assessment, remediation and testing completed by the end of August 1999.
Fortunately, 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.
In addition, 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. 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 continues 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.
ITEM 7. FINANCIAL STATEMENTS.
See pages F-1 through F-28 for this information.
Vari-L Company, Inc.
Index to Financial Statements
December 31, 1998 and 1997
Independent Auditor's Report F-1
Balance Sheets F-2 - F-3
Statements of Income F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7 - F-28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Vari-L Company, Inc.
We have audited the accompanying balance sheets of Vari-L Company,
Inc. as of December 31, 1998 and 1997, and the related statements of
income, stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Vari-L
Company, Inc. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
HAUGEN, SPRINGER & CO., P.C.
January 29, 1999
Denver, Colorado
VARI-L COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------
Assets 1998 1997
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 6,515,061 $ 5,970,582
Trade accounts receivable,
less $23,000 and $18,000
allowance for doubtful
accounts 4,416,865 5,172,874
Inventories 7,901,034 6,936,890
Prepaid expenses and other 1,235,493 887,272
----------- -----------
Total Current Assets 20,068,453 18,967,618
----------- -----------
Property and Equipment:
Machinery and equipment 22,299,396 15,730,870
Furniture and fixtures 1,498,619 1,200,453
Leasehold improvements 7,797,303 4,707,324
----------- -----------
31,595,318 21,638,647
Less accumulated
depreciation and
amortization 4,444,244 3,313,483
----------- -----------
Net Property and
Equipment 27,151,074 18,325,164
----------- -----------
Other Assets:
Long-term inventories 475,000 375,000
Covenant not to compete 33,197 66,389
Patents, net of
accumulated
amortization of
$141,010 and $88,210 1,172,765 504,895
Other 1,770,531 1,317,238
----------- -----------
Total Other Assets 3,451,493 2,263,522
----------- -----------
TOTAL ASSETS $50,671,020 $39,556,304
============ =========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
VARI-L COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Current installments
of long-term debt $ 831,705 $ 596,645
Financed insurance
premiums 21,424 23,730
Trade accounts payable 2,147,313 1,851,057
Accrued expenses 684,366 628,718
----------- ----------
Total Current Liabilities 3,684,808 3,100,150
Bank line of credit 4,755,909 1,813,409
Long-term debt 5,901,205 4,464,021
Deferred income taxes 3,904,386 2,343,654
----------- -----------
Total Liabilities 18,246,308 11,721,234
----------- ----------
Commitments and Contingencies
(Notes 9, 10, 11, and 12)
Stockholders' Equity:
Common stock, $.01 par
value, 50,000,000 shares
authorized, 5,464,134
and 5,251,288 shares
issued and outstanding,
respectively 54,641 52,513
Paid-in capital 22,102,533 20,211,589
Retained earnings 10,286,238 7,589,668
Less loans for purchase
of stock (18,700) (18,700)
----------- -------------
Total Stockholders' Equity 32,424,712 27,835,070
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $50,671,020 $39,556,304
====================== =========== ===========
</TABLE>
VARI-L COMPANY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Net sales $18,063,254 $17,385,364
Cost of products sold 8,100,164 8,365,555
----------- -----------
Gross profit 9,963,090 9,019,809
Other income and expenses:
General and administrative 1,955,510 1,761,111
Engineering 1,155,128 1,026,009
Selling 2,085,432 2,082,336
Profit sharing plan
contribution 4,027 17,803
Interest expense 663,401 767,061
Interest income (328,482) (185,175)
Other 69,704 155,515
----------- ------------
5,604,720 5,624,660
----------- -----------
Income before taxes 4,358,370 3,395,149
Income taxes 1,661,800 1,360,300
----------- -----------
NET INCOME $ 2,696,570 $ 2,034,849
=========== ===========
Basic earnings per share $0.50 $0.45
Diluted earnings per share $0.48 $0.43
</TABLE>
See Accompanying Notes to Financial Statements
VARI-L COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Number Common Paid-In
of Shares Stock Capital
--------- ------ -------
<S> <C> <C> <C>
Balance 12/31/96 3,806,138 $38,061 $12,422,232
Issued from
conversion of
debentures 1,264,778 12,648 6,465,983
Stock options
exercised 171,705 1,717 1,260,939
Issued under employee
stock purchase plan 7,467 75 51,522
Issued under stock
grant plan 1,200 12 10,913
Net income - - -
-------- ------- -----------
Balance 12/31/97 5,251,288 52,513 20,211,589
Stock options
exercised 47,816 478 390,307
Stock warrants
exercised 130,000 1,300 1,119,842
Issued under employee
stock purchase plan 13,530 135 93,357
Issued under stock
grant plan 26,500 265 314,419
Shares repurchased (5000) (50) (26,981)
Net income - - -
--------- ------- ------------
Balances 12/31/98 5,464,134 $54,641 $22,102,533
========= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
Total
Loans for Stock-
Retained Purchase Holders'
Earnings of Stock Equity
-------- -------- --------
<S> <C> <C> <C>
Balance 12/31/96 $ 5,554,819 $(18,700) $17,966,412
Issued from
conversion of
debentures - - 6,478,631
Stock options
exercised - - 1,262,656
Issued under employee
stock purchase plan - - 51,597
Issued under stock
grant plan - - 10,925
Net income 2,034,849 - 2,034,849
------------ ---------- -----------
Balance 12/31/97 7,589,668 (18,700) 7,835,070
Stock options
exercised - - 390,785
Stock warrants
exercised - - 1,121,142
Issued under employee
stock purchase plan - - 93,492
Issued under stock
grant plan - - 314,684
Shares repurchased - - (27,031)
Net income 2,696,570 - 2,696,570
------------ ---------- -----------
Balances 12/31/98 $ 10,286,238 $ (18,700) $32,424,712
============ ========== ===========
</TABLE>
VARI-L COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Net cash provided by operating
activities (Note 15) $ 4,398,283 $ 1,846,726
------------ ------------
Cash flows from investing
activities:
Purchases of property
and equipment (9,956,671) (5,879,494)
------------ ------------
Net cash (used in)
investing activities (9,956,671) (5,879,494)
------------ ------------
Cash flows from financing activities:
Lease acquisition cost repaid - 641,486
Net increase in long-term debt 1,672,244 316,611
Repayments of capital
lease obligations - (16,266)
Borrowings under bank line
of credit 4,433,500 1,420,000
Repayments under bank
line of credit (1,491,000) (1,732,000)
Net repayments for
insurance financing (2,306) (9,922)
Net proceeds from
stock issuances 1,517,460 8,158,714
Acquisition of treasury stock (27,031) -
------------ ------------
Net cash provided by
financing activities 6,102,867 8,778,623
------------ ------------
Net increase in cash 544,479 4,745,855
Beginning cash 5,970,582 1,224,727
Ending cash $ 6,515,061 $ 5,970,582
============ ============
Supplemental disclosure
of cash information:
Cash paid for interest $ 06,842 $ 692,192
============ ============
</TABLE>
See Accompanying Notes to Financial Statements
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Vari-L Company, Inc. is a manufacturer of electronic components
and was founded in 1953. The Company's business is the design,
manufacture, and marketing of microwave signal processing
components and devices used in the communications industry. The
Company's products are sold to original equipment manufacturers
of communication equipment, either in the military or commercial
marketplace in the United States and internationally.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include a mutual fund which is
convertible to a known amount of cash.
INVENTORIES
Inventories are stated at the lower of cost method or market.
Cost is determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and
amortization for the principal components of property and
equipment are computed using straight-line and accelerated
methods over 1 to 12 year estimated useful lives. Other
components of property and equipment are depreciated using units-
of-production methods which recognize the productive lives of
the underlying assets.
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION PLANS
The Company applies Accounting Principles Board (ABP) Opinion
No. 25, Accounting for Stock Issued to Employees, in accounting
for its stock compensation plans. The Company discloses the
fair value of those plans pursuant to Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation.
INCOME TAXES
The Company uses the asset and liability method as identified in
SFAS No. 109, Accounting for Income Taxes.
Earnings Per Share
Basic earnings per common share are based upon the weighted
average shares outstanding. Outstanding stock options,
warrants, and convertible debentures are treated as common stock
equivalents for purposes of computing diluted earnings per share
and represent the difference between basic and diluted weighted
average shares outstanding.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense when
incurred. Research and development expense for the years 1998
and 1997 totaled $1,155,128, and $1,026,009, respectively.
