<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [_]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
VARIFLEX, INC
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
VARIFLEX, INC.
5152 NORTH COMMERCE AVENUE
MOORPARK, CA 93021
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
DECEMBER 8, 1998 AT 10:00 A.M., LOCAL TIME
------------------------
Notice is hereby given that the 1998 Annual Meeting of Stockholders of
Variflex, Inc. (the "Company") will be held at the Radisson Hotel, 999 Enchanted
Way, Simi Valley, California, on Tuesday, December 8, 1998 at 10:00 a.m., local
time, for the following purposes:
1. To elect six directors for terms expiring in 1999.
2. To consider and take action upon a proposal to ratify the selection of
Ernst & Young LLP, independent certified public accountants, as
auditors for the Company for the year ending July 31, 1999.
3. To transact such other business as may properly come before the
meeting, or any adjournment or adjournments thereof.
Holders of common stock of the Company are entitled to vote for the
election of directors and on each of the other matters set forth above.
The stock transfer books of the Company will not be closed. The Board of
Directors has fixed the close of business on October 29, 1998 as the record date
for the determination of stockholders entitled to notice of, and to vote at, the
Annual Meeting and any adjournments thereof.
You are cordially invited to be present.
By order of the Board of Directors
/s/ KENNETH N. BERNS
----------------------------------
Kenneth N. Berns, Secretary
November 3, 1998
<PAGE>
VARIFLEX, INC.
5152 NORTH COMMERCE AVENUE
MOORPARK, CA 93021
PROXY STATEMENT
______________________________
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD DECEMBER 8, 1998
______________________________
This statement is furnished in connection with the solicitation of proxies
by the Board of Directors of Variflex, Inc. (the "Company") from holders of the
Company's outstanding shares of common stock ("Common Stock") entitled to vote
at the 1998 Annual Meeting of Stockholders of the Company (and at any and all
adjournments thereof) for the purposes referred to below and set forth in the
accompanying Notice of Annual Meeting of Stockholders. These proxy materials are
first being mailed to stockholders on or about November 3, 1998.
The Board of Directors has fixed the close of business on October 29, 1998
as the record date for the determination of stockholders entitled to notice of,
and to vote at, said meeting. Holders of Common Stock are entitled to one vote
for each share held of record on the record date with respect to each matter to
be acted on at the 1998 Annual Meeting.
On October 29, 1998, there were outstanding and entitled to vote 6,025,397
shares of Common Stock. Stockholders who do not expect to attend in person are
requested to sign and return the enclosed form of proxy in the envelope
provided. At any time prior to their being voted, proxies are revocable by
written notice to the Secretary of the Company or by voting in person at the
meeting.
1. ELECTION OF DIRECTORS
The Company's Bylaws permit the Board of Directors to fix the number of
Board members between three and nine directors. At present, the Board of
Directors has six members. The directors are elected at each annual meeting of
the stockholders of the Company for a term of office running until the next
annual meeting of the Company's stockholders and until their successors have
been elected.
The Board of Directors recommends a vote FOR the election of each of the
nominees named below. Proxies in the enclosed form received from holders of
Common Stock will be voted for the election on the six nominees named below as
directors of the Company unless stockholders indicate otherwise.
The votes of the holders of a majority of the voting power of the Common
Stock present at the meeting in person or by proxy is required for the approval
of the nominees as Directors in accordance with the Bylaws of the Company.
Abstentions and "broker non-votes" (as defined below) are counted for
purposes of determining whether a quorum is present, but do not represent votes
cast with respect to any proposal. Abstention from voting on any matter will
have the practical effect of voting against any of the proposals since it is one
less vote for approval. Broker non-votes are not considered to be shares
"entitled to vote" (other than for quorum purposes), and will therefore have the
effect of reducing the absolute number of votes required for stockholders to
approve the nominees as Directors. "Broker non-votes" are shares held by a
broker or nominee for which an executed proxy is received by the Company, but
are not voted as to one or more proposals because instructions have not been
received from the beneficial owners or persons entitled to vote and the broker
or nominee does not have discretionary power to vote.
If any nominees for director should be unable or unwilling to serve, the
persons authorized by the proxy to vote shall, pursuant to the authority granted
to them by the Board of Directors, have the discretion to select and vote for
1
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substituted nominees (unless stockholders indicate otherwise, as noted above).
The Board of Directors has no reason to believe that the nominees will be unable
or unwilling to serve.
The following information includes the age, the year in which first elected
a director of the Company, the principal occupation, and other directorships of
each of the nominees named for election as directors.
