<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: Commission File No.:
April 30, 1996 0-24338
VARIFLEX, INC.
(Exact name of Registrant as specified in its charter)
Delaware 95-3164466
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
5152 North Commerce Avenue
Moorpark, California 93021
(Address of principal executive offices)
Registrant's telephone number, including area code:
(805) 523-0322
---------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of June 10, 1996, there were 6,025,397 shares of Common Stock, $.001 par
value, outstanding.
<PAGE>
VARIFLEX, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
April 30, 1996 and July 31, 1995................................... 3
Consolidated Statements of Income
Three Month and Nine Month Periods Ended April 30, 1996 and 1995... 4
Consolidated Statements of Cash Flows
Nine Months Ended April 30, 1996 and 1995.......................... 5
Notes to Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 7
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K................................... 11
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
VARIFLEX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
April 30, July 31,
1996 1995
--------- ---------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $1,250 $6,617
Marketable equity securities available for sale 25 25
Short-term debt securities available for sale - 5
Trade accounts receivable, less allowances of $941 and
$911 as of April 30, 1996 and July 31, respectively 18,912 18,251
Inventory (finished goods) 11,143 9,366
Inventory (raw materials and work-in-process) 1,284 1,027
Deferred income taxes 1,316 1,288
Prepaid expenses and other current assets 2,006 1,202
------- -------
Total current assets 35,936 37,781
Property and equipment, net 2,615 1,519
Long-term debt securities available for sale 12,427 10,858
Other assets 940 1,063
------- -------
Total assets $51,918 $51,221
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Trade acceptances payable $885 $842
Accounts payable 1,675 1,166
Accrued warranty 522 903
Accrued salaries and related liabilities 601 612
Accrued co-op advertising 1,538 2,202
Other accrued expenses 565 983
Current portion of capital leases 51 51
------- -------
Total current liabilities 5,837 6,759
Capital leases 54 103
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares
authorized, none issued and outstanding - -
Common stock, $.001 par value, 40,000,000 shares
authorized, 6,025,397 issued and outstanding as
of April 30, 1996 and July 31, 1995 9 9
Additional paid-in capital 21,023 21,023
Retained earnings 24,995 23,327
------- -------
Total stockholders' equity 46,027 44,359
------- -------
Total liabilities and stockholders' equity $51,918 $51,221
======= =======
</TABLE>
See accompanying notes.
3
<PAGE>
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Three months ended
April 30, April 30,
----------------- ------------------
1996 1995 1996 1995
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales $59,514 $81,809 $21,707 $23,823
Cost of goods sold 47,646 61,863 17,410 18,274
------- ------- ------- ------
Gross profit 11,868 19,946 4,297 5,549
------- ------- ------- ------
Operating expenses:
Selling and marketing 5,900 6,006 2,151 1,960
General and administrative 3,730 3,735 1,216 1,326
------- ------- ------- ------
Total operating expenses 9,630 9,741 3,367 3,286
------- ------- ------- ------
Income from operations 2,238 10,205 930 2,263
------- ------- ------- ------
Other income (expense):
Interest expense (92) (308) (2) (95)
Interest income and other 548 466 182 144
------- ------- ------- ------
Total other income (expense) 456 158 180 49
------- ------- ------- ------
Income before provision for income taxes 2,694 10,363 1,110 2,312
Provision for income taxes 941 3,988 403 890
------- ------- ------- ------
Net income $1,753 $6,375 $707 $1,422
======= ======= ======= ======
Earnings per share of common stock:
Net income per share $0.29 $1.05 $0.12 $0.24
======= ======= ======= ======
Weighted average number of common shares
outstanding, including common share equivalents 6,039 6,051 6,039 6,023
======= ======= ======= ======
</TABLE>
See accompanying notes.
