<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, 1998 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 12, 1998, 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 at
April 30 1998 and July 31, 1997....................................... 3
Consolidated Statements of Operations for the
Three Month and Nine Month Periods Ended April 30, 1998 and 1997...... 4
Consolidated Statements of Cash Flows for the
Nine Months Ended April 30, 1998 and 1997............................. 5
Notes to Consolidated Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 9
Part II - Other Information
Item 1. Legal Proceedings............................................... 14
Item 4. Submission of Matters to a Vote of Security Holders............. 14
Item 6. Exhibits and Reports on Form 8-K................................ 14
</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,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,901 $7,823
Marketable securities available for sale 20,251 14,959
Trade accounts receivable, less allowances of $543 and
$549 as of April 30, 1998 and July 31, 1997, respectively 11,928 9,600
Inventory (finished goods) 6,824 7,798
Inventory (raw materials and work-in-process) 895 1,908
Deferred income taxes -- 784
Prepaid expenses and other current assets 1,503 2,131
------ ------
Total current assets 46,302 45,003
Property and equipment, net 1,301 2,154
Other assets 173 736
------ ------
Total assets $47,776 $47,893
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade acceptances payable $1,176 $570
Accounts payable 542 677
Accrued warranty 897 720
Accrued salaries and related liabilities 429 349
Accrued co-op advertising 2,550 1,859
Accrued returns and allowances 210 173
Other accrued expenses 874 445
------ ------
Total current liabilities 6,678 4,793
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, 1998 and July 31, 1997 9 9
Common stock warrants 702 --
Additional paid-in capital 21,023 21,023
Retained earnings 19,364 22,068
------ ------
Total stockholders' equity 41,098 43,100
------ ------
Total liabilities and stockholders' equity $47,776 $47,893
====== ======
</TABLE>
See accompanying notes.
3
<PAGE>
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Three months ended
April 30, April 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $34,862 $40,688 $10,558 $14,567
Cost of goods sold 28,902 34,652 8,516 12,841
------ ------ ----- ------
Gross profit 5,960 6,036 2,042 1,726
------ ------ ------ ------
Operating expenses:
Selling and marketing 4,225 4,995 1,407 1,668
General and administrative 3,898 3,369 956 930
Impairment write-off 995 -- -- --
------ ------ ------ ------
Total operating expenses 9,118 8,364 2,363 2,598
------ ------ ------ ------
Loss from operations (3,158) (2,328) (321) (872)
------ ------ ------ ------
Other income (expense):
Interest expense -- (38) -- (16)
Interest income and other 941 685 408 240
------ ------ ------ ------
Total other income (expense) 941 647 408 224
------ ------ ------ ------
Income (loss) before provision for income taxes (2,217) (1,681) 87 (648)
Provision for (benefit from) income taxes 572 (772) 67 (268)
------ ------ ------ ------
Net income (loss) ($2,789) ($909) $20 ($380)
====== ====== ====== ======
Earnings (loss) per share of common stock:
Net income (loss) per share - basic and diluted ($0.46) ($0.15) $0.00 ($0.06)
====== ====== ====== ======
Weighted average number of common
shares outstanding 6,025 6,025 6,025 6,025
====== ====== ====== ======
</TABLE>
See accompanying notes.
4
<PAGE>
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
April 30,
1998 1997
______ ______
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($2,789) ($909)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 696 1,116
Gain on sale of marketable securities (27) --
Deferred income taxes 784 (33)
Impairment write-offs 995 --
Common stock warrants issued 702 --
Changes in operating assets and liabilities:
Trade accounts receivable (2,328) (3,320)
Inventory 1,987 4,192
Prepaid expenses and other current assets 628 714
Trade acceptances payable 606 974
Accounts payable (135) (198)
Other current liabilities 1,414 (674)
------ ------
Net cash provided by operating activities 2,533 1,862
------ ------
INVESTING ACTIVITIES
Purchases of property and equipment (249) (559)
Purchases of available-for-sale securities (25,605) (3,722)
Net proceeds from sales of available-for-sale securities 20,348 --
Other assets 51 127
------ ------
Net cash used in investing activities (5,455) (4,154)
------ ------
Financing activities -- --
Net increase in cash (2,922) (2,292)
Cash at beginning of period 7,823 3,351
------ ------
Cash at end of period $4,901 $1,059
====== ======
Cash paid during the period for:
Interest -- $39
Income taxes -- --
</TABLE>
Supplemental disclosure of non-cash financing activities:
In November 1997, the Company issued stock warrants and recorded therewith a
non-cash expense of $702,000 as compensation in connection with certain
consulting agreements entered into as further described in Note 4.