NOMINEES FOR ELECTION AS DIRECTORS
KENNETH N. BERNS, age 38, was appointed to the Company's Board of Directors
in October 1998. Mr. Berns also serves as a Director and Assistant Secretary of
UTI Energy Corp. Mr. Berns has been employed by REMY Investors & Consultants,
Inc., a private investment and financial management company, and its affiliates
(collectively, "Remy") since 1994. From 1993 through 1994, Mr. Berns was
employed by Ridge Properties, Ltd., a real estate development and management
company. Mr. Berns is the majority stockholder of RD Management, Inc., which is
the general partner of Ridge Properties, Ltd. Mr. Berns is a Certified Public
Accountant and holds a Bachelors Degree in Business Administration from San
Diego State University and a Masters Degree in Taxation from Golden Gate
University.
MICHAEL T. CARR, age 45, was elected to the Company's Board of Directors in
March 1998. Mr. Carr has served as President and Chief Executive Officer of
Weider Publications, Inc., a publisher of several consumer magazines and
specialty publications, since April 1990. Mr. Carr also presently serves on the
Board of Directors of the Magazine Publishers of America.
LOREN HILDEBRAND, age 59, was appointed to the Company's Board of Directors
in February 1994. Mr. Hildebrand presently is the President and sole director
and stockholder of Creative Consultants, a company he founded in 1992 to render
consulting services to the toy industry. From May 1994 to September 1997, Mr.
Hildebrand was Executive Vice President of Lewis Galoob Toys, Inc., a publicly
traded toy manufacturer. From 1989 through 1992 Mr. Hildebrand was Executive
Vice President of Toy Soldiers, Inc., a closely held toy company he co-founded
which was sold in 1992. Mr. Hildebrand earned his Bachelor of Arts degree in
Economics from Pacific Lutheran University and his Masters of Business
Administration degree from the University of Washington Graduate School of
Business.
RAYMOND (RAY) H. LOSI, age 75, has served on the Board of Directors of the
Company since its inception in August 1977. Mr. Losi served as the Chairman of
the Board from 1977 until his resignation from that position and the position of
Chief Executive Officer effective November 18, 1997. Mr. Losi served as
President of the Company from 1977 until 1989, at which time he became Chief
Executive Officer. Mr. Losi has 55 years of experience in the junior sporting
goods and bulk toys market. Mr. Losi attended Yale University and the University
of Connecticut. Mr. Losi is the father of Raymond (Jay) H. Losi II, who is also
an officer and director of the Company.
RAYMOND (JAY) H. LOSI II, age 46, has served as Chief Operating Officer of
the Company since 1992, as a director since 1985, and effective November 18,
1997 was also named Chief Executive Officer. From 1992 until August 1998, Mr.
Losi served as President of the Company. Prior to 1992, Mr. Losi served as Vice
President in Charge of Procurement from 1984 and as Vice President in Charge of
International Sales from 1981. Mr. Losi has directed product development for the
Company since its inception in August 1977. Mr. Losi is the son of Raymond (Ray)
H. Losi, who is also a director of the Company.
MARK S. SIEGEL, age 47, was elected to the Company's Board of Directors and
as Chairman of the Board, on November 18, 1997. Mr. Siegel also serves as
Chairman of the Board of Directors of UTI Energy Corp. Mr. Siegel is President
of Remy and has been associated with Remy since 1993. From 1992 to 1993, Mr.
Siegel was President, Music Division, of Blockbuster Entertainment Corp. From
1988 through 1992, Mr. Siegel was an Executive Vice President of Shamrock
Holdings, Inc. and Managing Director of Shamrock Capital Advisors, Incorporated.
Mr. Siegel received a Bachelor of Arts degree in Philosophy from Colgate
University and a Juris Doctor from the University of California at Berkeley
(Boalt Hall) School of Law.
2
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THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR ELECTION OF EACH OF THE ABOVE NOMINEES
Directors who are employees of the Company or serve the Company through
consulting agreements receive no compensation for service as members of the
Board. Each non-employee director receives options to purchase 4,000 shares of
common stock of the Company at market price upon being appointed or elected to
the Board, and options to purchase 2,000 shares of common stock of the Company
at market price as an annual retainer. Each non-employee director also receives
$1,000 for each Board meeting and $500 for each committee meeting personally
attended, or $250 for each such meeting in which they participate by telephone.
All directors are reimbursed for expenses incurred in connection with attendance
at meetings. The Company may grant awards to the directors under the Company's
1994 Stock Plan.
In March 1994, the Board of Directors established a Compensation Committee
and an Audit Committee. The Compensation Committee, on which Messrs. Carr,
Hildebrand and Siegel serve, establishes salaries, incentive and other forms of
compensation for officers and other employees, administers the various incentive
compensation and benefit plans, and recommends policies relating to such plans.
The Audit Committee, on which Messrs. Randall L. Bishop, Raymond (Ray) H. Losi,
and Siegel served as of September 30, 1998, is responsible for meeting
periodically with representatives of the Company's independent public
accountants to review the general scope of audit coverage, including
consideration of the Company's accounting practices and procedures and system of
internal accounting controls, and to report to the Board with respect thereto.
