<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended July 31, 1998 Commission File No.: 0-24338
VARIFLEX, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3164466
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
5152 NORTH COMMERCE AVENUE
MOORPARK, CALIFORNIA 93021
(Address of principal executive offices)
Registrant's telephone number, including area code:
(805) 523-0322
__________________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value per share
__________________________
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 ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the Common Stock held by non affiliates of
the Registrant as of October 9, 1998 was approximately $10,742,000 based upon
the closing sale price of the Registrant's Common Stock on such date.
Shares of $.001 par value Common Stock outstanding at October 9, 1998:
6,025,397 shares.
__________________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1998 Annual Meeting of
Stockholders scheduled to be held on December 8, 1998 are incorporated by
reference into Part III of this Form 10-K.
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Statements in this Annual Report on Form 10-K under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as oral statements that may be made by the Company or by
officers, directors or employees of the Company acting on the Company's behalf,
that are not historical fact constitute "forward-looking 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. All statements, trend
analysis and other information contained in this Form 10-K relative to markets
for the Company's products and trends in net sales, gross margins and
anticipated expense levels, as well as other statements including words such as
"anticipate," "plan," "estimate," "expect," "intend" and other similar
expressions, constitute forward-looking statements. These forward-looking
statements involve risks and uncertainties, including, but not limited to: the
risk of reduction in consumer demand for the product categories in which the
Company does business or for the Company's products in particular; the risk that
the Company may not continue to expand and diversify its business and product
lines; the risk of loss of one or more of the Company's major customers; 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 its products are price competitive;
and the risk that the Company may not be able to obtain its products and
supplies on substantially similar terms, including cost. In addition, the
Company's business, operations and financial condition are subject to risks
which are described in the Company's reports and statements filed from time to
time with the Securities and Exchange Commission, including this Report. Actual
results of operations may differ materially from those contained in the forward-
looking statements.
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS.
Variflex, Inc. (the "Company") is a leading distributor and wholesaler
in the United States of in-line skates, skateboards, recreational safety
helmets, athletic protective equipment (such as wrist guards, elbow pads and
knee pads used by skaters and skateboarders), snowboards and related
accessories, and portable instant canopies. 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.
The Company was originally incorporated in California in 1977, and
reincorporated in Delaware in March 1994. Unless the context otherwise
requires, references in this Form 10-K to the "Company" refer to Variflex, Inc.
and its subsidiaries.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Financial information concerning the Company's business is included in
Items 6, 7, 8 and 14.
(C) NARRATIVE DESCRIPTION OF BUSINESS.
(1) PRODUCTS.
The Company's principal products are in-line roller skates, which feature
wheels mounted in a straight line on a composite plastic chassis, functioning
much like the blade on an ice skate. The Company currently sells various models
of in-line skates to the mass market under the Variflex(R) brand.
The Company's in-line roller skates generally consist of a molded polymer
boot with, depending upon the model, either an integrated wheel chassis or a
wheel chassis riveted to the bottom of the boot, and high density polyurethane
wheels mounted on bearings and bolted through the wheel chassis. The boot
contains a removable breathable nylon liner which increases comfort. The wheel
chassis is, depending on the model, made of either fiberglass-filled nylon or
various plastics. Each chassis holds three or four wheels mounted in line, and
each pair of skates has either one or two brakes, consisting of a hard rubber
pad mounted on the rear of the chassis.
The Company also markets and distributes skateboards, skoot skates and
scooters. The Company presently offers different models of skateboards under the
Variflex(R) brand and under the Static(R) brand, various models of the Variflex
Skoot Skate, which is a skateboard with a removable handle for young children
and beginners, and various models of scooters in two different sizes.
Additionally, the Company offers a line of skating and skateboarding protective
equipment, such as knee pads, elbow pads and wrist guards, as well as
accessories and replacement parts such as wheels.
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During 1997, the Company developed and began marketing and distributing
its new Quik Shade(R) instant canopy, designed to offer portable shade and
shelter for a variety of uses with the convenience of easy set-up and take-down.
The frames and tops for the Quik Shade(R) are manufactured overseas by
independent contractors. The Company presently offers multiple models of the
Quik Shade(R).
The Company also markets and distributes a line of bicycle and
recreational safety helmets. The helmets are marketed to cyclists, skateboarders
and in-line skaters. The Company presently has adult helmet models, young adult
models, youth models, one child model and one toddler model. Each model features
ventilated aerodynamic designs with adjustable harnesses, and each comes in a
variety of colors and graphics. The Company's helmets are manufactured by
independent contractors through a process of injecting a polyurethane foam to
form a strong, lightweight protective inner shell bonded to a hard PVC outer
shell. All of the Company's helmets meet or exceed the standards of the American
Society for Testing and Materials (ASTM).
During 1998, the Company sold the assets of the manufacturing operation
of its wholly-owned subsidiary, Static Snowboards, Inc., and closed the
manufacturing factory, with the intention of sourcing snowboards from
independent contractors. The BarfootTM brand is currently being sourced to
domestic independent contractors.