VALUATION OF LONG-LIVED ASSETS
The Company reviews long-lived assets, including intangible
assets, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. The Company establishes guidelines for
determining fair value based on future net cash flows for the
use of the asset and for the measurement of an impairment loss.
Any impairment loss is recorded in the period in which the
recognition criteria are first applied and met.
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Finished goods $ 2,174,094 $ 1,173,847
Work in process 3,364,833 2,405,396
Raw materials 2,210,833 3,202,454
Gold bullion 151,274 155,193
----------- -----------
$ 7,901,034 $ 6,936,890
=========== ===========
Long-term inventories $ 475,000 $ 375,000
=========== ===========
</TABLE>
The gold bullion was purchased for purposes of managing the cost
of gold consumed in the Company's manufacturing process.
The Company's normal operating cycle for certain products may be
in excess of one year, and the Company occasionally takes
advantage of quantity discounts for raw materials. Also, the
Company manufactures some finished goods in anticipation of
customer demands. As a result of these factors, the Company
maintains certain inventory quantities in excess of one year's
supply which are accordingly classified as long-term.
NOTE 3 - PROPERTY, EQUIPMENT, AND OTHER ASSETS
During 1998 and 1997, the Company invested significant amounts
in the remodeling of its leased facilities and expansion of its
automated production capacity. The Company has capitalized
certain direct and overhead costs related to these projects.
Patents are carried at cost less accumulated amortization which
is calculated on a straight-line basis over the estimated useful
lives, which is generally 17 years.
Other assets at December 31, 1998 and 1997 included costs
related to the Company's efforts to obtain ISO 9001 registration
for its commercial products and military/aerospace operations.
These costs consisted of wages, travel, training, consulting,
and related overhead costs. Registration of the Company's
commercial operations was successful in January 1998 and those
costs (approximately $887,000 at December 31, 1998 and 1997,
respectively) are being amortized over a fifteen-year period.
Accumulated amortization at December 31, 1998 was approximately
$57,000. Registration costs for the Company's military and
aerospace operations totaled approximately $467,000 at December
31, 1998. Those costs will be amortized commencing with the
date of successful registration.
Other assets at December 31, 1998 and 1997 also included
approximately $355,000 of costs associated with a joint venture
agreement with the Chinese government; see Note 16.
NOTE 4 - BANK LINE OF CREDIT AND LONG-TERM DEBT
The Company has credit facilities with two banking institutions.
The first consists of a $5.0 million line of credit agreement.
The second consists of two agreements, a $4.1 million term loan
agreement and a $4.0 million revolving equipment term loan
agreement.
LINE OF CREDIT
The line of credit was restructured April 1998 and 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 December 31, 1998, the outstanding balance due under the line
of credit was $4,755,909.
The Company's accounts receivable, inventory, and general
intangible assets secure the line of credit.
TERM LOAN
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 1.5% and then 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
$64,000 are required. At December 31, 1998, the balance due
under the term loan was $4,113,763.
REVOLVING EQUIPMENT TERM LOAN
The Company renewed its revolving equipment term loan for one
year and increased the borrowing provision to $4.0 million.
Interest accrues on the outstanding principal balance of the
revolving equipment term loan at prime plus .25 percent when
advances are made under the revolver. These borrowings can be
converted to term notes at rates which adjust to the three-year
treasury note rate plus 1.95 percent. 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 December
31, 1998, the balance of the outstanding advances under the
revolving loan that had been converted to term notes totaled
$2,551,815. Interest accrues on the outstanding principal
balances of these term notes at rates ranging from 6.10 percent
to 7.72 percent, and monthly principal and interest payments
totaling $36,671 are required.
The Company's property and equipment secure the term loan and
revolving equipment term loan.
Under the credit facilities, the Company must maintain certain
financial ratios and obtain the banks' approvals prior to
entering into various transactions, including the payment of
dividends, disposal of significant assets, changing its
executive management, or entering into direct borrowing
arrangements or contingent liabilities.
PROMISSORY NOTES
The Company has financed the purchase of vehicles with
promissory notes bearing interest at rates ranging from 7.75
percent to 8.50 percent. Monthly principal and interest
payments totaling $2,262 are required. The notes mature from
1999 through 2002.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
----- -----
<S> <C> <C>
Term loan $ 4,113,763 $ 4,532,976
Equipment term loan 2,551,815 495,512
Vehicle notes 67,332 32,178
----------- -----------
6,732,910 5,060,666
Less current installments 831,705 596,645
----------- -----------
Long-term portion $ 5,901,205 $ 4,464,021
=========== ===========
</TABLE>
Scheduled annual principal payments on the bank line of credit and
long-term debt for each of the next five years are as follows:
1999 $ 831,705
2000 5,653,045
2001 1,671,455
2002 3,332,614
2003 -
NOTE 5 - STOCKHOLDERS' EQUITY
During 1997, the Company sold 75 units of debentures and
warrants under a securities purchase agreement. The units
consisted of $7,500,000 in four-year, seven percent
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. The debentures plus
accrued interest of approximately $97,000 were subsequently
converted into 1,264,778 common shares. Warrants for the
issuance of 85,000 shares were exercised during 1998.
In connection with the sale of the units, the Company issued
45,000 warrants to the underwriter. These underwriter warrants
were exercised during the first quarter 1998 at an average price
of $6.97 per share.
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES
The provisions for income taxes consisted of:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
---- ----
<S> <C> <C> <C>
Deferred: Federal $1,525,000 $1,194,000
State 136,800 166,300
---------- ----------
Total tax provisions $1,661,800 $1,360,300
========== ==========
</TABLE>
For the years ended December 31, 1998 and 1997, the Company had no current
federal or state income tax liabilities due to net operating losses
generated during those years. The operating losses resulted primarily
from the income tax benefit of stock options exercised and the use of
accelerated depreciation rates for tax purposes. The amount of the losses
available for carryover at December 31, 1998 were approximately $2.3
million (federal) and $3.8 million (state), and expire in varying amounts
through December 31, 2013.
Significant components of deferred tax balances as of December 31, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $4,004,063 $2,719,765
Other, net 798,656 111,549
---------- -----------
Total deferred tax liabilities 4,802,719 2,831,314
Deferred tax assets:
Net operating loss carryovers 898,333 487,660
---------- -----------
Net deferred tax liabilities $3,904,386 $2,343,654
========== ==========
</TABLE>
VARI-L COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES (CONTINUED)
The differences between the U.S. federal statutory rate and the
Company's effective tax rate are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Federal statutory tax rate 34.00% 34.00%
State income taxes, net of
federal benefit 3.30 3.30
Officers' life insurance and other .83 2.77
----- -----
Effective tax rate 38.13% 40.07%
===== =====
</TABLE>
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> Income Shares Per Share
(Numerator)(Denominator) Amount
----------------------- -----------
FOR THE YEAR ENDED DECEMBER 31, 1998:
<S> <C> <C> <C>
Basic earnings per share 2,696,570 5,407,142 $ .50
=========
Effect of dilutive securities:
Stock options - 172,588
Warrants - 30,541
-------
Diluted earnings per share $ 2,696,570 5,610,271 $ .48
=========== ========= ========
FOR THE YEAR ENDED DECEMBER 31, 1997:
Basic earnings per share $ 2,034,849 4,528,423 $ .45
========
Effect of dilutive securities:
Convertible debentures 58,033 185,895
Stock options - 100,611
Warrants - 10,586
----------- ---------
Diluted earnings per share $ 2,092,882 4,825,515 $ .43
=========== ========= ========
</TABLE>
At December 31, 1998, the Company had 5,464,134 common shares
outstanding. The Company issued 217,846 and purchased 5,000 shares
during 1998. For purposes of computing earnings per share, these
shares were weighted for the period of time they were outstanding.
NOTE 8 - STOCK COMPENSATION PLANS
The Company has three stock-based compensation plans which are
described below. The Company applies APB No. 25 in accounting for
its stock compensation plans. For 1998 and 1997, no compensation
cost was recognized for the stock option portion of the plans. Had
compensation cost been determined on the basis of fair value pursuant
to SFAS No. 123, net income and earnings per share would have been
reduced to the following proforma amounts:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Income: As Reported $ 2,696,570 $ 2,034,849
=========== ===========
Pro Forma $ 1,823,750 $ 1,515,746
=========== ===========
Earnings
Per Share:
Basic: As Reported $ .50 $ .45
=========== ===========
Pro Forma $ .34 $ .33
=========== ===========
Diluted: As Reported $ .48 $ .43
=========== ===========
Pro Forma $ .33 $ .33
=========== ===========
</TABLE>
STOCK OPTION PLAN
During 1987, the Company established a nonqualified tandem stock
option/stock appreciation rights plan for key employees. The plan,
which was amended in 1990, 1994 and 1996, provides for the grant of
incentive stock options, nonqualified stock options and stock
appreciation rights to officers, directors or employees of, as well
as advisers and consultants to, the Company.