The Audit Committee also recommends to the Board of Directors the appointment of
the Company's independent auditors.
The Board of Directors held three meetings in fiscal 1998, and took various
actions by unanimous written consent. During fiscal 1998, each incumbent
director attended at least 75% of the aggregate of the total number of meetings
of the Board of Directors plus the total number of meetings of all committees of
the Board on which he or she served. The Audit Committee and the Compensation
Committee each had one meeting in fiscal 1998, each of which was fully attended.
The following table sets forth the beneficial ownership of Common Stock as
of September 30, 1998 of each of the Company's directors, each person (and
certain related individuals) known by the Company to own beneficially more than
5% of the Common Stock, and each of the Named Executive Officers (as defined
below).
<TABLE>
<CAPTION>
Named Executive Officers, Shares Beneficially
Directors and 5% Stockholders (1) Owned (2)
--------------------------------- ---------------------------------
Number Percent
------ -------
<S> <C> <C>
REMY Capital Partners IV, L.P. 2,066,667 (3)(4) 32.16%
Mark S. Siegel 2,066,667 (3)(4) 32.16%
Randall L. Bishop 2,066,667 (4)(5) 32.16%
Raymond (Jay) H. Losi II (6) 1,429,415 (4)(7) 23.27%
Raymond (Ray) H. Losi (6) 446,575 (4)(8) 7.17%
Dimensional Fund Advisors Inc. 342,200 (9) 5.68%
Warren F. Marr 30,558 0.50%
Loren Hildebrand 2,000 0.03%
Michael T. Carr 1,000 0.02%
All directors and executive officers as a group (11 persons) 3,986,515 58.76%
</TABLE>
_____________
(1) Unless otherwise indicated, the address of persons listed in this column is
c/o Variflex, Inc., 5152 N. Commerce Avenue, Moorpark, CA 93021.
(2) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under Rule 13d-3(d), shares not
outstanding which are subject to options, warrants, rights or conversion
privileges exercisable within 60 days are deemed outstanding for the
purpose of calculating the number and percentage
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<PAGE>
owned by such person, but not deemed outstanding for the purpose of
calculating the percentage owned by each other person listed. Shares of
common stock which may be acquired within 60 days of September 30, 1998,
through the exercise of options, or otherwise, is as follows: Mr. Raymond
(Jay) H. Losi II, 18,000 shares; Mr. Warren F. Marr, 30,558; Mr. Rocco
Attolico, 5,000; and Ms. Paula Coffman, 5,000.
(3) REMY Capital Partners IV, L.P. ("REMY IV") owns 1,666,667 shares of Common
Stock and 400,000 warrants currently exercisable to purchase Common Stock.
The General Partner of REMY IV is REMY Investors, L.L.C. ("REMY LLC"), and
the Managing Member for REMY LLC is Mark S. Siegel, the Company's Chairman
of the Board. The address of REMY IV, REMY LLC and Mr. Siegel is 1801
Century Park East, Suite 1111, Los Angeles, California 90067.
(4) As a result of the Voting Agreement, Raymond (Ray) H. Losi, Raymond (Jay)
H. Losi II, Eileen Losi, Barbara Losi, Mark S. Siegel, Randall L. Bishop
and Remy Capital Partners IV, L.P. may be deemed to beneficially own
4,149,095 shares of Common Stock.
(5) As a member of REMY LLC, Mr. Bishop may be deemed to beneficially own
1,666,667 shares of Common Stock and 400,000 warrants currently exercisable
to purchase Common Stock, however Mr. Bishop disclaims beneficial ownership
of such shares and warrants. Effective as of October 31, 1998, Mr. Bishop
resigned as a Director and Secretary of the Company.
(6) Mr. Raymond (Ray) H. Losi and Mrs. Barbara Losi are married. Mr. Raymond
(Jay) H. Losi II is the son of Mr. Raymond (Ray) H. Losi and his prior
spouse, Ms. Eileen Losi.
(7) Includes 807,507 shares held by Losi Enterprises Limited Partnership, of
which Losi Properties, Inc., a corporation whose sole stockholder is the
1989 Raymond H. Losi II Revocable Trust, of which Mr. Raymond (Jay) H. Losi
II is a Trustee, is a general partner. Also includes 120,000 shares held by
the Jay and Kathy Losi Revocable Trust dated January 1, 1989, for which Mr.
Raymond (Jay) H. Losi II and his spouse are beneficiaries. Also includes
263,908 shares held by EML Enterprises Limited Partnership, of which Mr.
Raymond (Jay) H. Losi II is a Trustee of the general partner, and 120,000
shares held by Mrs. Eileen Losi through the Eileen Losi Revocable Trust,
for which Mr. Raymond (Jay) H. Losi II is a Trustee. Also includes 100,000
warrants currently exercisable to purchase Common Stock.