For the fiscal years ended July 31, 1998, 1997 and 1996, these products
comprised the following percentages of the Company's total gross sales:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
In-line skates 56% 69% 77%
Skateboards and scooters 18% 17% 10%
Canopies 9% 1% -
Bicycle and recreational safety helmets 7% 5% 5%
Athletic protective equipment 5% 5% 8%
Snowboards 5% 3% (*)
Other (*) (*) (*)
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</TABLE>
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(*) Less than one-half of one percent.
The Company's products are marketed in North America primarily through a
network of independent sales representatives and marketing organizations,
through attendance by representatives of the Company at industry trade shows and
through customer visits by Company employees. The Company's current customers
consist primarily of national mass merchandisers, regional mass merchandisers,
catalog houses, major sporting goods chains, and international exporters. The
Company also sells to independent sporting goods stores and specialty shops,
particularly with respect to its Barfoot(TM)products. The Company's wholly
owned subsidiary, Oketa Ltd., is used to facilitate sales and the shipment of
products to international customers and to customers in the United States who
desire to purchase product through international letter of credit transactions.
(2) STATUS OF PRODUCTS IN DEVELOPMENT.
The Company frequently changes the cosmetic features of its products,
such as graphics and colors, and attempts to develop new products or new designs
for existing products in response to customer requests or changes in consumer
preferences.
During 1998, the Company introduced additional models of its Quik
Shade(R) portable instant canopy. This product was initially introduced during
1997, with only one model. A U.S. Patent was issued for the Quik Shade(R) during
1998.
Despite these and other efforts by the Company to update the designs,
features and componentry of existing products and develop potential new products
or new designs, there can be no assurance that such efforts will be successful
or that such changes or new products will be readily acceptable to customers and
consumers.
3
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(3) SOURCE OF MATERIALS.
With the exception of snowboards, all of the Company's products are
sourced from independent contractors located primarily in Asia. These suppliers
manufacture, assemble and package the Company's products under the detailed
specifications of the Company's management representatives who visit frequently
to oversee quality control and work on cost containment. The raw materials and
subcomponents for these products are manufactured by independent contractors,
most of which are also located primarily in Asia, that have been procured by the
Company's suppliers or, often, by the management of the Company.
The Company submits purchase orders to its manufacturers for the
production of specific amounts of its products and has not entered into any
long-term contractual agreements. The Company negotiates the cost of its
products directly with its foreign suppliers in U.S. Dollars.
A significant portion of the Company's products, including various models
of its in-line skates, are manufactured in mainland China, which trades with the
United States under a Most Favored Nation ("MFN") trade status. While the
Company believes that alternative manufacturing sources could be found,
maintaining existing costs will depend upon these products continuing to be
treated under MFN tariff rates. From time to time, the U.S. has threatened to
rescind MFN tariff rates and impose trade sanctions on certain goods
manufactured in China. To date, no such sanctions have been imposed that have
affected the Company or its products, however there can be no assurance with
regard to the possible imposition of sanctions in the future.
(4) PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS.
The Company holds or has pending certain design patents, but no utility
patents. In the course of its business the Company employs various trademarks
and trade names, including its own logos, in the packaging and advertising of
its products. Registration of various other trademarks for the Company's
products are pending. The Company also has registered the Variflex(R), Static(R)
and Quik Shade(R) trademarks in the United States, and has secured a worldwide
watch to alert the Company to any unauthorized use in any other parts of the
world.
(5) MAJOR CUSTOMERS.
The Company had four customers which have each individually accounted for
more than 10% of the Company's sales in one or more of the past three fiscal
years: the Kmart Corporation, based in Detroit, Michigan; Sears, Roebuck and
Co., based in Chicago, Illinois; Target Stores, based in Minneapolis, Minnesota;
and Toys "R" Us, Inc., based in Paramus, New Jersey.
Collectively, sales to Kmart, Sears, Target and Toys "R" Us represented
approximately 67%, 70%, and 74% of the Company's total gross sales for the
fiscal years ended July 31, 1998, 1997, and 1996, respectively. Kmart, which
accounted for 15% of the Company's gross sales for fiscal 1997, is no longer a
major customer for the Company's in-line skates and skateboards. However, due to
the pricing structure for Kmart, this event had a positive impact on the
Company's gross margin for fiscal 1998.
(6) BACKLOG.
The Company had approximately $3,459,000 in unfilled purchase orders as
of September 30, 1998, compared to approximately $4,523,000 as of September 30,
1997. The Company believes that substantially all of these unfilled orders are
firm and will be filled in the 1999 fiscal year. Of the backlog as of September
30, 1998, approximately $991,000 represented orders for products which had not
yet been received from suppliers as of that date. Substantially all of the
remaining $2,468,000 of the backlog at September 30, 1998 represents fall
booking orders of products on hand to be shipped at future dates.
(7) GOVERNMENT CONTRACTS.
The Company has no United States or foreign government contracts.
4
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(8) COMPETITION.