The Company has reserved 3,000,000 shares of its common stock for
issuance upon exercise of rights and options under the plan.
Typically, rights and options have been granted subject to a vesting
schedule, vesting at the rate of 20 percent per year, becoming fully
vested upon the change of control of the Company, and expiring 10
years from the date of issuance. Certain options granted to senior
management were vested upon issuance or on a shorter vesting
schedule. The exercise price is equal to the fair market value of
the Company's common stock on the grant date or the average of that
value over a stated period of time prior to such date.
The fair value of each option grant is estimated on the grant date
using a binomial option-pricing model with certain weighted-average
assumptions which, for 1998 and 1997 respectively, were: expected
volatility of 78 percent and 55 percent, risk-free interest rates of
5.5 percent and 5.5 percent, and zero dividend yields for both years.
The expected average remaining life of the options were seven years.
The binomial option-pricing valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of its employee stock
options.
Following is a summary of the status of the stock option plan during
1998 and 1997:
<TABLE>
<CAPTION>
Number Weighted Average
of Options Exercise Price
---------- --------------
<S> <C> <C>
Outstanding at January 1, 1997 831,540 $ 7.30
Granted 322,526 10.85
Exercised (171,705) 7.22
Forfeited (14,693) 9.35
---------
Outstanding at December 31, 1997 967,668 8.47
=========
Options exercisable at
December 31, 1997 680,126 8.45
=========
Weighted average fair value
of options granted during 1997 $ 4.42
=========
Outstanding at January 1, 1998 967,668 8.47
Granted 1,042,574 7.68
Exercised 47,816) 6.06
Forfeited (3,390) 8.61
---------
Outstanding at December 31, 1998 1,959,036 7.78
=========
Options exercisable at
December 31, 1998 1,137,571 7.39
=========
Weighted average fair value
of options granted during 1998 $ 2.43
=========
</TABLE>
Following is a summary of the status of stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------- -------------------
Weighted
Average Weighted Weighted
Exercise Remaining Average Average
Price Contractual Exercise Exercise
Range Number Life Price Number Price
----- ------ ---- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$ 2.21 - 3.45 87,000 4.8 Yrs $ 2.21 87,000 $ 2.21
3.45 - 5.18 2,500 6.1 4.58 2,500 4.58
5.18 - 6.90 483,250 4.7 6.34 333,250 6.24
6.90 - 8.63 833,351 7.6 8.31 427,285 8.25
8.63 -10.35 532,935 8.6 9.06 275,536 8.91
10.35 -12.08 15,000 4.5 10.93 7,000 10.98
12.08 -13.80 3,500 8.1 12.69 3,500 12.69
13.80 -15.53 500 7.1 14.95 500 14.95
15.53 -17.25 1,000 7.1 17.02 1,000
--------- ---------
1,929,036 1,137,571
========= =========
</TABLE>
The Company obtained an income tax deduction for the difference
between the market value of the shares issued and exercise prices of
options exercised during 1998 and 1997. This deduction resulted in
income tax benefits to the Company which have been credited to paid-
in capital.
EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an employee stock purchase plan during 1995.
Eligible employees may contribute up to 10 percent of their earnings,
through payroll deductions, to purchase shares of the Company's
common stock. The purchase price is equal to 85 percent of the fair
market value of the stock on specified dates. A total of 800,000
common shares have been reserved under the plan, and the maximum
number of shares to be issued is 200,000 per year. Since the plan is
noncompensatory, no charges to operations are recorded.
EMPLOYEE STOCK PURCHASE PLAN
Employee withholdings during 1998 were approximately $82,000 and were
used to purchase 12,773 shares which were issued January 1999.
Withholdings during 1997 were approximately $94,000. During January
1998, these withholdings were used to purchase 13,530 shares.
Compensation cost for the SFAS No. 123 pro forma amounts was
estimated using a binomial option-pricing model with certain
assumptions similar to those used for the stock option plan. The
weighted-average fair value of those purchase rights granted in 1998
and 1997 was $2.07 and $1.65 per share, respectively.
STOCK GRANT PLAN
During 1996, the Company adopted a stock grant plan under which stock
grants can be made to the Company's officers, directors, employees,
consultants, and advisors. The Company reserved 100,000 shares of
its common stock for issuance under the stock grant plan. The plan
provides for automatic grants of 50 shares per month to nonmanagement
members of the Company's Board of Directors. During 1998 and 1997,
those members received grants for 1,500 and 1,200 common shares,
respectively. Compensation cost charged to operations was measured
by the fair market value of the stock on the date of the grants.
In connection with the executive employment agreements described in
Note 12, 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. The remaining shares are scheduled to
vest in equal amounts during 1999 and 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 four-year term of the employment agreements. For 1998, the
value of the vested stock bonuses, and the related income and payroll
taxes, totaled approximately $559,000. At December 31, 1998, the
unamortized portion of this cost was approximately $489,000, and was
included in Prepaid Expenses.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
NONRELATED PARTY LEASES
The Company leases certain facilities under long-term operating
leases, including a new office and manufacturing facility which the
Company occupied November 1997. Minimum future annual lease payments
over the next five years are as follows:
1999 $ 639,277
2000 643,261
2001 647,383
2002 651,637
2003 656,029
-----------
$ 3,237,587
===========
Rent expense on these leases was $639,101 and $175,049 for 1998 and
1997, respectively.
RELATED PARTY LEASES
Certain facilities are leased under long-term operating leases from
the Company's chairman and a partnership in which he is a partner.
Minimum future annual lease payments over the next five years are as
follows:
1999 $ 168,957
2000 168,957
2001 168,957
2002 159,565
2003 129,615
---------
$ 796,051
=========
Rent expense on these leases was $127,287 for 1998 and $118,953 for
1997.
Contingencies
The Company is contingently liable for guarantees of indebtedness
owed by senior officers to a former officer referred to in Note 10.
The amount of this contingent liability at December 31, 1998 was
approximately $225,000.
NOTE 10 - AGREEMENTS WITH FORMER OFFICERS
The Company is party to agreements with two of its former officers.
Among other items, both agreements provided for a severance package,
a consulting agreement, and a covenant not to compete against the
Company.
The first agreement was dated in 1992. Amounts payable under the
severance provision of this agreement were expensed by the Company
when those amounts became due. As of December 31, 1998, these
amounts were paid in full.
The second agreement was dated November 1996 and was entered into in
connection with the employment agreements described in Note 12. The
Company capitalized $99,581 as the cost of the covenant not to
compete, which represented the total amount of severance pay due the
former officer. The covenant is being amortized using the straight-
line method over the three year life of the covenant.
NOTE 11 - RELATED PARTY TRANSACTIONS
Certain amounts required to be paid to a former officer as part of
her severance agreement were rent on properties owned by the former
officer. These payments totaled $8,595 for 1998 and $25,290 for
1997.
As described in Note 9, the Company leases certain facilities from
the Company's chairman and a partnership in which he is a partner.
NOTE 12 - EMPLOYMENT AGREEMENTS
Effective June 1, 1997, the Company entered into new four-year
employment agreements with its two senior officers which provide for
(i) automatic annual renewals of their full terms, (ii) minimum
annual base salaries during the officers' employment with the
Company, and (iii) severance pay after employment. Severance pay
will be equal to the greater of the senior officer's annual base
salary multiplied by the remaining term of the agreement or 2.99
times the senior officer's average annual compensation over the last
five years in the event of involuntary termination of employment by
the Company. In the case of voluntary retirement, the senior officer
will be entitled to (i) one-half of his annual base salary as
severance pay, (ii) be engaged as a consultant for a period of up to
five years for a fee equal to 50 percent of his annual base
salary, and (iii) a retirement benefit of 25 percent of his annual
base salary. Each of the agreements provide for a bonus of 25,000
shares of the Company's stock, 50 percent of which was vested on June
1, 1997 and April 6, 1998 with the remaining 50 percent vesting 25
percent on each of April 15, 1999 and April 15, 2000 if the senior
officer achieves performance goals set by the Compensation Committee.