(8) Includes shares held by Mr. Raymond (Ray) H. Losi as Trustee of the 1989
Raymond H. Losi Revocable Trust under declaration of trust dated January
23, 1989, for benefit of Raymond (Ray) H. Losi. Although Mr. Losi is
married to Mrs. Barbara Losi, the shares retain their identity as the sole
and separate property of the beneficiary of the trust (Mr. Raymond (Ray) H.
Losi). Also includes 200,000 warrants currently exercisable to purchase
Common Stock.
(9) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 342,200 shares of Common
Stock as of December 31, 1997, all of which shares are held in portfolios
of DFA Investment Dimensions Group Inc., a registered open-end investment
company, or in series of the DFA Investment Trust Company, a Delaware
business trust, or the DFA Group Trust and DFA Participation Group Trust,
investment vehicles for qualified employee benefit plans, all of which
Dimensional Fund Advisors Inc. serves as investment manager. Dimensional
disclaims beneficial ownership of all such shares. The address for
Dimensional is 1299 Ocean Avenue, 11th Floor, Santa Monica, California
90401.
4
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The names, ages and positions of the executive officers of the Company
as of October 29, 1998, are listed below, together with a brief description of
each such officer's business experience for the past five years, except in the
case of those who are also members of the Board of Directors, for whom
biographies appear above under the caption: "NOMINEES FOR ELECTION AS
DIRECTORS." Executive officers will be appointed each year by the Board of
Directors at its annual meeting following the annual meeting of stockholders and
serve for one year or until their successors are chosen and qualify in their
stead.
ROCCO ATTOLICO, age 57, has served as Vice President of Manufacturing
since January 1994. Mr. Attolico has been an employee of the Company since July
1991 when he was hired to supervise and direct the Company's shipping,
warehousing and order processing functions.
PAULA COFFMAN, age 34, has been an employee of the Company since June
1984. Since January 1993, she has served as Vice President of Administrative
Services. Prior to her appointment as Vice President, Ms. Coffman served the
Company as Product and Sales Planning Manager, Sales Administration Manager and
Sales Coordinator.
WARREN F. MARR, age 57, has served as Vice President of Sales since
he joined the Company in January 1990.
STEVEN L. MUELLNER, age 48, has served as President since August 1998.
Prior to joining the Company, Mr. Muellner was President and Co-Chief Executive
Officer of Applause Enterprises, a gift and toy company from July 1996 to May
1998. From January 1995 to June 1996, Mr. Muellner was Executive Vice
President, Sales & Marketing for Caradon Doors & Windows, Ltd., a door and
window manufacturing company. From August 1992 to August 1994, Mr. Muellner was
President of LouverDrape, a window coverings company.
ROGER M. WASSERMAN, age 57, has served as Chief Financial Officer
since May 1998 and Treasurer since June 1998. Prior to joining the Company, Mr.
Wasserman was Controller of several divisions of Kellwood Company, a major
apparel wholesaler and distributor from July 1995 to May 1998. From October
1993 to July 1995, Mr. Wasserman was a Financial Consultant. From January 1990
to October 1993, Mr. Wasserman was Vice President Finance and Chief Financial
Officer for Chauvin International, Inc., an apparel wholesaler and distributor.
5
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid by the Company
during fiscal 1996, 1997 and 1998 to (i) each of the individuals serving as the
Company's principal executive officers during fiscal 1998, (ii) the four other
most highly compensated executive officers of the Company during fiscal 1998,
and (iii) up to two additional individuals who would have been among the
Company's four most highly compensated officers, but for the fact that they were
not serving as executive officers of the Company at the end of fiscal 1998
(collectively referred to as the "NAMED EXECUTIVE OFFICERS").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------------------------------------------------------------------
Securities All Other
Name and Principal Fiscal Other Annual Underlying Compensation
Position Year Salary Bonus Compensation Options (1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Raymond (Jay) H. Losi II 1998 $300,000 $ - $ * - $ -
Chief Executive Officer 1997 300,000 * 90,000
(Principal Executive Officer) 1996 300,000 * - 3,997
Raymond (Ray) H. Losi 1998 $109,231 $ $ * - $ -
Consultant 1997 131,731 * - -
1996 150,000 * - -
Warren F. Marr 1998 $137,782 $ 1,000 $ * - $ -
Vice President of Sales 1997 142,659 1,000 * 23,951
1996 133,757 7,500 * 2,667 8,200
Brad Ogden 1998 $116,461 $ 1,000 $ * - $ -
Former Chief Financial Officer 1997 131,652 1,000 * 12,500
1996 127,382 2,500 * - 7,790
</TABLE>
____________________
* Any perquisites and other personal benefits, securities or property are
less than $50,000 and less than 10% of total annual salary and bonus
reported for the named executive officer.