The principal competitive factors in each of the Company's product
categories are price and performance. With respect to in-line skates in
particular, the main areas of difference in product performance are in the
weight and strength of the boot and frame, the hardness of the wheels, and the
quality of the wheel bearings. The Company offers a 60-day warranty on its
products with the exception of the Quik Shade(R) instant canopy where a one year
warranty is offered. Beyond such warranty, the Company does not offer service
on its products, and does not believe that is an important competitive factor.
Management believes that the Company has a significant market share in
the in-line skate category, particularly in the mass market segment, where
Variflex enjoys name recognition and is considered a market leader. The
Company's primary competitors in the mass market include First Team Sports, Inc.
(Skate Attack), Roller Derby (CAS), Seneca and certain models from Rollerblade,
Inc. (Blade Runner). In the case of athletic protective equipment, Franklin
Sports is the Company's primary competitor in the mass market. Bell Sports
Corp. (Bell and BSI) and Protective Technologies, Inc. (PTI) are the primary
competitors in the bicycle safety helmet mass market. For instant canopies, a
new category introduced in 1997, the Company's primary competitors are
International E-Z Up, Inc. and KD Kanopy, Inc. In addition, the Company may
compete with its primary customers when such customers directly source products
that the Company sells.
While management believes that the quality of its products and the
service it provides to its customers are important factors in retaining
accounts, the Company clearly operates in a highly competitive environment and
there are no significant technological or manufacturing barriers to entry.
Management believes that price is a major competitive factor, particularly in
the mass market. At present, the Company believes that its products in each
category, when compared to competitors' products of comparable quality, are
currently offered at comparable or lower prices than most or all of its
competitors. However there can be no assurance that other companies, whether
new enterprises or established members of the retail or sporting goods
industries, will not be able to develop products of comparable or higher quality
at lower prices, or that the Company's price structure will not be affected by
future circumstances.
(9) RESEARCH AND DEVELOPMENT.
Estimated research and development expenses for Company-sponsored
research activities relating to the development of new products, services or
techniques or the improvement of existing products, services or techniques were
not material in fiscal 1998, fiscal 1997 and fiscal 1996.
(10) EFFECT OF ENVIRONMENTAL REGULATION.
To the extent that the Company's management can determine, there are no
federal, state or local provisions regulating the discharge of materials into
the environment or otherwise relating to the protection of the environment, with
which compliance by the Company has had or is expected to have a material effect
upon the capital expenditures, earnings or competitive position of the Company.
(11) EMPLOYEES.
As of July 31, 1998, the Company employed approximately 86 full-time
employees. None of the Company's employees are represented by unions.
ITEM 2. PROPERTIES.
The Company's principal facility is a leased 104,000 square foot concrete
tilt-up building comprising the Company's corporate headquarters and executive
offices, as well as serving as the United States distribution center for the
Company's products, located at 5152 North Commerce Avenue, Moorpark, California,
approximately forty miles northwest of Los Angeles, California. The Company also
subleases in an immediately adjacent building approximately 27,000 square feet
consisting primarily of additional warehouse space. The leases for these
facilities expire December 31, 2000 and June 30, 1999, respectively, after which
management believes new leases can be negotiated, at those locations or for
other equivalent space, on satisfactory terms. The Company also stores inventory
in temporary facilities from time to time as required due to the timing of
shipments.
5
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In July 1995, the Company's subsidiary, Static Snowboards, Inc. entered
into a lease agreement for a facility of approximately 30,000 square feet,
located in Huntington Beach, California. The lease expires September 30, 2000.
With the closure of the Static manufacturing operation, the Company is currently
attempting to sublet the facility in Huntington Beach, California.
Management believes that the Company's present facilities will be
adequate for the near future.
ITEM 3. LEGAL PROCEEDINGS.
In March 1998, the Company was served with two lawsuits entitled: (i)
Mark C. Carter and International E-Z 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 the 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's 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. In September 1998, the Company
received a demand for defense and indemnification of Service Merchandise
Company, Inc. in that action entitled Mark C. Carter, et. al. v. Service
Merchandise Company, Inc., (Case No. C98-03274 DLJ ENB) in the United States
District Court for the Northern District of California. The complaint in this
action is virtually identical to the complaint on behalf of Service Merchandise
in the above-referenced action by Carter in the Central District of California
in Los Angeles. The Company has agreed to indemnify and defend Service
Merchandise (which is a retailer of the Company's product) in this action. The
Company and Service Merchandise filed an answer to the complaint on behalf of
Service Merchandise in the Central District of California (Los Angeles) action.
In October 1998, counsel for the Company and Service Merchandise plan to move to
dismiss the Northern District of California (Oakland) action based on another
action pending, or, in the alternative, to transfer it to the Central District
of California in Los Angeles. These lawsuits are at 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 and 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 and 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 and adverse effect on the Company's business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders during
the quarter ended July 31, 1998.
6
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EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The following sets forth the names and ages of executive officers and
directors of the Company as of September 30, 1998, in addition to information
regarding their positions with the Company, their periods of service in such
positions, and their business experience for the past five years.