All unvested stock bonuses and options and stock appreciation rights
previously granted to the senior officers will fully vest in the
event of a change of control of the Company or an involuntary
termination. In addition, the officers have agreed they will not
compete against the Company for a period of one year after
termination or expiration of their respective employment agreements,
or the period covered by any severance allowance, consulting
arrangement or retirement benefit, whichever is greater. The
Company's Board of Directors has determined that amounts payable to
the officers under the severance pay provisions of the agreements is
adequate consideration for the officers' covenants not to compete.
As described in Note 10, another senior officer retired during
November of 1996. The Company and the retiring officer entered into
a consulting and severance agreement providing for nine months salary
payable over the first year of a three year consulting relationship
in lieu of the benefits provided by the senior officer's employment
agreement.
NOTE 13 - FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by SFAS No. 105, consist
primarily of trade accounts receivable. The Company's products are
sold to original equipment manufacturers of communications equipment,
either in the military or commercial marketplace. In 1998 and 1997,
the Company two largest customers accounted for approximately 27
percent and 24 percent, respectively, of total sales. For 1998,
sales to these two customers totaled approximately $2.9 million and
$1.9 million, respectively. The accounts receivable at December 31,
1998 for these same two customers was approximately $814,000 and
$159,000, respectively. Approximately 43 percent of the Company's
1998 sales were to foreign customers. The Company performs credit
evaluations of its customers but generally does not require
collateral. Receivables due from foreign customers are generally
insured with the Untied States Export-Import Bank. Otherwise,
letters of credit are required of foreign customers.
At times, cash balances in operating checking accounts may exceed
federally insured limits. At December 31, 1998, the Company had
$6,504,722 invested in a mutual fund and a $151,274 gold bullion
investment. The mutual fund invests in United States government
securities and is not otherwise federally insured. The gold bullion
investment is held in street name by a national broker and is not
federally insured.
Disclosure of fair value information about certain financial
instruments, whether or not recognized in the balance sheet, is
required by SFAS No. 107. The carrying amounts of cash and cash
equivalents and gold bullion approximate fair value.
The Company estimates the fair value of short- and long-term debt
using discounted cash flow analysis, based on the Company's current
incremental borrowing rates for similar arrangements. The carrying
amounts of the Company's short-and long-term debt at December 31,
1998 approximate their fair values. The fair value of contingent
liabilities is based on the amounts of the underlying instruments,
which approximates the amounts disclosed in Note 9.
NOTE 14 - RETIREMENT PLANS
During 1990, the Company adopted a qualified profit sharing plan for
its employees. Annual contributions to the plan, which may be in the
form of cash or shares of the Company's stock, are determined by the
Board of Directors at its sole discretion. During 1998 and 1997, the
Company contributed cash of $4,027 and $17,803, respectively, to the
plan.
During 1998, the Company adopted a 401(k) plan to which employees may
contribute up to 15 percent of their pay. Although the Company may
make matching contributions to the plan, none were made for 1998.
NOTE 15 - 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 years ended December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Net Income $ 2,696,570 $ 2,034,849
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation of property
and equipment 1,130,761 716,278
Amortization of other assets 108,903 57,200
Deferred income taxes 1,661,800 1,360,300
Amortization of covenant
not to compete 33,192 33,192
Changes in assets and liabilities:
Decrease (increase) in
accounts receivable 756,009 (2,428,694)
(Increase) decrease in
inventories (1,064,144) 761,086
(Increase) decrease in
prepaid expenses and
other current assets (46,646) 102,858
(Increase) in patents and
other assets (1,230,066) (1,107,414)
Increase in accounts payable 296,256 351,065
Increase in accrued expenses 55,648 43,780
(Decrease) in due to
related party - (77,774)
------------ -----------
Total adjustments 1,701,713 (188,123)
------------ -----------
Net cash provided by
operating activities $ 4,398,283 $ 1,846,726
============ ===========
</TABLE>
NOTE 16 - CHINA JOINT VENTURE
During 1996, the Company entered into a joint venture agreement with
Chen-Hui Company, a governmental corporation of the People's Republic
of China. The original agreement provided for the creation of a
manufacturing company to be owned 51 percent by the Company and 49
percent by Chen-Hui. During December 1998, the agreement was amended
to provide for a sales and distribution arrangement whereby the
products to be marketed will be manufactured by the Company at its
domestic facilities. Also, during December 1998, the Company
received patent protection from the Chinese government for its
products.
As described in Note 3, costs associated with the joint venture
agreement are included in Other Assets at December 31, 1998 and 1997.
With patent protection being received, the Company reclassified these
costs as patent costs effective January 1999.
NOTE 17 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement No. 129, Disclosure of Information about Capital
(SFAS No. 129). In June 1997, the FASB issued Statement No. 130,
Reporting Comprehensive Income (SFAS No. 130), and Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information
(SFAS No. 131). SFAS No. 129 consolidates the existing guidance from
several other pronouncements relating to an entity's capital
structure. SFAS No. 130 establishes new standards for reporting and
displaying comprehensive income and its components. SFAS No. 131
requires disclosure of certain information regarding operating
segments, products and services, geographic areas of operation and
major customers. The Company has no items of comprehensive income as
defined by SFAS No. 130. Also, the Company operates in only one
segment as defined by SFAS No. 131. Accordingly, adoption of these
statements during 1998 had no impact on the Company's financial
position, results of operations, or cash flows.
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS No. 133). SFAS
No. 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities by requiring that all
derivatives be recognized at fair value in the balance sheet, and
that the corresponding gains or losses be reported either in the
statement of operations or as a component of comprehensive income.
SAFS No. 133 is effective for fiscal years beginning after June 15,
1999. The adoption of this statement is expected to have no impact
on the Company, as it does not currently hold any derivative
instruments or engage in hedging activities.
In March 1998, the Accounting Standards Executive Committee released
Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use (SOP No. 98-1). SOP
98-1 requires companies to capitalize certain costs of computer
software developed or obtained for internal use, provided that those
costs are not research and development. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. The Company is
evaluating the requirements of SOP 98-1 and the effects, if any, on
the Company's current policies on accounting for software costs.
NOTE 18 - YEAR 2000 ISSUES (UNAUDITED)
The Company has given serious attention to the potential problems
that could arise from the rollover of computer clocks with two-digit
fields when the year 2000 arrives. The Company is assessing the
effects on both its IT (information technology) and non-IT systems.
This assessment was substantially complete as of December 31, 1998,
except for its survey of suppliers, for which the Company has had a
52 percent response rate. The Company expects to have all
assessment, remediation, and testing completed by the end of August
1999.
During recent years, the Company has automated much of its
manufacturing processes with investments in new machinery and
equipment. Accordingly, computers and software purchased for this
purpose incorporated Year 2000 compliant technology. As a result,
specific costs incurred through December 31, 1998 regarding Year 2000
issues have not been material. The Company anticipates the future,
separately identifiable costs will be less than $50,000.
The Company has also initiated a licensing audit project to ensure
that all software utilized by the Company is properly licensed by the
software provider to be Year 2000 compliant. Also, the Company has
prohibited the purchase of any new hardware without empirical proof
that such hardware is Year 2000 compliant.
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. As described above, the
Company is in the process of surveying those vendors and contractors
regarding their compliance with Year 2000 issues.
With respect to the Company's customer base, most are large, multi-
national customers who are expected to be in timely compliance with
Year 2000 issues.
The Company will have manual backup systems in place to minimize the
impact of any unanticipated Year 2000 problems. In addition, data being
currently generated and collected in those systems is being continuously
archived as a part of the Company's existing business practices.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on any
matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure during the period of this
report.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 1999 annual meeting of
shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 1999 annual meeting of
shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 1999 annual meeting of
shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from the
Company's definitive proxy statement for the 1999 annual meeting of
shareholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Description
----------- -----------
3.1a Restated Articles of Incorporation, as Amended, filed
as Exhibit 4.1 to the Registrant's Form S-8 Registration
Statement (No. 33-88666) and incorporated herein by
reference.
3.1b Articles of Amendment to the Articles of Incorporation
filed as Exhibit 3.1b to Registrant's Form 10-KSB for the
year ended December 31, 1996 and incorporated herein by
reference.