4
<PAGE>
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
April 30,
1996 1995
------ ------
<S> <C> <C>
Operating activities
Net income $1,753 $6,375
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,314 570
Deferred income taxes (28) (284)
Loss on sale of marketable securities - 8
Changes in operating assets and liabilities:
Trade accounts receivable (661) (1,125)
Inventory (2,034) (6,437)
Prepaid expenses and other current assets (804) (467)
Trade acceptances payable 43 (4,128)
Accounts payable 509 (22)
Other current liabilities (1,474) 719
------ ------
Net cash used in operating activities (1,382) (4,791)
------ ------
Investing activities
Purchases of property and equipment (2,274) (1,108)
Purchases of available-for-sale securities (11,985) (2,023)
Net proceeds from sales of available-for-sale securities 10,200 4,476
Other assets 123 122
------ ------
Net cash provided by (used in) investing activities (3,936) 1,467
------ ------
Financing activities
Net borrowings on revolving line of credit - 3,241
Long-term obligations, net (49) 82
------ ------
Net cash provided by (used in) financing activities (49) 3,323
------ ------
Net decrease in cash (5,367) (1)
Cash at beginning of period 6,617 766
------ ------
Cash at end of period $1,250 $765
====== ======
Cash paid during the period for:
Interest $83 $308
Income taxes $1,545 $4,471
</TABLE>
See accompanying notes.
5
<PAGE>
VARIFLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month and nine month periods
ended April 30, 1996 are not necessarily indicative of the results that may be
expected for the full fiscal year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the fiscal year ended July 31, 1995.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
---------------------
NET SALES. Net sales for the third quarter of fiscal 1996 (the quarter
---------
ended April 30, 1996) totaled $21,707,000, representing a decrease of
$2,116,000, or 9%, from net sales of $23,823,000 for the third quarter of fiscal
1995. This decrease was due to decreases in sales volume of the Company's in-
line skate, athletic protective equipment, and bicycle and recreational safety
helmet lines, primarily attributable to a general weakness in retail sales,
particularly in the mass merchandise market segment, coupled with poor weather
conditions sustained throughout the quarter in many parts of the United States
this year in comparison with the same period last year. The effect of the
decreases in these three product categories was partially offset by an increase
in sales of skateboards.
With respect to in-line skates, gross sales for the third quarter of fiscal
1996 totaled $16,198,000, a decrease of $3,313,000, or 17%, compared to the
third quarter of fiscal 1995, while unit volume decreased by approximately
143,000 units, or 16%. As discussed above, this decrease is primarily due to a
soft retail market and poor weather throughout much of the country during the
quarter. Contributing to the decline as well has been a slowdown in growth in
the in-line skate market in general when compared to the significant annual
growth in this market experienced over the past few years. Gross sales for
athletic protective equipment totaled $1,224,000 during the third quarter of
fiscal 1996, a decrease of $635,000, or 34%, compared to the third quarter of
fiscal 1995, while unit volume decreased approximately 154,000, or 41%. The
decrease in gross sales was less than the decrease in unit volume due to an
increase in the number of multiple-unit packages sold relative to individually-
packaged units. Gross sales of bicycle and recreational safety helmets totaled
$1,119,000 during the third quarter of fiscal 1996, a decrease of $1,307,000, or
54%, compared to the third quarter of fiscal 1995, while unit volume decreased
by approximately 130,000 units, or 45%. The decrease in gross sales is greater
than the decrease in unit volume due to close-outs and other price reductions in
response to competitive pressures in the helmet market. The declines in
protective equipment and helmet sales are primarily due to higher inventories of
these products at certain of the Company's major customers and a weaker sell-
through at retail during the holidays this year in comparison with the prior
year. With respect to skateboards, as a result of a substantial increase in
demand, gross sales for the third quarter of fiscal 1996 totaled $3,386,000, an
increase of $3,019,000, or 824%, compared to the third quarter of fiscal 1995,
while unit volume increased by approximately 212,000 units, or 713%. The
increase in gross sales was greater than the increase in unit volume due to the
introduction of certain new, higher-priced skateboard models.
For the nine months ended April 30, 1996, net sales totaled $59,514,000, a
decrease of 27% compared to the corresponding period of the prior year. Total
gross sales dollars in the Company's in-line skate, athletic protective
equipment, and bicycle and recreational safety helmet categories decreased
approximately 33%, 30% and 47%, respectively, while gross sales of skateboards
increased approximately 506%.
7
<PAGE>
Sales to the Company's three largest accounts represented approximately 70%
of the Company's total sales during the third quarter of fiscal 1996, compared
to 69% during the third quarter of fiscal 1995.