(1) Amounts represent Company annual contributions to the Defined Benefit
Pension Plan and Trust, which was terminated effective July 31, 1997.
INDIVIDUAL OPTION GRANTS TO NAMED EXECUTIVE
OFFICERS DURING FISCAL YEAR 1998
No stock options were granted by the Company to the Named Executive Officers
during the fiscal year ended July 31, 1998.
6
<PAGE>
FY 1998 OPTIONS EXERCISE AND FY 1998 YEAR-END VALUE TABLE
The following table sets forth information covering the value of unexercised
options and deferred stock units held by the Named Executive Officers as of July
31, 1998.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Options In-The-Money-Options
At End - FY 1998 At End-FY 1998(1)
----------------------------------------------------------
Acquired
Name of Executive Officer on Exercise Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Raymond (Jay) H. Losi II - 18,000 72,000 N/A N/A
Raymond (Ray) H. Losi - - - - -
Warren F. Marr - 30,558 9,571 $80,424 $30,245
William B. Ogden - - - - -
</TABLE>
(1) Calculated by determining the difference between the fair market value of
the Securities underlying the option at July 31, 1998 (the closing price of
$5.25 per share as quoted on the Nasdaq National Market) and the exercise
price of the Named Executive Officer's Option.
7
<PAGE>
COMPENSATION ARRANGEMENTS UPON RESIGNATION, RETIREMENT OR OTHER TERMINATION;
EMPLOYMENT AGREEMENTS
EMPLOYMENT RELATED AGREEMENTS. In April 1994, the Company entered into
employment agreements with Mr. Raymond (Jay) H. Losi II as President and Chief
Operating Officer, Mr. Rocco Attolico as Vice President of Manufacturing, Mr.
Warren F. Marr as Vice President of Sales, and Ms. Paula Coffman as Vice
President of Administrative Services. The employment agreement for Mr. Raymond
(Jay) H. Losi II provides for a three year initial term, while the employment
agreements for Messrs. Attolico and Marr and Ms. Coffman provide for one year
initial terms. In May 1998, the Company entered into an employment agreement
for one year with Mr. Roger Wasserman as Chief Financial Officer. In August
1998, the Company entered into an employment agreement with Steven Muellner for
two and one-half years as President. Each employment agreement renews
automatically following the expiration of its initial term unless 60 days prior
written notice is given. Pursuant to such automatic renewal provisions, the
Company's agreement with Mr. Raymond (Jay) H. Losi II renews for one additional
three year period, while the Company's agreements with Messrs. Attolico, Marr,
Wasserman and Muellner and Ms. Coffman each renew for one additional one year
period. Each employment agreement requires that the employee devote his or her
entire time to the performance of his or her executive obligations.
Each of the employment agreements includes the following provisions relating
to termination for cause: (i) the Company may terminate the employment of an
executive if the executive willfully breaches or habitually neglects his duties
or commits such acts of dishonesty, fraud or misrepresentation as would prevent
the effective performance of his duties; (ii) the executive may terminate his or
her employment with the Company if the Company breaches or fails to fulfill any
representations, warranties or covenants entered into with the executive,
demotes the executive, requires the executive to participate in any felony or
other crime, commits any act which adversely reflects upon the name and
reputation of the executive, if there is a change in control of the Company or
if the Company engages in other conduct constituting legal cause for
termination. Except for the employment agreement with Raymond (Jay) H. Losi II,
each of the employment agreements includes the following provisions relating to
termination without cause: (i) the employment of an executive shall terminate
automatically upon the death of the executive; (ii) the employment of an
executive may terminate at the Company's election if the executive is prevented
from discharging his duties under the agreement for a period specified due to
any physical or mental disability; or (iii) the employment of the executive may
be terminated at the executive's election upon prior written notice to the
Company. If Mr. Losi II terminates the agreement for cause pursuant to clause
(ii) of the first sentence of this paragraph, he is entitled to receive, in lieu
of any other remedy, three years base salary.
The employment of Raymond (Jay) H. Losi II terminates without cause upon his
death, or at the Company's election if he is unable to discharge his duties due
to any physical or mental disability for a period of 30 days. Effective as of
November 18, 1997, Mr. Losi's employment agreement was amended to eliminate the
right of Mr. Losi to terminate his employment agreement without cause upon 180
days notice and to provide that Mr. Losi will be the Chief Executive Officer of
the Company.
As base compensation under their respective employment agreements, Mr. Raymond
(Jay) H. Losi II receives $300,000 per year, Mr. Attolico receives $82,680 per
year, Mr. Marr receives $141,497 per year, Ms. Coffman receives $71,500 per
year, Mr. Wasserman receives $125,000 per year and Mr. Muellner receives
$250,000 per year. Base compensation for each employee is reviewed at least
once per year and may be increased at the discretion of the Board of Directors.