<TABLE>
<CAPTION>
NAME AND AGE OF CURRENT POSITIONS WITH COMPANY AND PRINCIPAL
EXECUTIVE OFFICER OCCUPATIONS FOR THE PAST FIVE YEARS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Mark S. Siegel Chairman of the Board and Director since November 1997; President of REMY Investors &
Age 47 Consultants, Inc., a private investment and financial management company, and its affiliates
(collectively, "Remy") since its founding in 1993.
Raymond H. Losi, II Chief Executive Officer since November 1997; Chief Operating Officer of the Company
Age 46 since January 1992; Director of the Company since 1985; President of the Company from
1992 to August 1998; Vice President of Procurement for the Company from 1984 to January 1992;
Director of Product Development for the Company since its inception in August 1977. Mr. Losi
is the son of Raymond H. Losi, who is a director of the Company.
Steven L. Muellner President of the Company since August 1998; President and Co-Chief Executive Officer of
Age 48 Applause Enterprises, a gift and toy company, from July 1996 to May 1998; Executive
Vice President, Sales and Marketing for Caradon Doors & Windows, Ltd., a door and
window manufacturing company, from January 1995 to June 1996; President of LouverDrape,
a window coverings company, from August 1992 to August 1994.
Roger M. Wasserman Chief Financial Officer of the Company since May 1998 and Treasurer of the Company
Age 56 since June 1998; Controller of several divisions of Kellwood Company, a major apparel
wholesaler and distributor, from July 1995 to May 1998; Financial Consultant from
October 1993 to July 1995; Vice President Finance and Chief Financial Officer for
Chauvin International, Inc., an apparel wholesaler and distributor from January 1990 to
October 1993.
Rocco Attolico Vice President of Manufacturing and Distribution for the Company since January 1994;
Age 57 Shipping Manager for the Company from July 1991 to January 1994.
Paula Coffman Vice President of Administrative Services for the Company since January 1993; Product
Age 34 and Sales Planning Manager for the Company from December 1991 to January 1993.
Warren F. Marr Vice President of Sales for the Company since January 1990.
Age 57
Randall L. Bishop Secretary of the Company since January 1998; Director of the Company since November
Age 29 1997; Employed by Remy since August 1997 and previously associated with Remy from July
1993 to July 1995.
</TABLE>
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<TABLE>
<CAPTION>
NAME AND AGE OF CURRENT POSITIONS WITH COMPANY AND PRINCIPAL
EXECUTIVE OFFICER OCCUPATIONS FOR THE PAST FIVE YEARS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Michael T. Carr Director of the Company since March 1998; President and Chief Executive Officer of
Age 45 Weider Publications, Inc., a publisher of several consumer magazines and specialty
publications, since April 1990.
Loren Hildebrand Director of the Company since February 1994; President of Creative Consultants, which
Age 59 provides consulting services to the toy industry, since 1992; Executive Vice President
of Lewis Galoob Toys, Inc., toy manufacturer, from May 1994 to September 1997.
Raymond H. Losi Director of the Company since its inception in August 1977; Chairman of the Board from
Age 75 1977 until November 1997; Chief Executive Officer of the Company since August 1989
until November 1997; President of the Company from 1977 until August 1989. Mr. Losi is
the father of Raymond H. Losi II, who is an officer and director of the Company.
</TABLE>
8
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(A) MARKET INFORMATION.
The range of trading prices for the Company's Common Stock during each
of the quarters of the fiscal years ended July 31, 1997 and 1998 was as follows
(per share):
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Quarter ended:
October 31, 1996 $6/7/8/ $5/3/8/
January 31, 1997 6/1/4/ 4/3/8/
April 30, 1997 6 4/5/8/
July 31, 1997 5/5/8/ 4/1/2/
October 31, 1997 5 3/3/4/
January 31, 1998 6/13/16/ 3/7/8/
April 30, 1998 6/1/4/ 4/13/16/
July 31, 1998 6 4/3/4/
</TABLE>
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "VFLX."
(B) HOLDERS.
The Company believes there were approximately 1,480 holders of the
Company's Common Stock as of October 9, 1998. The number of stockholders was
computed by including an estimate of the number of those stockholders whose
stock is held for them by participants in a clearing agency as of that date.
There were 116 holders of record of the Company's Common Stock on October 9,
1998.
(C) DIVIDENDS.