The following table shows the Company's major product categories as a
percentage of total gross sales:
<TABLE>
<CAPTION>
Quarter Ended April 30, Nine Months Ended April 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
In-line skates 74% 80% 76% 83%
Athletic protective equipment 6% 8% 8% 8%
Bicycle and recreational safety helmets 5% 10% 6% 8%
Skateboards 15% 1% 10% 1%
Snowboards (*) - (*) -
Other (*) (*) (*) (*)
---- ---- ---- ----
Total 100% 100% 100% 100%
---- ---- ---- ----
(*) Less than one-half of one percent
</TABLE>
GROSS PROFIT. The Company's gross profit margin as a percentage of net
------------
sales was 19.8% for the quarter ended April 30, 1996, compared to 23.3% for the
quarter ended April 30, 1995, and was 19.9% for the nine months ended April 30,
1996, compared to 24.4% for the nine months ended April 30, 1995. The gross
margin decrease is primarily attributable to the higher proportion of factory
overhead costs, including overhead costs in connection with the start-up of the
Company's new snowboard manufacturing facility. Gross margins were also
impacted, with respect to in-line skates and bicycle and recreational safety
helmets in particular, by close outs and other price reductions resulting both
from increased customer pricing pressures as well as certain programs designed
to clear the way for new models the Company has introduced. Note that there
can be no assurance that the Company can continue to obtain its products from
suppliers at sufficiently low costs to fully offset the downward pressure on
sales prices and likewise sustain or improve present gross profit margins.
OPERATING EXPENSES. The Company's operating expenses (consisting of
------------------
selling and marketing expenses and general and administrative expenses) for the
third quarter of fiscal 1996 totaled $3,367,000, or 15.5% of net sales,
compared to $3,286,000, or 13.8% of net sales, for the third quarter of fiscal
1995. For the nine months ended April 30, 1996, operating expenses totaled
$9,630,000, or 16.2% of net sales, compared to $9,741,000, or 11.9% of net
sales, for the nine months ended April 30, 1995.
Selling and marketing expenses increased $191,000, or 10%, to
$2,151,000 for the third quarter of fiscal 1996, compared to $1,960,000 for the
third quarter of fiscal 1995. Thus, selling and marketing expenses represented
9.9% of net sales during the third quarter of fiscal 1996, compared to 8.2% in
the same quarter of the prior year. For the nine months ended April 30, 1996,
selling and marketing expenses amounted to 9.9% of net sales, compared to 7.3%
for the nine months ended April 30, 1995. The increase in selling and
marketing expenses as a percentage of net sales is due to several factors,
including wages and benefits associated with additional marketing personnel and
increased advertising expenses for co-op programs with certain of the Company's
major customers.
8
<PAGE>
General and administrative expenses decreased $110,000, or 8%, to
$1,216,000 for the third quarter of fiscal 1996, compared to $1,326,000 for the
third quarter of fiscal 1995, thus representing 5.6% of net sales during the
third quarter of fiscal 1996, compared to 5.6% in the same quarter of the prior
year. For the nine months ended April 30, 1996, general and administrative
expenses amounted to $3,730,000, or 6.3% of net sales, compared to $3,735,000,
or 4.6% of net sales, for the nine months ended April 30, 1995. These decreases
are primarily due to a decrease in product development expenses, since a year
ago the Company was in the early stages of developing its new Static brand of
products, and also because of financing expenses incurred during the third
quarter a year ago in connection with the refinancing of the Company's line of
credit, offset in part by increases in costs associated with the Company's new
snowboard operations.
OTHER INCOME (EXPENSE). Other income for the third quarter of fiscal
----------------------
1996 was $180,000, compared to $49,000 during the third quarter of fiscal 1995.