See accompanying notes.
5
<PAGE>
VARIFLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
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 and nine month periods ended
April 30, 1998 are not necessarily indicative of the results that may be
expected for the full fiscal year. For further information, refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the fiscal year ended July 31, 1997.
Note 2. Reclassifications
Certain reclassifications have been made to the fiscal 1997 financial
statements to conform with fiscal 1998 presentation.
Note 3. Earnings per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share." FASB No. 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is computed similar to the
previous method used to compute fully diluted earnings per share and includes
the dilutive effects of stock options and warrants. The Company's diluted
earnings per share for the three and nine month periods ended April 30, 1998 and
1997 is the same as basic earnings per share since the effect of options and
warrants is antidilutive or immaterial. All earnings per share amounts for all
periods have been presented, and where necessary restated, to conform to the
requirements of FASB No. 128.
6
<PAGE>
VARIFLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 4. Stock Warrants
In November 1997, in connection with the acquisition of approximately 28%
of the Company's outstanding common stock by REMY Capital Partners IV, L.P., a
private investment partnership ("Remy"), the Company entered into consultation
agreements with Remy and Raymond H. Losi, the Company's co-founder and former
Chairman of the Board. As compensation under those agreements, Remy and Mr. Losi
received warrants to purchase 400,000 and 200,000 shares, respectively, of the
Company's common stock for $5.10 per share. The Company recognized non-cash
consulting expenses of $702,000 in connection with the issuance of those stock
warrants. The amount of consulting expense was determined in accordance with
FASB Statement No. 123, "Accounting for Stock-Based Compensation," and the
Company recognized the entire amount of the expense immediately.
Note 5. Impairment of Assets
During the quarter ended January 31, 1998, as required by FASB Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets," the Company
considered the operating losses of its wholly-owned subsidiary, Static
Snowboards, Inc., and the continuing challenges facing the snowboard industry in
general and concluded that impairment of the subsidiary's assets has occurred.
Accordingly, an impairment loss totaling $995,000, representing the excess of
the carrying value over the estimated fair market value of assets, was
recognized during the quarter for write-downs of fixed assets and write-off of
the remaining unamortized balance of goodwill relating to such subsidiary.
7
<PAGE>
VARIFLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Note 6. Legal Proceedings
In March 1998, the Company was served with two lawsuits entitled: (i) Mark
C. Carter and International EZ-Up, Inc. v. Variflex, Inc. and Service
Merchandise Co., Inc. (Case No. 98-0167 WJR (RNBx)) in the United States
District Court for the Central District of California in Los Angeles and (ii)
James P. Lynch and KD Kanopy, Inc. v. Variflex, Inc. (Civil Action No. 98-D-477)
in the United States District Court of Colorado. The first complaint (i)
alleges, among other things, that the Company's Quik Shade(R) product infringes
a patent owned by plaintiff and used in a competing instant set-up, collapsible
canopy product and (ii) prays for unspecified monetary damages, treble damages,
punitive damages, costs and attorney's fees, an injunction and the destruction
of all allegedly infringing products. The second complaint (i) alleges that the
Company's Quik Shade(R) product infringes two patents owned by the plaintiff and
(ii) prays for an accounting, general damages, treble damages, an injunction and
costs and attorney fees. The Company has filed an answer in both lawsuits
denying the allegations of the complaints and has filed counterclaims in both
lawsuits seeking declarations of patent invalidity and non-infringement as to
the plaintiffs' patents, as well as damages against the plaintiffs for alleged
antitrust violations. Both lawsuits are in an early stage. The Company
believes it has meritorious defenses to the claims alleged in the complaints and
intends to conduct a vigorous defense. The Company also intends to vigorously
pursue its counterclaims. An unfavorable outcome in the above matters could
have a material adverse effect on the Company's business prospects and financial
condition. In addition, even if the ultimate outcome in both cases is resolved
in favor of the Company, the defense of such litigation may involve considerable
costs, which could be material, and could divert the efforts of management,
which could have a material adverse effect on the Company's business and results
of operations.