3.2 Restated Bylaws of the Company as adopted by its Board
of Directors on November 4, 1992 filed as Exhibit 3.2 to
the Registrant's Form SB-2 Registration Statement (No. 33-
74704-D) and incorporated herein by reference
4.1 Specimen Certificate for $.01 par value Common Stock
of the Company filed as Exhibit 4.3 to the Registrant's
Form SB-2 Registration Statement (No. 33-74704-D) and
incorporated herein by reference
4.2 Specimen Certificate for Warrant to Purchase Common
Stock of the Company filed as Exhibit 4.4 to the
Registrant's Form SB-2 Registration Statement (No. 33-74704-
D) and incorporated herein by reference
4.3 Rights Agreement with American Securities Transfer,
Inc. dated March 15, 1996 filed as Exhibit 4.2 to
Registrant's Form 8-A/A Registration Statement (No. 0-
23866) and incorporated herein by reference
4.4 Specimen Certificate for Right to Purchase $.01 par
value Common Stock of the Company filed as Exhibit 4.3 to
Registrant's Form 8-A/A Registration Statement (No. 0-
23866) and incorporated herein by reference
4.5 Securities Purchase Agreement between the Registrant
and certain purchasers dated March 4, 1997 filed as Exhibit
4.5 to Registrant's Form S-3 Registration Statement (No.
333-25173) and incorporated herein by reference
4.6 Form of Convertible Subordinated Debenture issued to
the Purchasers under the Securities Purchase Agreement
dated March 4, 1997 filed as Exhibit 4.6 to Registrant's
Form S-3 Registration Statement (No. 333-25173) and
incorporated herein by reference
4.7 Form of Warrant to Purchase Common Stock issued to the
Purchasers under the Securities Purchase Agreement dated
March 4, 1997 filed as Exhibit 4.7 to Registrant's Form S-3
Registration Statement (No. 333-25173) and incorporated
herein by reference
4.8 Form of Warrant to Purchase Common Stock issued to
Neidiger, Tucker, Bruner, Inc. under the Securities
Purchase Agreement dated March 4, 1997 filed as Exhibit 4.8
to Registrant's Form S-3 Registration Statement (No. 333-
25173) and incorporated herein by reference
10.1 Executive Employment Agreement with Joseph H. Kiser,
dated effective June 1, 1997, filed as Exhibit 10.1 to the
Registrant's Form 10-QSB for the quarter ended September
30, 1998 and incorporated herein by reference
10.2 Executive Employment Agreement with David G. Sherman,
dated effective June 1, 1997, filed as Exhibit 10.2 to the
Registrant's Form 10-QSB for the quarter ended September
30, 1998 and incorporated herein by reference
10.3 Executive Employment Agreement with Alwin E. Branson,
dated November 12, 1992, filed as Exhibit 10.3 to the
Registrant's Form SB-2 Registration Statement (No. 33-74704-
D) and incorporated herein by reference
10.4 Tandem Stock Option and Stock Appreciation Rights
Plan, effective as of June 19, 1998 filed as Exhibit 10.7
to the Registrant's Form 10-QSB for the quarter ended
September 30, 1998 and incorporated herein by reference.
10.5 Equipment Lease Agreement dated May 26, 1993 between
the Company and Rossi Hardesty Financial Inc., filed as
Exhibit 10.14 to the Registrant's Form SB-2 Registration
Statement (No. 33-74704-D) and incorporated herein by
reference
10.6 Lease Agreement dated January 1, 1987, between the
Company and J.C. Enterprises for the facility located at
5165 Peoria Street, Denver, Colorado, as amended on
December 6, 1990 and March 23, 1993, filed as Exhibit 10.15
to the Registrant's Form SB-2 Registration Statement (No.
33-74704-D) and incorporated herein by reference
10.7 Amended Lease Agreement dated July 1, 1992 between the
Company and Bello-1 Partnership for the facility located at
11101 East 51st Avenue, Denver Colorado, filed as Exhibit
10.16 to the Registrant's Form SB-2 Registration Statement
(No. 33-74704-D) and incorporated herein by reference
10.8 Consulting Agreement between Carolyn Y. Kiser and the
Company, dated January 31, 1992, as amended March 23, 1993,
filed as Exhibit 10.17 to the Registrant's Form SB-2
Registration Statement (No. 33-74704-D) and incorporated
herein by reference
10.9 Settlement Agreement between the Company, Joseph H.
Kiser, David G. Sherman, Alwin E. Branson and Carolyn Y.
Kiser dated January 31, 1992, as amended March 23, 1993,
filed as Exhibit 10.18 to the Registrant's Form SB-2
Registration Statement (No. 33-74704-D) and incorporated
herein by reference
10.10 Warrant Agreement with American Securities
Transfer, Inc., filed as Exhibit 10.19 to the Registrant's
Form SB-2 Registration Statement (No. 33-74704-D) and
incorporated herein by reference
10.11 Consulting Agreement between the Company and
Neidiger/Tucker/Bruner, Inc. dated April 26, 1994, filed as
Exhibit 10.23 to the Registrant's Form SB-2 Registration
Statement (No. 33-74704-D and incorporated herein by
reference
10.12 Profit Sharing Plan and Trust Agreement, as
amended and restated effective April 19, 1994 filed as
Exhibit 10.16 to the Registrant's Form 10-KSB for the year
ended December 31, 1994 and incorporated herein by
reference
10.13 Assignment of Amended Lease Agreement dated July
1, 1992 between the Company and Bello-1 Partnership from
Bello-1 Partnership to Kenneth L. Bettenhausen and Jean M.
Bettenhausen dated May 26, 1994 for the facility located at
11101 East 51st Avenue, Denver, Colorado filed as Exhibit
10.18 to the Registrant's Form 10-KSB for the year ended
December 31, 1994 and incorporated herein by reference
10.14 Stock Grant Plan effective as of June 19, 1998
filed as Exhibit 10.8 to the Registrant's Form 10-QSB for
the quarter ended September 30, 1998 and incorporated
herein by reference
10.15 Lease Agreement dated July 14, 1995 between the
Company and Joseph H. and Nora L. Kiser, as amended
September 1, 1995, for the facility located at 15556 East
17th Avenue, Denver, Colorado filed as Exhibit 10.21 to the
Registrant's Form 10-KSB for the year ended December 31,
1995 and incorporated herein by reference.
10.16 Term Loan and Credit Agreement between the
Company and Norwest Bank Colorado, National Association,
dated May 17, 1996 filed as Exhibit 10.1 to the
Registrant's Form 10-QSB for the quarter ended June 30,
1996 and incorporated herein by reference.
10.17 Lease Agreement dated March 12, 1997 between the
Company and Five K Investments for the facility located at
11900 E. 49th Avenue, Denver, Colorado filed as Exhibit 10
to the Registrant's Form 10-QSB for the quarter ended
September 30, 1997 and incorporated herein by reference.
10.18 Business Loan Agreement between the Company and
Bank One, Colorado, N.A., dated August 13, 1997 with a
maturity date of August 13, 1998 filed as Exhibit 10.18 to
the Registrant's Form 10-KSB for the year ended December
31, 1997 and incorporated herein by reference.
10.19 Business Loan Agreement between the Company and
Bank One, Colorado, N.A., dated August 13, 1997 with a
maturity date of February 13, 2001 filed as Exhibit 10.19
to the Registrant's Form 10-KSB for the year ended December
31, 1997 and incorporated herein by reference.
10.20 Letter Agreement between the Company and Norwest
Bank, Colorado N.A., dated April 30, 1998 and filed as
Exhibit 10 to the Registrant's Form 10-QSB for the quarter
ended June 30, 1998 and incorporated herein by reference.
10.21 Amendment to Business Loan Agreement between the
Company and Bank One, Colorado N.A., dated effective August
21, 1998 and filed as Exhibit 10.3 to the Registrant's Form
10-QSB for the quarter ended September 30, 1998 and
incorporated herein by reference.
10.22 Amendment to Business Loan Agreement between the
Company and Bank One, Colorado N.A., dated effective August
13, 1998 and filed as Exhibit 10.4 to the Registrant's Form
10-QSB for the quarter ended September 30, 1998 and
incorporated herein by reference.
10.23 Second Amendment to Lease Agreement dated July
14, 1995 between the Company and Joseph H. Kiser and Nora
L. Kiser for the facility located at 15556 East 17th
Avenue, Denver, Colorado, as amended September 31, 1995 and
July 31, 1998 and filed as Exhibit 10.5 to the Registrant's
Form 10-QSB for the quarter ended September 30, 1998 and
incorporated herein by reference.
10.24 Third Amendment to Lease Agreement dated January
1, 1987 between the Company and J.C. Enterprises for the
facility located at 5165 Peoria Street, Denver, Colorado,
as amended December 6, 1990, March 23, 1993, and October
30, 1998 and filed as Exhibit 10.6 to the Registrant's Form
10-QSB for the quarter ended September 30, 1998 and
incorporated herein by reference.