The employment agreements also provide for certain additional benefits.
Effective as of November 18, 1997, the employment agreement with Raymond (Ray)
H. Losi was mutually and voluntarily terminated, Mr. Losi voluntarily resigned
as Chief Executive Officer, and the Company and Mr. Losi entered into a
Consulting Agreement. The Consulting Agreement with Mr. Losi is for a term of
two years. Under the Consulting Agreement, Mr. Losi will receive a salary of
$100,000 per year. In addition, Mr. Losi received warrants to purchase 200,000
shares of Common Stock of the Company at a price of Five Dollars and Ten Cents
($5.10) per share, all of which are currently exercisable. The Company will also
pay the lease payments for two automobiles used by Mr. Losi, the automobile
insurance for those vehicles, and the premiums for Mr. Losi's health insurance
policies. Mr. Losi's consulting agreement automatically terminates upon his
death.
At the same time, the Company and Remy Capital Partners IV, L.P., entered into
a Consulting Agreement pursuant to which in exchange for the rendition of advice
and assistance on such financial matters as the Company may
8
<PAGE>
request, Remy Capital Partners IV, L.P. was granted warrants to purchase 400,000
shares of the Common Stock of the Company at a price of Five Dollars and Ten
Cents ($5.10) per share, all of which are currently exercisable. As additional
compensation for the services to be rendered, the Company also granted to Remy
Capital Partners IV, L.P. certain registration rights pursuant to a Registration
Rights Agreement entered into between the Company and Remy. The Consulting
Agreement with Remy is for a term of two years and provides that Remy is not
required to render services for more than twenty hours per month during the
term. Remy Capital Partners IV, L.P. owns 1,666,667 shares of the Common Stock
of the Company (in addition to the 400,000 warrants). The General Partner of
Remy Capital Partners IV, L.P. is Remy Investors, L.L.C. and the Managing Member
of Remy Investors, L.L.C. is Mark S. Siegel, the Company's Chairman of the
Board. Kenneth N. Berns is a director and the Secretary of the Company and is
employed by Remy Investors, L.L.C.
The employees and consultants who have entered into the agreements noted above
have, pursuant to the terms of such agreements, covenanted that they shall not,
for specified periods, compete with the Company within certain specified
geographic areas, or solicit the Company's employees or customers. Messrs.
Raymond (Jay) H. Losi II, Attolico, Marr, Wasserman and Muellner, and Ms.
Coffman have so covenanted for a period of one year following the termination of
each of their employment or services. In addition, these employees have
covenanted to return all proprietary information to the Company following the
termination of their respective employment agreements, and not use or disclose
any confidential information of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Carr, Hildebrand and Siegel, non-employee directors, served as members
of the Compensation Committee of the Board of Directors of the Company (the
"Compensation Committee") during fiscal 1998. None of the executive officers or
directors is a director on any other board which relationship would be construed
to constitute a compensation committee interlock within the meaning of the proxy
rules of the Securities and Exchange Commission.
9
<PAGE>
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings,
including this Proxy Statement in whole or in part, the following Report of the
Compensation Committee and Performance Graph for Variflex, Inc., on Executive
Compensation shall not be incorporated by reference in any such filings.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee was established by the Board of Directors in
March 1994. The Compensation Committee issues reports disclosing the
Compensation Committee's compensation policies applicable to the Company's
executive officers.
The Company's compensation program for executive officers is primarily
comprised of base salary, an annual incentive based on the achievement of
financial performance objectives, and long-term incentives in the form of stock
option grants. Executives also participate in various other benefits plans,
including a health insurance plan generally available to all employees of the
Company.
It is the Company's philosophy to pay base salaries and annual incentives
to executives at or above medium competitive levels for similarly-situated
companies based on the achievement of stretch performance objectives. Stock
option grants are intended to result in minimal or no rewards if the stock price
does not appreciate, but may provide substantial rewards to executives as
stockholders benefit from stock price appreciation. An important objective of
the Compensation Committee is to ensure that the compensation practices of the
Company are competitive and effectively designed to attract, retain and motivate
highly qualified personnel. In that regard, the Company's executive compensation
program is designed to reward and retain executives who are capable of leading
the Company in achieving its strategic and financial objectives.
Base Salary
Base salaries for executive positions are established relative to
comparable positions in similarly-sized consumer goods manufacturing and
distribution companies. The Committee has access to salary surveys and outside
compensation consultants to help determine the relevant competitive pay levels.
In determining salaries the Compensation Committee also takes into account
individual experience and performance, equity relative to other positions within
the Company, and specific issues particular to the Company.
Annual Incentives
The top six executive officers are eligible for annual incentives based on
the achievement of predetermined after-tax net income and individual objectives.