From time to time the company is involved in other claims and lawsuits
arising in the ordinary course of its business. In the opinion of management,
all of these claims and lawsuits are covered by insurance or these matters will
not have a material adverse effect on the Company's business, financial
condition or results of operations.
Note 7. Subsequent Event
In May 1998, the Company entered into a Purchase and Sale Agreement to sell
certain assets of its wholly-owned subsidiary, Static Snowboards, Inc. The
Company closed its manufacturing factory in California, with the intention of
sourcing snowboards from independent contractors located in Asia.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
--------------
OVERVIEW
--------
The Company is a leading distributor and wholesaler in the United States of
in-line skates, skateboards, recreational safety helmets and athletic protective
equipment (such as wrist guards, elbow pads and knee pads used by skaters and
skateboarders) to the mass market. The Company also distributes Quik
Shade(R), a convenient and portable instant canopy, and markets snowboards and
related accessories. The Company designs and develops these products which are
then manufactured to the Company's detailed specifications by independent
contractors. The Company distributes its products throughout the United States
and to foreign countries.
RESULTS OF OPERATIONS
---------------------
NET SALES. Net sales for the third quarter of fiscal 1998 (the quarter
---------
ended April 30, 1998) totaled $10,558,000 compared to $14,567,000 for the third
quarter of fiscal 1997, representing a decrease of $4,009,000, or 28%. For the
nine months ended April 30, 1998, net sales totaled $34,862,000 compared to
$40,688,000 for the corresponding period of the prior year, representing a
decrease of $5,826,000, or 14%. The decrease in net sales primarily resulted
from decreases in sales of the Company's in-line skates and skateboards, offset
to a lesser degree by increases in sales of safety helmets and the Quik Shade(R)
instant canopy. The decrease in the Company's skate sales was attributable to a
continuing industry-wide decline in consumer demand compared to the same period
in fiscal 1997 and prior years. Net sales were also adversely affected during
the quarter by competitive pressures, which caused sale prices to decline in
many of the Company's product categories. The Company's sales benefited from the
introduction since the third quarter of the prior year of new products such as
the 3-D(TM) safety helmets and the Quik Shade(R) instant canopy.
Another factor contributing to the decline in net sales is the fact that
Kmart Corporation, which accounted for 26% of the Company's gross sales for
fiscal 1997, is no longer a major customer for the Company's in-line skates and
skateboards. Due to the pricing structure for Kmart Corporation, this event had
a positive impact on the Company's gross margin for the quarter ended April 30,
1998. The Company has added The Home Depot as a new significant customer for
its Quik Shade(R) instant canopy. The Company believes that The Home Depot
could become a major customer in the future.
9
<PAGE>
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,
1998 1997 1998 1997
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
In-line skates 47% 71% 58% 69%
Athletic protective equipment 4% 5% 5% 5%
Bicycle and recreational safety helmets 12% 5% 7% 5%
Skateboards and scooters 16% 17% 18% 17%
Snowboards and accessories 2% 1% 6% 3%
Canopies 19% - 6% -
Other (*) 1% (*) 1%
---- ---- ---- ----
Total 100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
----------------------------
(*) Less than one-half of one percent.