10.25 Employment Agreement with Daniel J. Wilmot dated
January 1, 1998 and filed as Exhibit 10.9 to the
Registrant's Form 10-QSB for the quarter ended September
30, 1998 and incorporated herein by reference.
10.26 Employment Agreement with Derek L. Bailey dated
January 1, 1998 and filed as Exhibit 10.10 to the
Registrant's Form 10-QSB for the quarter ended September
30, 1998 and incorporated herein by reference.
10.27 Employment Agreement with Jon L. Clark dated
January 1, 1998 and filed as Exhibit 10.11 to the
Registrant's Form 10-QSB for the quarter ended September
30, 1998 and incorporated herein by reference.
10.28 Employee Stock Purchase Plan effective as of
December 31, 1998 filed herewith.
23 Consent of Haugen, Springer & Co. to the incorporation
by reference of their financial statements in the
Registrant's Form S-8 Registration Statements (No. 33-
88666), (No. 33-81045) and (No. 333-45137) and the
Registrant's Form S-3 Registration Statement (No. 333-
25173).
27 Financial Data Schedule
REPORTS ON FORM 8-K
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VARI-L COMPANY, INC.
By:/s/David G. Sherman
David G. Sherman,
President
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/Joseph H. Kiser Date: March 15, 1999
Joseph H. Kiser, Chairman of the Board,
Chief Scientific Officer
and Director
/s/David G. Sherman Date: March 15, 1999
David G. Sherman, President,
Chief Executive Officer, Principal
Executive Officer, and Director
/s/Jon L. Clark Date: March 15, 1999
Jon L. Clark, Vice President of Finance,
Chief Financial Officer and
Principal Accounting and Financial Officer
/s/Sarah L. Booher Date: March 15, 1999
Sarah L. Booher, Director
/s/David A. Lisowski Date: March 15, 1999
David A. Lisowski, Director
/s/Anthony B. Petrelli Date: March 15, 1999
Anthony B. Petrelli, Director
EXHIBIT INDEX
No. Description Method of Filing
- --- ----------- ----------------
10 Employee Stock Purchase Plan
effective as of December 31,
1998
Filed herewith electronically
23 Consent of Haugen, Springer & Co.
to the incorporation by reference
of their financial statements in
the Registrant's Form S-8
Registration Statements (No. 33-88666),
(No. 33-81045) and (No. 333-45137) and
the Registrant's Form S-3 Registration
Statement (No. 333-25173)
Filed herewith electronically
27 Financial Data Schedule
Filed herewith electronically
VARI-L COMPANY, INC. EMPLOYEE STOCK PURCHASE PLAN
AS OF DECEMBER 31, 1998
ARTICLE I. - PURPOSE
1.01. PURPOSE.
The Vari-L Company, Inc. Employee Stock Purchase Plan is intended to
provide a method whereby employees of Vari-L Company, Inc. (hereinafter
referred to, unless the context otherwise requires, as the "Company") will
have an opportunity to acquire a proprietary interest in the Company
through the purchase of shares of the Common Stock of the Company. It is
the intention of the Company to have the Plan qualify as an "Employee
Stock Purchase Plan" under Section 423 of the Internal Revenue Code of
1986, as amended (the "Code"). The provisions of the Plan shall be
construed so as to extend and limit participation in a manner consistent
with the requirements of that section of the Code.
ARTICLE II. - DEFINITIONS
2.01. BASE PAY.
"Base Pay" shall mean regular straight-time earnings including
payments for overtime, shift premium, bonuses and other special payments,
commissions and other marketing incentive payments.
2.02. COMMITTEE.
"Committee" shall mean the individuals described in Article XI.
2.03. EMPLOYEE.
"Employee" means any person who is customarily employed on a full-
time or part-time basis by the Company and is regularly scheduled to work
more than 20 hours per week.
ARTICLE III. - ELIGIBILITY AND PARTICIPATION
3.01. INITIAL ELIGIBILITY.
Any employee who shall have completed one hundred eighty (180) days'
employment and shall be employed by the Company on the date his
participation in the Plan is to become effective shall be eligible to
participate in offerings under the Plan which commence on or after such
180-day period has concluded.
3.02. LEAVE OF ABSENCE.
For purposes of participation in the Plan, a person on leave of
absence shall be deemed to be an employee for the first 180 days of such
leave of absence and such employee's employment shall be deemed to have
terminated at the close of business on the 180th day of such leave of
absence unless such employee shall have returned to regular full-time or
part-time employment (as the case may be) prior to the close of business
on such 180th day. Termination by the Company of any employee's leave of
absence, other than termination of such leave of absence on return to full-
time or part-time employment, shall terminate an employee's employment for
all purposes of the Plan and shall terminate such employee's participation
in the Plan and right to exercise any option.
3.03. RESTRICTIONS ON PARTICIPATION.
Notwithstanding any provisions of the Plan to the contrary, no
employee shall be granted an option to participate in the Plan:
(a) if, immediately after the grant, such employee would own stock,
and/or hold outstanding options to purchase stock, possessing 5% or more
of the total combined voting power or value of all classes of stock of the
Company (for purposes of this paragraph, the rules of Section 424(d) of
the Code shall apply in determining stock ownership of any employee); or
(b) which permits his rights to purchase stock under all employee
stock purchase plans of the Company to accrue at a rate which exceeds
$25,000 in fair market value of the stock (determined at the time such
option is granted) for each calendar year in which such option is
outstanding.
3.04. COMMENCEMENT OF PARTICIPATION.
An eligible employee may become a participant by completing an
authorization for a payroll deduction on the form provided by the Company
and filing it with the President of the Company on or before the date set
therefor by the Committee, which date shall be prior to the end of the
third pay period after the Offering Commencement Date for the Offering (as
such terms are defined below). Payroll deductions for a participant shall
commence on the applicable Offering Commencement Date when his
authorization for a payroll deduction becomes effective and shall end on
the Offering Termination Date of the Offering to which such authorization
is applicable unless sooner terminated by the participant as provided in
Article VIII.
ARTICLE IV. - OFFERINGS
4.01. ANNUAL OFFERINGS.
The Plan was originally implemented by four annual offerings of the
Company's Common Stock beginning on the 10th day of March, 1995 and the
1st day of January in each of the years 1996, 1997, and 1998, each
offering terminating on December 31 of the same year (the "Pre-1999
Offerings"). The Company will make four additional annual offerings of
the Company's Common Stock (the "Offerings") beginning on January 1, 1999
and on the first day of January in each of the years 2000, 2001 and 2002;
provided, however, that each annual Offering may, in the discretion of the
Committee exercised prior to the commencement thereof, be divided into two
six-month Offerings commencing, respectively, on January 1 and July 1 of
such year and terminating on June 30 of such year and December 31 of such
year, respectively. The maximum number of shares issued in the respective
years shall be:
- From January 1, 1999 to December 31, 1999: 189,216 shares.
- From January 1, 2000 to December 31, 2000: 189,216 shares plus
unissued shares from the prior Offerings, whether offered or not.
- From January 1, 2001 to December 31, 2001: 189,216 shares plus
unissued shares from the prior Offerings, whether offered or not.
- From January 1, 2002 to December 31, 2002: 189,216 shares plus
unissued shares from the prior Offerings, whether offered or not.
If a six-month Offering is made, the maximum number of shares to be issued
shall be one-half (1/2) of the number of shares set forth for the annual
period in which the six-month Offering falls, plus, if the Offering is a
July 1 to December 31 Offering, unissued shares, whether offered or not,
from the immediately preceding six-month Offering. As used in the Plan,
"Offering Commencement Date" means the January 1 or July 1, as the case
may be, on which the particular Offering begins and "Offering Termination
Date" means the June 30 or December 31, as the case may be, on which the
particular Offering terminates.
ARTICLE V. - PAYROLL DEDUCTIONS
5.01. AMOUNT OF DEDUCTION.
At the time a participant files his authorization for payroll
deduction, he shall elect to have deductions made from his pay on each
payday during the time he is a participant in an Offering at the rate of
1, 2, 3, 4, 5, 6, 7, 8, 9 or 10% of his base pay in effect at the Offering
Commencement Date of such Offering. In the case of a part-time, hourly
employee, such employee's base pay during an Offering shall be determined
by multiplying such employee's hourly rate of pay in effect on the
Offering Commencement Date by the number of regularly scheduled hours of
work for such employee during such Offering.
5.02. PARTICIPANT'S ACCOUNT.
All payroll deductions made for a participant shall be credited to
his account under the Plan. A participant may not make any separate cash
payment into such account except when on leave of absence and then only as
provided in Section 5.04.