These objectives are established by the Board annually and represent stretch
levels of achievement. The performance measures and levels are reviewed annually
to ensure that the plan supports the objectives of the strategic plan and is
consistent with the competitive labor market.
Stock Option Grant
The Company strongly believes in tying employee rewards directly to the
long-term success of the Company and increases in stockholder value through
grants of executive stock options. Stock grants will also enable employees to
develop and maintain a significant stock ownership position in the Company's
common stock.
10
<PAGE>
Other Benefits
Executive officers are eligible to participate in benefits programs
designed for all full-time employees of the Company. Other all-employee benefits
programs include medical, dental, long-term disability and life insurance
coverage.
1998 Compensation
During fiscal 1998 the Company's revenues decreased 16% from the prior year
and the Company incurred a net loss of $3,488,000 versus a net loss of
$1,805,000 during the prior fiscal year. However, the Company made substantial
progress in the design and development of new products. Based on this
performance, only selective cost-of-living and merit salary increases were
implemented during the year and minimal cash bonuses were given during the year
to the Company's executive officers. If the Company's operating results improve
in fiscal 1999, the Company anticipates implementing a program of regular merit
salary adjustments for executive officers together with other forms of
compensation such as cash incentive bonuses and/or stock option awards.
Benefit Plan Replacement
During fiscal 1997 the Board of Directors, at the recommendation of both
the Company's independent auditors and its pension plan accountants, terminated
the Company's Defined Benefit Plan effective July 31, 1997 and launched in its
place a discretionary defined contribution plan. This change was made to take
advantage of the fact that the assets in the Defined Benefit Plan had
appreciated to a level that exceeded the present value of accrued benefit
obligations at the time of this action. The Board's decision was also intended
to reduce potential exposure to the Company, considering the fact that under the
Defined Benefit Plan, a decline in the value of plan assets, if it occurred,
could have to made up through contributions from the Company. The new defined
contribution plan was implemented effective August 1, 1997, and is intended to
offer employees greater long-term benefits at lower costs to the Company
compared to the Defined Benefit Plan. Participation and vesting requirements are
essentially the same under the defined contribution plan as compared to the
Defined Benefit Plan.
CEO Compensation
As with the other executive officers of the Company, total compensation for
the Chief Executive Officer, Mr. Raymond (Jay) H. Losi II is delivered through a
combination of base salary, annual incentive, stock options and standard
benefits afforded to all employees. Mr. Losi's total compensation was $300,000.
With respect to the above matters, this constitutes the report of the
Compensation Committee members named below.
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Michael T. Carr
Loren Hildebrand
Mark S. Siegel
11
<PAGE>
PERFORMANCE GRAPH
The following is a graph which compares the Company's cumulative total
stockholder return on the Common Stock with the cumulative total return on the
NASDAQ Stock Market-U.S. Index and the NASDAQ Non-Financial Stock Index from
June 17, 1994, the date of the Company's initial public offering, through July
31, 1998, the last day of fiscal 1998. The cumulative total shareholder return
is based on $100 invested in Common Stock of the Company and in the respective
indices on June 17, 1994 (including reinvestment of dividends):
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
-------------------------------------------------------------------------------------------------------
6/17/94 7/94 10/94 1/95 4/95 7/95 10/95 1/96 4/96 7/96 10/96 1/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VARIFLEX, INC. 100 110 132 98 103 92 54 50 53 39 37 35
NASDAQ STOCK MARKET (U.S.) 100 99 107 104 117 139 144 147 166 151 170 193
NASDAQ NON-FINANCIAL 100 99 109 105 119 143 146 148 170 151 170 193
<CAPTION>
----------------------------------------------------
4/97 7/97 10/97 1/98 4/98 7/98
<S> <C> <C> <C> <C> <C> <C>
VARIFLEX, INC. 32 31 31 39 34 34
NASDAQ STOCK MARKET (U.S.) 176 223 224 228 263 263
NASDAQ NON-FINANCIAL 173 220 218 219 255 257
</TABLE>
12
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission reports of ownership and changes in ownership of Common
Stock and other equity securities of the Company. Officers, directors and
greater than ten percent stockholders are also required to furnish the Company
with copies of all Section 16(a) forms they file.
A Form 3 for Roger M. Wasserman was not timely filed upon employment as the
Chief Financial Officer of the Company. To the Company's knowledge, based
solely on a review of the copies of such reports furnished to the Company during
fiscal 1998, all other Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% Stockholders were complied with.
2. RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected Ernst & Young LLP, independent certified
public accountants, as independent auditors for the Company for the fiscal year
ending July 31, 1999. A resolution will be submitted to stockholders at the
meeting for ratification of such selection. Although ratification by
stockholders is not a prerequisite to the ability of the Board of Directors to
select Ernst & Young LLP as the Company's independent auditors, the Company
believes such ratification to be desirable. If the stockholders do not ratify
the selection of Ernst & Young LLP, the selection of independent auditors will
be reconsidered by the Board of Directors; however, the Board of Directors may
select Ernst & Young LLP notwithstanding the failure of the stockholders to
ratify its selection.