The Company has never paid cash dividends and has no present intention to
pay cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
(In thousands, except per share data)
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Operations Data:
Net sales $43,148 $51,661 $72,379 $100,317 $80,000
Pre-tax income (loss) (2,704) (3,083) 680 11,193 11,176
Net income (loss) (3,488) (1,805) 564 6,921 6,584
Net income (loss) per share:
Basic ($0.58) ($0.30) $ 0.09 $ 1.15 $ 1.41
Diluted ($0.58) ($0.30) $ 0.09 $ 1.15 $ 1.40
Weighted avg. shares outstanding:
Basic 6,025 6,025 6,025 6,005 4,683
Diluted 6,025 6,025 6,039 6,039 4,698
Balance Sheet Data:
Total assets $44,755 $47,893 $49,405 $ 51,221 $47,456
Working capital 39,283 40,210 28,346 31,022 25,494
Long-term obligations -- -- -- 103 58
Stockholders' equity 39,872 43,100 44,812 44,359 37,004
</TABLE>
9
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
YEAR ENDED JULY 31, 1998 COMPARED TO YEAR ENDED JULY 31, 1997
NET SALES. Net sales for the fiscal year ended July 31, 1998 totaled
$43,148,000, a decrease of $8,513,000, or 16% from fiscal 1997 net sales of
$51,661,000. Decreases in volume and average selling prices with respect to the
Company's in-line skate, athletic protective equipment, skateboards and scooter
categories, offset to a lesser degree by increases in volume in the helmet and
instant canopy categories, were the primary factors leading to the decline in
total sales. Net sales were also adversely affected during fiscal 1998 by
competitive pressures, which caused sales prices to decline in many of the
Company's product categories.
With respect to in-line skates, gross sales for fiscal 1998 totaled
$24,926,000, a decrease of approximately $12,006,000, or 33%, compared to fiscal
1997, as unit volume in fiscal 1998 totaled 1,507,000 units, a decrease of
approximately 520,000, or 26%. The average price per unit (gross revenues
divided by units sold) of the Company's in-line skates was approximately $16.48
during fiscal 1998, compared to $18.22 for fiscal 1997. The decrease in in-line
skate sales was primarily due to a continuing industry-wide decline in consumer
demand compared to the prior year, as well as to the fact that Kmart
Corporation, which accounted for 15% of the Company's gross sales for fiscal
1997 only accounted for 5% for fiscal 1998, and is no longer a major customer
for the Company's in-line skates and skateboards.
Gross sales for athletic protective equipment during fiscal 1998 totaled
$2,173,000, a decrease of approximately $524,000, or 19%, compared to fiscal
1997, while unit volume in fiscal 1998 was 441,000, a decrease of approximately
75,000, or 15%. The Company's sales of these products generally correlate with
sales of in-line skates; thus the decrease in sales of protective equipment also
is primarily attributable to the factors discussed above.
Gross sales of bicycle and recreational safety helmets during fiscal 1998
totaled $3,112,000, an increase of approximately $604,000, or 24%, compared to
fiscal 1997, while unit volume increased approximately 55,000, or 16%, to a
total of 402,000 units during fiscal 1998. The increase in helmet sales is
primarily due to the introduction of the new 3-D recreational helmets during
fiscal 1998.
Gross sales of skateboards and scooters during fiscal 1998 totaled
$7,757,000, a decrease of approximately $1,516,000, or 16%, compared to fiscal
1997, on total volume of 578,000 units, a decrease of approximately 91,000
units, or 14%. The decrease is primarily due to a reduction in skateboard sales
to Kmart Corporation of $1,533,000 between fiscal 1998 and fiscal 1997, since
Kmart is no longer a major customer for this product category.
Gross sales of snowboards and snowboarding accessories, such as bindings,
leashes and miscellaneous apparel items, during fiscal 1998 totaled $2,085,000,
an increase of approximately $602,000, or 41%, compared to fiscal 1997, while
unit volume of snowboards increased approximately 19,500, or 201%, to a total of
29,200 units during fiscal 1998. The increase in snowboard and snowboarding
accessories sales is primarily due to the introduction of this product category
to the major mass market merchandisers during fiscal 1998.
Gross sales of portable instant canopies totaled $4,071,000 during fiscal
1998, which was the Company's first full year in the category. Gross sales for
fiscal 1997 totaled $441,000. The Company sold a total of approximately 41,000
Quik Shade(R) instant canopies in 1998 compared to approximately 5,000 in the
prior year, with the major portion of sales primarily due to the Company opening
a national program in the home improvement distribution market.
Sales to the Company's four largest accounts, each of which is a major
mass market merchandiser, represented 67% of the Company's gross sales in fiscal
1998, compared to 70% in fiscal 1997. The decrease is the result of several
factors including the deletion of Kmart Corporation during the year as a major
customer for the Company's in-line skates and skateboards. This decrease in
sales was partially offset by the addition of The Home Depot, which was not one
of the Company's four largest accounts, as a significant customer for the Quik
Shade(R) Canopy.
By product category, in-line skates, athletic protective equipment and
helmets accounted for 56%, 5% and 7%, respectively, of the Company's total gross
sales during fiscal 1998, compared to 69%, 5% and 5%, respectively, during
fiscal 1997. Skateboards and scooters accounted for 18% of the Company's total
gross sales during fiscal 1998, compared to 17% during fiscal 1997. Portable
instant canopies represented 9% of total gross sales during 1998, compared to 1%
in the prior year. Snowboards and snowboarding accessories represented 5% of
total gross sales during fiscal 1998, compared to 3% in fiscal 1997
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GROSS PROFIT. Gross profit for the fiscal year ended July 31, 1998
decreased by $100,000 compared to the fiscal year ended July 31, 1997,
representing a 1% decrease. The Company's gross profit margin as a percentage
of net sales was 15.3% in fiscal 1998, compared with 13.0% in fiscal 1997. The
increase in gross margin percentage is due to several factors, including the
impact of the addition to the sales product mix of Quik Shade canopies which had
a higher margin, as well as lower product costs as a result of beneficial
sourcing during fiscal 1998, the effects of higher than usual amounts of close-
out sales during fiscal 1997 and the decrease in sales to Kmart Corporation
during fiscal 1998 which had a positive impact on the Company's gross margin due
to the pricing structure for Kmart. 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 in order to 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
fiscal 1998 totaled $10,780,000, or 25.0% of net sales. Operating expenses for
fiscal 1997 were $10,599,000, or 20.5% of net sales.