GROSS PROFIT. Gross profit for the third quarter of fiscal 1998 totaled
------------
$2,042,000, compared to $1,726,000 for the third quarter of fiscal 1997, an
increase of $316,000, or 18%. The Company's gross margin was 19.3% of net sales
for the quarter ended April 30, 1998, compared to 11.8% for the quarter ended
April 30, 1997. The increase in gross margin percentage was the result of
several factors, including the impact of the addition to the sales product mix
of canopies which had a higher margin, as well as lower product costs as a
result of beneficial sourcing and decreases in warranty costs. Gross margin was
17.1% for the nine months ended April 30, 1998, compared to 14.8% for the nine
months ended April 30, 1997. The increase in gross margin was primarily due to
the same factors that impacted the third quarter, as discussed above. The
Company's gross margin of 19.3% for the third quarter of fiscal 1998 represents
an increase from 16.5% for the quarter ended January 31, 1998. There continues
to be significant downward pressure on sales prices in many of the Company's
product categories, however, the Company has moved aggressively to lower product
costs to offset sales price declines.
OPERATING EXPENSES. The Company's selling and marketing expenses totaled
------------------
$1,407,000 for the third quarter of 1998, compared to $1,668,000 in the third
quarter of 1997, a decrease of $261,000, or 16%. Selling and marketing expenses
for the third quarter of fiscal 1998 thus amounted to 13.3% of net sales,
compared to 11.5% during the third quarter of fiscal 1997. The decrease in
selling and marketing expenses is primarily due to decreases in commissions and
co-op advertising expenses resulting from lower sales volume. The increase as a
percentage of net sales is the result of certain other types of expenses, such
as administrative salaries and some promotional expenses, that are not directly
related to sales. For the nine months ended April 30, 1998, selling and
marketing expenses amounted to 12.1% of net sales, compared to 12.3% for the
nine months ended April 30, 1997. The decrease is primarily due to the
elimination or reduction of certain advertising programs that were fixed dollar
allowances, or replacement of such programs with volume-based programs.
10
<PAGE>
General and administrative expenses totaled $956,000 in the third quarter
of 1998, compared to $930,000 in the third quarter of 1997, an increase of
$26,000, or 3%, primarily resulting from increases in insurance expense. For
the nine months ended April 30, 1998, general and administrative expenses
increased $529,000, or 16%. This increase is due to consulting expenses
recognized with respect to the consultation agreements entered into in
connection with the stock acquisition by Remy as described in Note 4 in the
notes to the consolidated financial statements. Excluding such consulting
expenses, the Company's general and administrative expenses for the nine months
of fiscal 1998 decreased $173,000 or 5%, compared to the nine months of fiscal
1997, due primarily to decreases in administrative wages, bad debt expense,
costs associated with the Company's benefit plans and contributions expense.
As described in Note 5 in the notes to the consolidated financial
statements, during the quarter ended January 31, 1998, the Company recognized an
impairment loss of $995,000 for write-downs of fixed assets and a write-off of
the remaining unamortized balance of goodwill relating to its snowboard
operations.
OTHER INCOME (EXPENSE). Other income totaled $408,000 in the third quarter
----------------------
of 1998, compared to $224,000 in the third quarter of 1997, an increase of
$184,000, or 82%. This increase was primarily due to an increase in interest
income as a result of a change during the quarter in the investment of
marketable securities from lower yield tax-exempt securities to higher yield
taxable securities compared to the corresponding period of the prior year. The
Company incurred no interest expense during the third quarter of fiscal 1998,
compared to $16,000 during the third quarter of the prior year.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The Company's effective tax
-----------------------------------------
rate differs from the federal statutory tax rate due to certain amounts of
interest income which are exempt from federal income taxes, the effect of state
income taxes and in 1998 the establishment of a valuation allowance on the
Company's deferred tax assets. The provision for income taxes for the third
quarter of fiscal 1998 was $67,000, compared to a benefit from income taxes of
($268,000) for the third quarter of fiscal 1997. The provision for income taxes
for the third quarter of fiscal 1998 included a provision to increase the
deferred tax valuation allowance by $107,000. Excluding the portion of the
income tax provision associated with the valuation allowance, the provision for
income taxes for the third quarter of fiscal 1998 was $6,000, or 6.9% of income
before income taxes compared to an income tax benefit of ($268,000), or (41.4%)
of the loss before income taxes, for the third quarter of fiscal 1997. The
difference in the effective rate is primarily due to the amount of federally tax
exempt interest income earned in relation to the amount of income or loss for
the period. The provision for income taxes for the nine months ended April 30,
1998 was $572,000 and included a provision for the deferred tax valuation
allowance of $1,622,000. Excluding the portion of the income tax provision
associated with the valuation allowance, the benefit from income taxes for the
nine months ended April 30, 1998 was ($1,050,000), or (47.4%) of the loss before
income taxes, compared to ($772,000), or (45.9%) of the loss before income
taxes, for the nine months ended April 30, 1997. The difference in the
effective tax rate is primarily due to the amount of federally tax exempt
interest income earned in relation to the amount of income or loss for the
period. As a result of the change in the Company's investment strategy from
lower yield tax-exempt securities to higher yield taxable securities, the
Company's effective tax rate may increase in the future.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has a credit agreement with a major bank providing a $7,500,000
revolving line of credit for the issuance of commercial letters of credit. The
agreement, which expires December 31, 1998, is unsecured and contains certain
financial covenants which the Company must satisfy.