The Board of Directors recommends a vote "FOR" this resolution. Proxies
solicited by the Board of Directors will be so voted unless stockholders specify
a contrary vote. The resolution may be adopted by a majority of the votes cast
with respect thereto.
Ernst & Young LLP have been the Company's auditors since 1992.
It is expected that a representative of Ernst & Young LLP will be present at
the meeting, will have an opportunity to make a statement if he desires to do
so, and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
RATIFICATION OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT AUDITORS
STOCKHOLDERS' PROPOSAL
Proposals of Stockholders which are intended to be presented at the 1999
Annual Meeting must be received by the Company at its principal executive
offices no later than August 1, 1999 for inclusion in the Company's proxy
materials for that meeting.
13
<PAGE>
OTHER MATTERS
The Proxy and Proxy Statement have been approved by the Board of Directors and
sent to stockholders by its authority. The matters referred to in the Notice of
Meeting and in the Proxy Statement are, to management's knowledge, the only
matters which will be presented for consideration at the Meeting. If any other
matters properly come before the Meeting, the persons named in the enclosed
Proxy intend to vote said Proxy on any such matters in accordance with their
best judgment.
This Proxy Statement incorporates certain Financial Statements and other
information from the Company's Annual Report on Form 10-K, as amended, delivered
herewith for the fiscal year ending July 31, 1998.
Solicitation of proxies will be made by directors, officers and employees of
the Company by mail, telephone and, to the extent necessary, by telegrams and
personal interviews. Expenses in connection with the solicitation of proxies
will be borne by the Company. Brokers, custodians and fiduciaries will be
requested to transmit proxy material to the beneficial owners of Common Stock
held of record by such persons, at the expense of the Company.
By order of the Board of Directors
/s/ KENNETH N. BERNS
-----------------------------------
Kenneth N. Berns, Secretary
November 3, 1998
14
<PAGE>
Please date, sign and mail your
proxy card back as soon as possible!
Annual Meeting of Stockholders
VARIFLEX, INC.
December 8, 1998
Please Detach and Mail in the Envelope Provided
A [X] Please mark your
votes as in this
example.
FOR all nominees WITHHOLD
listed at right (except AUTHORITY
as marked to the to vote for all nominees
contrary below) listed at right
1. ELECTION [_] [_] Nominees:
OF Kenneth N. Berns
DIRECTORS Michael T. Carr
(Instruction: To withhold authority to vote for any Loren Hildebrand
individual nominee, strike a line through the Raymond (Ray) H. Losi
nominee's name at right:) Raymond (Jay) H. Losi, II
Mark S. Siegel
FOR AGAINST ABSTAIN
2. The proposal to ratify the appointment of [_] [_] [_]
ERNST & YOUNG LLP.
3. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the meeting.
Stockholders planning to attend the Annual Meeting are [_]
requested to indicate the number of persons attending in the
block.
Stockholders may attend the meeting whether or not the block is filled in.
THE SHARES REPRESENTED HEREBY WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS
IN THIS PROXY. IF INSTRUCTIONS ARE NOT INCLUDED HEREIN, THIS PROXY WILL BE VOTED
FOR ITEMS 1 AND 2.
- ---
PLEASE MARK, DATE, SIGN AND MAIL THIS PROXY CARD PROMPTLY IN THE ENVELOPE
ENCLOSED - NO POSTAGE IS REQUIRED.
_______________________ ___________________________ DATE _______________, 1998
(SIGNATURE) (SIGNATURE IF HELD JOINTLY)
NOTE: (Please sign as name(s) appear(s) on this proxy card. If joint account,
each joint owner should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporation name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.)
<PAGE>
PROXY COMMON STOCK PROXY PROXY
VARIFLEX, INC.
5152 North Commerce Avenue, Moorpark, CA 93021
REVOCABLE PROXY FOR ANNUAL MEETING ON DECEMBER 8, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Raymond H. Losi II and Kenneth N. Berns, and
each of them jointly and severally, as attorneys and proxies of the undersigned,
with full power of substitution, and hereby authorizes them to represent and to
vote, as designated on the reverse side, all the shares of common stock of
Variflex, Inc. which the undersigned may be entitled to vote at the Annual
Meeting of Stockholders to be held at the Radisson Hotel, 999 Enchanted Way,
Simi Valley, California, on December 8, 1998, and at all adjournments thereof
with all powers the undersigned would possess if personally present and voting
thereat.
IMPORTANT - THIS PROXY MUST BE SIGNED AND DATED ON THE REVERSE SIDE.