5.03. CHANGES IN PAYROLL DEDUCTIONS.
A participant may discontinue his participation in the Plan as
provided in Article VIII, but no other change can be made during an
Offering and, specifically, a participant may not alter the amount of his
payroll deductions for that Offering.
5.04. LEAVE OF ABSENCE.
If a participant goes on a leave of absence, such participant shall
have the right to elect: to withdraw the balance in his or her account
pursuant to Section 7.02, to discontinue contributions to the Plan but
remain a participant in the Plan, or remain a participant in the Plan
during such leave of absence, authorizing deductions to be made from
payments by the Company to the participant during such leave of absence
and undertaking to make cash payments to the Plan at the end of each
payroll period to the extent that amounts payable by the Company to such
participant are insufficient to meet such participant's authorized Plan
deductions.
ARTICLE VI. - GRANTING OF OPTION
6.01. NUMBER OF OPTION SHARES.
On the Commencement Date of each Offering, a participating employee
shall be deemed to have been granted an option to purchase a maximum
number of shares of the stock of the Company equal to an amount determined
as follows: an amount equal to (i) that percentage of the employee's base
pay which he has elected to have withheld (but not in any case in excess
of 10%) multiplied by (ii) the employee's base pay during the period of
the offering (iii) divided by 85% of the market value of the stock of the
Company on the applicable Offering Commencement Date. The market value of
the Company's stock shall be determined as provided in paragraphs (a) and
(b) of Section 6.02 below. An employee's base pay during the period of an
offering shall be determined by multiplying, in the case of a one-year
offering, his normal weekly rate of pay (as in effect on the last day
prior to the Commencement Date of the particular offering) by 52 or the
hourly rate by 2,080 or, in the case of a six-month offering, by 26 or
1,040, as the case may be, provided that, in the case of a part-time,
hourly employee, the employee's base pay during the period of an offering
shall be determined by multiplying such employee's hourly rate by the
number of regularly scheduled hours of work for such employee during such
Offering.
6.02. OPTION PRICE.
The option price of stock purchased with payroll deductions made
during such annual offering for a participant therein shall be the lower
of:
(a) 85% of the closing price of the stock on the nearest business
day prior to the Offering Commencement Date on which trading occurred on
the NASDAQ Small Cap Market (based on the average of the closing bid and
closing ask prices) or the NASDAQ National Market System; or
(b) 85% of the closing price of the stock on the Offering
Termination Date or the nearest prior business day on which trading
occurred on the NASDAQ Small Cap Market (based on the average of the
closing bid and closing ask prices) or the NASDAQ National Market System.
If the Common Stock of the Company is not admitted to trading on any of
the aforesaid dates for which closing prices of the stock are to be
determined, then reference shall be made to the fair market value of the
stock on that date, as determined on such basis as shall be established or
specified for the purpose by the Committee.
ARTICLE VII. - EXERCISE OF OPTION
7.01. AUTOMATIC EXERCISE.
Unless a participant gives written notice to the Company as
hereinafter provided, his option for the purchase of stock with payroll
deductions made during any offering will be deemed to have been exercised
automatically on the Offering Termination Date applicable to such
offering, for the purchase of the number of full shares of stock which the
accumulated payroll deductions in his account at that time will purchase
at the applicable option price (but not in excess of the number of shares
for which options have been granted to the employee pursuant to Section
6.01), and any excess in his account at that time will be returned to him.
7.02. WITHDRAWAL OF ACCOUNT.
By written notice to the Treasurer of the Company, at any time prior
to the Offering Termination Date applicable to any Offering, a participant
may elect to withdraw all the accumulated payroll deductions in his
account at such time.
7.03. FRACTIONAL SHARES.
Fractional shares will not be issued under the Plan and any
accumulated payroll deductions which would have been used to purchase
fractional shares will be returned to any employee promptly following the
termination of an Offering, without interest.
7.04. TRANSFERABILITY OF OPTION.
During a participant's lifetime, options held by such participant
shall be exercisable only by that participant.
7.05. DELIVERY OF STOCK.
As promptly as practicable after the Offering Termination Date of
each Offering, the Company will deliver to each participant, as
appropriate, the stock purchased upon exercise of his option.
ARTICLE VIII. - WITHDRAWAL
8.01. IN GENERAL.
As indicated in Section 7.02, a participant may withdraw payroll
deductions credited to his account under the Plan at any time by giving
written notice to the Treasurer of the Company. All of the participant's
payroll deductions credited to his account will be paid to him promptly
after receipt of his notice of withdrawal, and no further payroll
deductions will be made from his pay during such Offering. The Company
may, at its option, treat any attempt to borrow by an employee on the
security of his accumulated payroll deductions as an election, under
Section 7.02, to withdraw such deductions.
8.02. EFFECT ON SUBSEQUENT PARTICIPATION.
A participant's withdrawal from any Offering will not have any effect
upon his eligibility to participate in any succeeding Offering or in any
similar plan which may hereafter be adopted by the Company; except that
persons subject to the reporting requirements of Section 16 of the
Securities Exchange Act of 1934, as amended, may not elect to participate
in a succeeding Offering commencing within six months of a withdrawal by
such individual.
8.03. TERMINATION OF EMPLOYMENT.
Upon termination of the participant's employment for any reason,
including retirement (but excluding death while in the employ of the
Company or continuation of a leave of absence for a period beyond 180
days), the payroll deductions credited to his account will be returned to
him, or, in the case of his death subsequent to the termination of his
employment, to the person or persons entitled thereto under Section 12.01.
8.04. TERMINATION OF EMPLOYMENT DUE TO DEATH.
Upon termination of the participant's employment because of his
death, his beneficiary (as defined in Section 12.01) shall have the right
to elect, by written notice given to the Treasurer of the Company prior to
the earlier of the Offering Termination Date or the expiration of a period
of sixty (60) days commencing with the date of the death of the
participant, either:
(a) to withdraw all of the payroll deductions credited to the
participant's account under the Plan, or
(b) to exercise the participant's option for the purchase of stock
on the Offering Termination Date next following the date of the
participant's death for the purchase of the number of full shares of stock
which the accumulated payroll deductions in the participant's account at
the date of the participant's death will purchase at the applicable option
price, and any excess in such account will be returned to said
beneficiary, without interest.
In the event that no such written notice of election shall be duly
received by the President of the Company, the beneficiary shall
automatically be deemed to have elected, pursuant to paragraph (b), to
exercise the participant's option.
8.05. LEAVE OF ABSENCE.
A participant on leave of absence shall, subject to the election made
by such participant pursuant to Section 5.04, continue to be a participant
in the Plan so long as such participant is on continuous leave of absence.
A participant who has been on leave of absence for more than 180 days and
who therefore is not an employee for the purpose of the Plan shall not be
entitled to participate in any offering commencing after the 180th day of
such leave of absence. Notwithstanding any other provisions of the Plan,
unless a participant on leave of absence returns to regular full-time or
part-time employment with the Company at the earlier of: the termination
of such leave of absence or three months from the 180th day of such leave
of absence, such participant's participation in the Plan shall terminate
on whichever of such dates first occurs.
ARTICLE IX. - INTEREST
9.01. PAYMENT OF INTEREST.
No interest will be paid or allowed on any money paid into the Plan
or credited to the account of any participant employee.
ARTICLE X. - STOCK
10.01. MAXIMUM SHARES.
The maximum number of shares which shall be issued under the Plan,
subject to adjustment upon changes in capitalization of the Company as
provided in Section 12.04 shall not exceed 800,000 shares for all
Offerings, including the shares issued in the Pre-1999 Offerings,
consisting of 43,136 shares issued in Pre-1999 Offerings, 189,216 shares
in each annual Offering (94,608 shares in each six-month Offering) plus in
each Offering all unissued shares from prior Offerings, whether offered or
not. If the total number of shares for which options are exercised on any
Offering Termination Date in accordance with Article VI exceeds the
maximum number of shares for the applicable Offering, the Company shall
make a pro rata allocation of the shares available for delivery and
distribution in a nearly uniform manner as it shall be practicable and as
it shall determine to be equitable, and the balance of payroll deductions
credited to the account of each participant under the Plan shall be
returned to him as promptly as possible.
10.02. PARTICIPANT'S INTEREST IN OPTION STOCK.
The participant will have no interest in stock covered by his option
until such option has been exercised.