Selling and marketing expenses decreased by $1,464,000, or 23%, to
$4,880,000 for fiscal 1998 compared to fiscal 1997. Selling and marketing
expenses for fiscal 1998 amounted to 11.3% of net sales, compared to 12.3% in
the prior year. The decrease in amount and as a percentage of net sales is
primarily due to decreased advertising expenses for co-op programs with certain
of the Company's major customers as a result of the elimination or reduction of
certain advertising programs that were fixed dollar allowances, or replacement
of such programs with volume-based programs.
General and administrative expenses increased by $650,000, or 15%, to
$4,905,000 for fiscal 1998 compared to fiscal 1997. General and administrative
expenses for fiscal 1998 amounted to 11.4% of net sales, compared to 8.2% in
fiscal 1997. The dollar increase is primarily due to non-cash consulting
expenses of $702,000 recognized in connection with the Company entering into
consultation agreements, and issuing stock warrants as compensation under the
agreements, with REMY Capital Partners IV, LP, a private investment partnership
("Remy") and Raymond H. Losi, the Company's co-founder and former Chairman of
the Board. As compensation under these agreements, Remy and Mr. Losi received
warrants to purchase 400,000 and 200,000 shares, respectively, of the Company's
common stock. Excluding such consulting expenses, the Company's general and
administrative expense for fiscal 1998 decreased $52,000 or 1% compared to
fiscal 1997, due primarily to minor changes in various expenses.
During fiscal 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 the snowboard operations of its wholly-owned
subsidiary, Static Snowboards, Inc. Static's operating losses and the continuing
challenges facing the snowboard industry in general led to the conclusion that
impairment of the subsidiary's assets had occurred. In fiscal 1998, the Company
sold certain assets of Static, resulting in no significant gain or loss, and
closed its manufacturing facility with the intention of sourcing snowboards from
independent contractors located in Asia.
OTHER INCOME (EXPENSE). Other income for the fiscal year ended July 31,
1998 was $1,459,000, an increase of $660,000, or 83%, compared to fiscal 1997.
This increase is due to a decrease in interest expense of $39,000 resulting from
no short-term borrowings during fiscal 1998 compared to fiscal 1997, as well as
an increase in interest income of $621,000 due primarily to a change during the
year in the investment of marketable securities from lower yielding tax-exempt
securities to higher yielding taxable securities, of which 60% was invested in
high-yield bond funds, compared to fiscal 1997.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The provision for income taxes
for fiscal 1998 consists of the valuation allowance established against the
prior year net deferred tax asset. No tax benefit was recorded for the fiscal
1998 net operating losses due to either the non-deductibility of certain charges
included in the net operating loss or the uncertainty of realizing the tax
benefits of such losses under Statement of Financial Accounting Standard No. 109
"Accounting for Income Taxes." The Company's effective tax rate and provision
(benefit from) income taxes in fiscal 1997 differed from the federal statutory
rate primarily due to interest income, some of which is exempt from federal
income taxes due to the nature of the investments from which it is derived.
RECENT RESULTS. Net sales for the three months ended July 31, 1998,
which represents the fourth quarter of the Company's fiscal year, were
$8,286,000, a decrease of 24%, compared to $10,973,000 for the corresponding
period of the prior year. For the quarter, sales of in-line skates, athletic
protective equipment, skateboards and scooters, and snowboards and snowboarding
accessories were down 45%, 32%, 25% and 181%, respectively, while helmets and
portable instant canopies increased 37% and 313%, respectively, in comparison to
the fourth quarter of the prior year. These fluctuations were due to similar
factors as discussed above in the year-over-year comparisons for each of these
product categories.
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The Company's net loss for the quarter ended July 31, 1998 was $699,000
or $0.12 per share, compared with a net loss of $895,000, or $0.15 per share for
the corresponding period of the prior year. The decrease in loss is primarily
due to an increase in gross profit margin as a percentage of net sales of 1.7%
as a result of a higher margin sales product mix for the quarter ended July 31,
1998 versus the quarter ended July 31, 1997, and decreased advertising expenses
for co-op programs as discussed above in the year-over-year comparisons.