This increase is primarily due to a decrease in interest expense of
approximately $93,000 resulting from a decrease in the level of short-term
borrowings under the Company's line of credit and lower interest rates on such
borrowings compared to the prior year. For the nine months ended April 30,
1996, other income was $456,000, compared to $158,000 for the comparable period
of the prior year.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes for
--------------------------
the third quarter of fiscal 1996 was $403,000, representing 36.3% of income
before provision for income taxes, compared to $890,000, or 38.5% of income
before provision for income taxes for the third quarter of fiscal 1995. For
the nine months ended April 30, 1996, the provision for income taxes was 34.9%
of income before provision for income taxes, compared to 38.5% for the
comparable period of the prior year. These reductions in the Company's
effective tax rate for the three month and nine month periods are primarily due
to interest income representing a relatively greater portion of income before
provision for income taxes, and the fact that substantially all of that
interest income is exempt from federal income taxes due to the nature of the
investments from which it is derived.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has a credit agreement with a major bank providing a $20
million revolving line of credit, with separate sublimits of $12 million each
for the issuance of commercial letters of credit and actual borrowings. The
agreement, which expires February 1, 1997, is unsecured and carries an interest
rate equal to prime minus 0.25%, and also offers certain Libor-based interest
options. The amount the Company may borrow is limited by the level of its
eligible accounts receivable and inventory and the Company must satisfy certain
financial covenants. Over the past several years, borrowings have varied,
typically reaching highest levels in the pre-Christmas periods. Balances on the
line of credit are classified as current liabilities on the Company's balance
sheet. There was no balance outstanding under the revolving line of credit as
of April 30, 1996, and no balance outstanding as well as of July 31, 1995.
9
<PAGE>
The Company had cash of $1,250,000 on hand as of April 30, 1996, compared
to $6,617,000 as of July 31, 1995. Cash and marketable securities available for
sale, including those classified as short-term and long-term, totaled
$13,702,000 as of April 30, 1996, compared to $17,505,000 as of July 31, 1995,
with such decrease primarily due to capital expenditures and cash used in
operations during the period. Net working capital as of April 30, 1996 was
$30,099,000, compared to $31,022,000 as of July 31, 1995, with the decrease
resulting from additional investments in long-term marketable securities and
capital expenditures. The Company's current ratio was 6.2:1 as of April 30,
1996, compared to 5.6:1 as of July 31, 1995.
The Company had long-term debt of $54,000 as of April 30, 1996, compared to
$103,000 as of July 31, 1995. These balances represent the long-term portion of
capital leases for vehicles and equipment. The Company had net stockholders'
equity of $46,027,000 as of April 30, 1996, compared to $44,359,000 as of July
31, 1995, with such increase due to operating results for the nine months ended
April 30, 1996.
Capital expenditures for the nine months ended April 30, 1996 totaled
$2,274,000, compared to $1,108,000 for the same period of the prior year. The
increase is primarily due to equipment purchases for the Company's new snowboard
manufacturing facility. Production commenced at the facility during the third
quarter of fiscal 1996, however such production is primarily in preparation for
anticipated future orders. Neither inventory on hand nor sales have yet to
become material to the Company's overall operations.
10
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
---------
27 Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K were filed by the Registrant during
the quarter to which this Form 10-Q relates.
11
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VARIFLEX, INC.
June 11, 1996 /s/ Raymond H. Losi II
-----------------------
Raymond H. Losi II
President (Principal Executive Officer)
June 11, 1996 /s/ William B. Ogden
---------------------
William B. Ogden
Chief Financial Officer (Principal Financial
and Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> JUL-31-1996 JUL-31-1996
<PERIOD-START> AUG-01-1995 FEB-01-1996
<PERIOD-END> APR-30-1996 APR-30-1996
<CASH> 1,250 1,250
<SECURITIES> 25 25
<RECEIVABLES> 19,853 19,853
<ALLOWANCES> 941 941
<INVENTORY> 12,427 12,427
<CURRENT-ASSETS> 35,936 35,936
<PP&E> 5,358 5,358
<DEPRECIATION> 2,743 2,743
<TOTAL-ASSETS> 51,918 51,918
<CURRENT-LIABILITIES> 5,837 5,837
<BONDS> 0 0
0 0
0 0
<COMMON> 9 9
<OTHER-SE> 46,018 46,018
<TOTAL-LIABILITY-AND-EQUITY> 51,918 51,918
<SALES> 59,514 21,707
<TOTAL-REVENUES> 59,514 21,707
<CGS> 47,646 17,410
<TOTAL-COSTS> 47,646 17,410
<OTHER-EXPENSES> 9,630 3,367
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 92 2
<INCOME-PRETAX> 2,694 1,110
<INCOME-TAX> 941 403
<INCOME-CONTINUING> 1,753 707
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,753 707
<EPS-PRIMARY> 0.29 0.12
<EPS-DILUTED> 0.29 0.12
</TABLE>