10.03. REGISTRATION OF STOCK.
Stock to be delivered to a participant under the Plan will be
registered in the name of the participant, or, if the participant so
directs by written notice to the Treasurer of the Company prior to the
Offering Termination Date applicable thereto, in the names of the
participant and one such other person as may be designated by the
participant, as joint tenants with rights of survivorship or as tenants by
the entireties, to the extent permitted by applicable law.
10.04. RESTRICTIONS ON EXERCISE.
The Board of Directors may, in its discretion, require as conditions
to the exercise of any option that the shares of Common Stock reserved for
issuance upon the exercise of the option shall have been duly qualified,
upon official notice of issuance, upon NASDAQ, and that either:
(a) a Registration Statement under the Securities Act of 1933, as
amended, with respect to said shares shall be effective, or
(b) the participant shall have represented at the time of purchase,
in form and substance satisfactory to the Company, that it is his
intention to purchase the shares for investment and not for resale or
distribution.
ARTICLE XI. - ADMINISTRATION
11.01. APPOINTMENT OF COMMITTEE.
The Executive Committee of the Board of Directors (the "Committee")
shall administer the Plan.
11.02. AUTHORITY OF COMMITTEE.
Subject to the express provisions of the Plan, the Committee shall
have plenary authority in its discretion to interpret and construe any and
all provisions of the Plan, to adopt rules and regulations for
administering the Plan, and to make all other determinations deemed
necessary or advisable for administering the Plan. The Committee's
determination on the foregoing matters shall be conclusive.
11.03. RULES GOVERNING THE ADMINISTRATION OF THE COMMITTEE.
The Board of Directors may from time to time appoint members of the
Committee in substitution for or in addition to members previously
appointed and may fill vacancies, however caused, in the Committee. The
Committee may select one of its members as its Chairman and shall hold its
meetings at such times and places as it shall deem advisable and may hold
telephonic meetings. A majority of its members shall constitute a quorum.
All determinations of the Committee shall be made by a majority of its
members. The Committee may correct any defect or omission or reconcile
any inconsistency in the Plan, in the manner and to the extent it shall
deem desirable. Any decision or determination reduced to writing and
signed by a majority of the members of the Committee shall be as fully
effective as if it had been made by a majority vote at a meeting duly
called and held. The Committee may appoint a secretary and shall make
such rules and regulations for the conduct of its business as it shall
deem advisable.
ARTICLE XII. - MISCELLANEOUS
12.01. DESIGNATION OF BENEFICIARY.
A participant may file a written designation of a beneficiary who is
to receive any stock and/or cash. Such designation of beneficiary may be
changed by the participant at any time by written notice to the Treasurer
of the Company. Upon the death of a participant and upon receipt by the
Company of proof of identity and existence at the participant's death of a
beneficiary validly designated by him under the Plan, the Company shall
deliver such stock and/or cash to such beneficiary. In the event of the
death of a participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such participant's
death, the Company shall deliver such stock and/or cash to the executor or
administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the
Company, in its discretion, may deliver such stock and/or cash to the
spouse or to any one or more dependents of the participant as the Company
may designate. No beneficiary shall, prior to the death of the
participant by whom he has been designated, acquire any interest in the
stock or cash credited to the participant under the Plan.
12.02. TRANSFERABILITY.
Neither payroll deductions credited to a participant's account nor
any rights with regard to the exercise of an option or to receive stock
under the Plan may be assigned, transferred, pledged, or otherwise
disposed of in any way by the participant other than by will or the laws
of descent and distribution. Any such attempted assignment, transfer,
pledge or other disposition shall be without effect, except that the
Company may treat such act as an election to withdraw funds in accordance
with Section 7.02.
12.03. USE OF FUNDS.
All payroll deductions received or held by the Company under this
Plan may be used by the Company for any corporate purpose and the Company
shall not be obligated to segregate such payroll deductions.
12.04. ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
(a) If, while any options are outstanding, the outstanding shares of
Common Stock of the Company have increased, decreased, changed into, or
been exchanged for a different number or kind of shares or securities of
the Company through reorganization, merger, recapitalization,
reclassification, stock split, reverse stock split or similar transaction,
appropriate and proportionate adjustments may be made by the Committee in
the number and/or kind of shares which are subject to purchase under
outstanding options and on the option exercise price or prices applicable
to such outstanding options. In addition, in any such event, the number
and/or kind of shares which may be offered in the Offerings described in
Article IV hereof shall also be proportionately adjusted. No adjustments
shall be made for stock dividends. For the purposes of this paragraph,
any distribution of shares to shareholders in an amount aggregating 20% or
more of the outstanding shares shall be deemed a stock split and any
distributions of shares aggregating less than 20% of the outstanding
shares shall be deemed a stock dividend.
(b) Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving
corporation, or upon a sale of substantially all of the property or stock
of the Company to another corporation, the holder of each option then
outstanding under the Plan will thereafter be entitled to receive at the
next Offering Termination Date upon the exercise of such option for each
share as to which such option shall be exercised, as nearly as reasonably
may be determined, the cash, securities and/or property which a holder of
one share of the Common stock was entitled to receive upon and at the time
of such transaction. The Board of Directors shall take such steps in
connection with such transactions as the Board shall deem necessary to
assure that the provisions of this Section 12.04 shall thereafter be
applicable, as nearly as reasonably may be determined, in relation to the
said cash, securities and/or property as to which such holder of such
option might thereafter be entitled to receive.
12.05. AMENDMENT AND TERMINATION.
The Board of Directors shall have complete power and authority to
terminate or amend the Plan; provided, however, that the Board of
Directors shall not, without the approval of the stockholders of the
Corporation (i) increase the maximum number of shares which may be issued
under any Offering (except pursuant to Section 12.04); or (ii) amend the
requirements as to the class of employees eligible to purchase stock under
the Plan. No termination, modification, or amendment of the Plan may,
without the consent of an employee then having an option under the Plan to
purchase stock, adversely affect the rights of such employee under such
option.
12.06. EFFECTIVE DATE.
The Plan shall become effective as of March 10, 1995.
12.07. NO EMPLOYMENT RIGHTS.
The Plan does not, directly or indirectly, create any right for the
benefit of any employee or class of employees to purchase any shares under
the Plan, or create in any employee or class of employees any right with
respect to continuation of employment by the Company, and it shall not be
deemed to interfere in any way with the Company's right to terminate, or
otherwise modify, an employee's employment at any time.
12.08. EFFECT OF PLAN.
The provisions of the Plan shall, in accordance with its terms, be
binding upon, and inure to the benefit of, all successors of each employee
participating in the Plan, including, without limitation, such employee's
estate and the executors, administrators or trustees thereof, heirs and
legatees, and any receiver, trustee in bankruptcy or representative of
creditors of such employee.
12.09. GOVERNING LAW.
The laws of the State of Colorado will govern all matters relating to
this Plan except to the extent it is superseded by the laws of the United
States.
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors and Stockholders
Vari-L Company, Inc.
We consent to the incorporation by reference of our report on the
financial statements of Vari-L Company, Inc. as of December 31, 1998 and
1997 and for the years then ended in the Company's Registration Statements
on Form S-8 (No. 33-88666), (No. 33-81045), and (No. 333-45137) and the
Registration Statement on Form S-3 (No. 333-25173).
/s/Haugen, Springer & Co., P.C.
HAUGEN, SPRINGER & CO., P.C.
March 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Vari-L's
audited financial statements prepared as of December 31, 1998 and for the
twelve-month period then ended, included with its 10-KSB filing with the
Securities and Exchange Commission for the year ended December 31, 1998, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,515
<SECURITIES> 0
<RECEIVABLES> 4,440
<ALLOWANCES> 23
<INVENTORY> 7,901
<CURRENT-ASSETS> 20,068
<PP&E> 31,595
<DEPRECIATION> 4,444
<TOTAL-ASSETS> 50,671
<CURRENT-LIABILITIES> 3,685
<BONDS> 0
0
0
<COMMON> 55
<OTHER-SE> 32,370
<TOTAL-LIABILITY-AND-EQUITY> 50,671
<SALES> 18,063
<TOTAL-REVENUES> 18,391
<CGS> 8,100
<TOTAL-COSTS> 8,100
<OTHER-EXPENSES> 5,270
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 663
<INCOME-PRETAX> 4,358
<INCOME-TAX> 1,662
<INCOME-CONTINUING> 2,696
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,696
<EPS-PRIMARY> 0.50<F1>
<EPS-DILUTED> 0.48
<FN>
<F1>40. EPS Basic Earnings Per Share.
</FN>
</TABLE>