YEAR ENDED JULY 31, 1997 COMPARED TO YEAR ENDED JULY 31, 1996
NET SALES. Net sales for the fiscal year ended July 31, 1997 totaled
$51,661,000, a decrease of $20,718,000, or 29% from fiscal 1996 net sales of
$72,379,000. Decreases in volume and average selling prices with respect to the
Company's in-line skate, athletic protective equipment and bicycle and
recreational safety helmet categories were the principal factors leading to the
decline in total sales.
With respect to in-line skates, gross sales for fiscal 1997 totaled
$36,932,000, a decrease of approximately $20,214,000, or 35%, compared to fiscal
1996, as unit volume in fiscal 1997 totaled 2,027,000 units, a decrease of
approximately 600,000, or 23%. The average price per unit (gross revenues
divided by units sold) of the Company's in-line skates was approximately $18.22
during fiscal 1997, compared to $21.75 for fiscal 1996. The decrease in in-line
skate sales was primarily due to heavy inventory levels at retail throughout
much of the year, as well as an industry-wide decline in consumer demand for in-
line skates in general compared to prior year. These factors, as well as the
influences of strong competition in the mass market, in turn led to continued
significant pricing pressures within the category during the year.
Gross sales for athletic protective equipment during fiscal 1997 totaled
$2,697,000, a decrease of approximately $2,971,000, or 52%, compared to fiscal
1996, while unit volume in fiscal 1997 was 516,000, a decrease of approximately
519,000, or 50%. The Company's sales of these products generally correlate with
sales of in-line skates; thus the decrease in sales of protective equipment also
was primarily attributable to the factors discussed above. Additionally,
consumer preferences within the market have led to substantially all of the
Company's sales of protective equipment now being made via multiple-unit
packages, usually "triple packs" containing three pairs of equipment one pair
each of knee pads, elbow pads and wrist guards which yields less total revenue
than sales of separate single-unit packages.
Gross sales of bicycle and recreational safety helmets during fiscal
1997 totaled $2,508,000, a decrease of approximately $1,554,000, or 38%,
compared to fiscal 1996, while unit volume decreased approximately 173,000, or
33%, to a total of 347,000 units during fiscal 1997. These decreases in
comparison with the prior year were primarily due to continued high inventory
levels at the retail level, increased competition and pricing pressures within
the category and less safety awareness programs and legislation designed to
promote helmet use by bicyclists. The year-over-year decrease in gross sales
was greater as a percentage than the decrease in unit volume due to discounting
and other price reductions in response to competitive pressures in the
marketplace. The average price per unit for the Company's helmets was
approximately $7.22 during fiscal 1997, compared to $7.81 during fiscal 1996.
Competition and high inventory levels put downward pressure on retail and
wholesale prices throughout the industry.
Gross sales of skateboards and scooters during fiscal 1997 totaled
$9,273,000, an increase of approximately $1,972,000, or 27%, compared to fiscal
1996, on total volume of 669,000 units, an increase of approximately 143,000
units, or 27%. A resurgence in the demand for skateboards began during fiscal
1996 and carried through the first half of fiscal 1997, with momentum then
slowing in the latter half of the year as more inventory became available at
retail and a greater proportion of the Company's shipments represented customer
re-orders. Fiscal 1996 sales had increased 300% from the prior year. During
fiscal 1997, the Company introduced a new line of children's scooters, which
accounted for approximately $549,000 in gross sales on 17,000 units.
Gross sales of snowboards and snowboarding accessories, such as bindings,
leashes and miscellaneous apparel items, totaled $1,483,000 during fiscal 1997,
which was the Company's first full year in the category. Gross sales for fiscal
1996 totaled $159,000. The Company sold a total of approximately 9,700
snowboards during fiscal 1997, compared to approximately 1,100 in the prior
year.
Sales to the Company's four largest accounts, each of which is a major
mass market merchandiser, represented 70% of the Company's gross sales in fiscal
1997, compared to 74% in fiscal 1996. This decrease was the result of several
factors, including the growth of the Company's snowboard business during the
year, increases in sales of the Company's Static(R) brand skateboards and the
introduction during fiscal 1997 of the Company's new Quik Shade(R) canopies; a
significant portion of these sales were made through the sporting goods and
specialty markets rather than mass market channels.
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By product category, in-line skates, athletic protective equipment and
helmets accounted for 69%, 5% and 5%, respectively, of the Company's total gross
sales during fiscal 1997, compared to 77%, 8% and 5%, respectively, during
fiscal 1996. Skateboards and scooters accounted for 17% of the Company's total
gross sales during fiscal 1997, compared to 10% during fiscal 1996. Snowboards
and snowboarding accessories represented 3% of total gross sales during fiscal
1997, compared to less than one-half of one percent in the prior year.
GROSS PROFIT. Gross profit for the fiscal year ended July 31, 1997
decreased by $5,620,000 compared to the fiscal year ended July 31, 1996,
representing a 46% decrease. The Company's gross profit margin as a percentage
of net sales was 13.0% in fiscal 1997, compared with 17.0% in fiscal 1996. The
decrease in gross margin was due primarily to the price reductions mentioned
above, particularly within the in-line skate and helmet categories and the
effects of higher than usual amounts of close-out sales during the year.