Cash and marketable securities available for sale totaled $25,152,000 as of
April 30, 1998, compared to $22,782,000 as of July 31, 1997. Net working
capital as of April 30, 1998 was $39,624,000, compared to $40,210,000 as of July
31, 1997, and the Company's current ratio was 6.9:1 as of April 30, 1998,
compared to 9.4:1 as of July 31, 1997. The decreases in working capital and
current ratio were primarily due to the valuation allowance recorded for
deferred income taxes and increases in accruals for co-op advertising expenses.
The Company had no long-term debt as of April 30, 1998 and July 31, 1997.
The Company had net stockholders' equity of $41,098,000 as of April 30, 1998,
compared to $43,100,000 as of July 31, 1997, with the difference due to
operating results for the nine months ended April 30, 1998, and fluctuations in
unrealized gains and losses on investments in marketable securities.
YEAR 2000
---------
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. Based on preliminary information, costs of
addressing potential problems are currently not expected to have a material
adverse impact on the Company's financial position, results of operations or
cash flows in future periods. However, if the Company, its customers or vendors
are unable to resolve such processing issues in a timely manner, it could result
in a material financial risk. Accordingly, the Company plans to devote the
necessary resources to resolve all significant year 2000 issues in a timely
manner.
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
------------------------------------------------
From time to time, the Company may make certain statements that contain
"forward-looking" information or statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Words such as "anticipate", "believe",
"expect", "estimate", "project", and similar expressions are intended to
identify such forward-looking statements. Forward-looking statements may be
made by management orally or in writing, including, but not limited to, in press
releases, as part of the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in this Report, and in the
Company's other filings with the Securities Exchange Commission. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Such forward-looking statements are subject to
certain risks, uncertainties and assumptions, including, without limitation
those identified below. Should one or more of these risks or uncertainties
materialize, or should any of the underlying assumptions prove incorrect, actual
results of current or future operations may vary materially from those
anticipated, estimated, or projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates.
12
<PAGE>
GENERAL. There are several risks and uncertainties that may affect the future
operating results, business and financial condition of the Company, including,
without limitation: (1) the risk of reduction in consumer demand for the product
categories in which the Company does business or the Company's products in
particular; (2) the risk of loss of one or more of the Company's major
customers; (3) the risks inherent in the design and development of new products
and product enhancements, including those associated with patent issues and
marketability; (4) the risk that the Company may not be able to continue to
provide its products at prices which are competitive or that it can continue to
design and market products that appeal to consumers even if price-competitive;
(5) the risk that the Company may not be able to obtain its products and
supplies on substantially similar terms, including cost, in order to sustain its
operating margins; and (6) the risks inherent in legal proceedings.
NEW MAJOR CUSTOMER. As is customary in the industry, the Company does not have
long-term contracts with any of its customers, including The Home Depot.
Accordingly, there can be no assurance that The Home Depot will become a major
customer of the Company for the balance of fiscal 1998 or thereafter.
RELIANCE ON FOREIGN SUPPLIERS TO LOWER PRODUCT COSTS AND MAINTAIN OR IMPROVE
GROSS MARGINS. In order to meet the significant downward pressure on sales
prices, the Company has moved aggressively to lower product costs, and as a
result has maintained and even improved gross margins. However, since the
Company relies primarily on foreign suppliers, there can be no assurance that
the Company can continue to obtain its products at sufficiently low costs in
order to improve or sustain present gross margins. The Company does not
believe, however, that the current market crisis in Asia will have a material
adverse impact upon its ability to procure products from suppliers, since the
Company believes that it generally could move production quickly to alternate
sources in response to economic or political circumstances that might arise in
any particular country. Moreover, recent fluctuations in Asian currencies
should not have a material negative impact upon product costs because the
Company typically negotiates prices with its suppliers in U.S. dollars.
13
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 6 to Notes to Consolidated Financial Statements included in
Part I of this Form 10-Q, which is incorporated herein by this
reference.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders on May 12, 1998, the following
matters were voted on and approved:
1. Six Directors were elected to the Board of Directors to hold office
for a one-year term or until their successors are elected and
qualified. The following persons were elected: Randall L. Bishop,
Michael T. Carr, Loren Hildebrand, Raymond (Ray) H. Losi, Raymond
(Jay) H. Losi II and Mark S. Siegel. A total of 5,819,856 shares
voted, representing 96.6% of the Company's total shares
outstanding. None of the shares voting abstained. Following is a
summary of the votes for and against each Director:
<TABLE>
<CAPTION>
Votes Votes
For Against
<S> <C> <C>
Randall L. Bishop 5,787,250 32,606
Michael T. Carr 5,787,250 32,606
Loren Hildebrand 5,787,250 32,606
Raymond H. Losi 5,787,250 32,606
Raymond H. Losi II 5,787,250 32,606
Mark S. Siegel 5,787,250 32,606
</TABLE>
2. The Board's selection of Ernst & Young LLP as the Company's
independent public accountants for the fiscal year ended July 31,
1998 was ratified. 5,796,183 shares of common stock voted in favor
of the proposal, 17,123 shares votes against and 6,550 shares
abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
---------
Exhibit 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.
14
<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 12, 1998 /s/ Raymond H. Losi II
-------------------------------------------
Raymond H. Losi II
President and Chief Executive Officer
(Principal Executive Officer)
June 12, 1998 /s/ Roger M. Wasserman
-------------------------------------------
Roger M. Wasserman
Chief Financial Officer
(Principal Financial and Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS 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-31-1998 JUL-31-1998
<PERIOD-START> AUG-01-1997 FEB-01-1998
<PERIOD-END> APR-30-1998 APR-30-1998
<CASH> 4,901 4,901
<SECURITIES> 20,251 20,251
<RECEIVABLES> 12,471 12,471
<ALLOWANCES> 543 543
<INVENTORY> 7,719 7,719
<CURRENT-ASSETS> 46,302 46,302
<PP&E> 6,037 6,037
<DEPRECIATION> 4,736 4,736
<TOTAL-ASSETS> 47,776 47,776
<CURRENT-LIABILITIES> 6,678 6,678
<BONDS> 0 0
0 0
0 0
<COMMON> 9 9
<OTHER-SE> 41,089 41,089
<TOTAL-LIABILITY-AND-EQUITY> 47,776 47,776
<SALES> 34,862 10,558
<TOTAL-REVENUES> 34,862 10,558
<CGS> 28,902 8,516
<TOTAL-COSTS> 28,902 8,516
<OTHER-EXPENSES> 9,118 2,363
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (2,217) 87
<INCOME-TAX> 572 67
<INCOME-CONTINUING> (2,789) 20
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,789) 20
<EPS-PRIMARY> (0.46)<F1> 0.00<F1>
<EPS-DILUTED> (0.46) 0.00
<FN>
<F1>EPS-PRIMARY IS EQUAL TO EPS-BASIC
</FN>
</TABLE>