Surplus inventory and increased competition in the mass market, again
principally with respect to in-line skates and safety helmets, had an impact
upon the Company's gross margin.
OPERATING EXPENSES. The Company's operating expenses (consisting of
selling and marketing expenses and general and administrative expenses) for
fiscal 1997 totaled $10,599,000, or 20.5% of net sales. Operating expenses for
fiscal 1996 were $12,267,000, or 16.9% of net sales.
Selling and marketing expenses decreased by $1,327,000, or 17%, to
$6,344,000 for fiscal 1997 compared to fiscal 1996. Selling and marketing
expenses for fiscal 1997 amounted to 12.3% of net sales, compared to 10.6% in
the prior year. The increase as a percentage of net sales was due to several
factors, including increased advertising expenses for co-op programs with
certain of the Company's major customers and increases in other marketing
related expenses such as for trade shows, catalogs and promotional materials,
particularly with respect to the Company's snowboard operations, and the
increased percentage that these types of expenses, as well as corporate sales
and marketing salaries, represented upon a lower sales base. In dollars, these
increases were more than offset by decreases in sales commissions because of the
decline in sales during the year.
General and administrative expenses decreased by $341,000, or 7%, to
$4,255,000 for fiscal 1997 compared to fiscal 1996. General and administrative
expenses for fiscal 1997 amounted to 8.2% of net sales, compared to 6.3% in
fiscal 1996. The dollar decrease was primarily due to decreases in legal and
other professional fees, expenses associated with the Company's defined benefit
pension plan, donations and other expenditures resulting from management's
enhanced efforts to control administrative costs, offset in part by increases in
expenses associated with the first full year of the Company's new snowboard
operations.
OTHER INCOME (EXPENSE). Other income for the fiscal year ended July 31,
1997 was $799,000, an increase of $189,000, or 31%, compared to fiscal 1996.
This increase was due to a decrease in interest expense of $77,000 resulting
from a decrease in the level of short-term borrowings under the Company's line
of credit, as well as an increase in interest income of $112,000 due to higher
balances of marketable securities and other investments during fiscal 1997
compared to the prior year.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The Company's benefit from
income taxes during fiscal 1997 was $(1,278,000), or (41.5%) of loss before
income taxes, reflecting the federal tax benefit, net of applicable state taxes,
associated with the results of operations for the year, compared to a provision
for income taxes of $116,000, or 17.1% of income before income taxes, during
fiscal 1996. The Company's effective tax rates differ from the federal
statutory rate primarily due to interest income, most of which is exempt from
federal income taxes due to the nature of the investments from which it is
derived.
LIQUIDITY AND CAPITAL RESOURCES
Since its initial public offering, the Company funded its activities
principally from cash flow generated from operations and credit facilities with
institutional lenders. In June 1994, the Company completed an initial public
stock offering, issuing a total of 1,500,000 new common shares which raised
approximately $20,723,000 in proceeds to the Company, net of fees and expenses.
A portion of these proceeds was used by the Company to pay off borrowings on its
line of credit and for other working capital purposes. The remainder was
invested in marketable securities.
The Company has a credit agreement with a major bank providing a $7.5
million revolving line of credit, for the issuance of commercial letters of
credit. The agreement, which expires December 31, 1998, is unsecured. The
agreement requires that the Company satisfy certain financial covenants. Over
the past several years, borrowings have varied, typically reaching highest
levels in the pre-Christmas periods. However, more recently the Company has
borrowed against its line of credit less frequently due to the ability to
finance operations internally from cash and marketable securities available for
sale. Balances on the line of credit are classified as current liabilities on
the Company's balance sheet.
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Cash and marketable securities available for sale totaled $27,669,000 as
of July 31, 1998, compared to $22,782,000 as of July 31, 1997. Net working
capital as of July 31, 1998 was $39,283,000 compared to $40,210,000 as of July
31, 1997, and the Company's current ratio was 9.0:1 as of July 31, 1998,
compared to 9.4:1 as of July 31, 1997. These fluctuations are primarily due to
cash used in and generated from operations, particularly via increases and
decreases in inventory and increases in and collections of accounts receivable,
that result in daily fluctuations in short-term investments.
The Company had no long-term debt as of July 31, 1998 and 1997. The
Company had net stockholders' equity of $39,872,000 as of July 31, 1998,
compared to $43,100,000 as of July 31, 1997, with such decrease due primarily to
operating results for the fiscal year ended July 31, 1998, as well as
fluctuations in unrealized gains and losses on marketable securities
investments. Management believes that inflation has not had a significant
impact upon the Company's costs and prices during the past three fiscal years.
Capital expenditures for fiscal 1998 totaled $308,000, compared to
$888,000 during fiscal 1997. The decrease is primarily due to significantly
less machinery and equipment expenditures for the snowboard manufacturing
facility and for production molds than made in the prior year. Of the fiscal
1998 total, approximately $145,000 represented machinery and equipment
expenditures for the snowboard plant and $75,000 represented production molds
compared to $368,000 and $470,000, respectively, for such expenditures during
the prior year. Sales and disposals of property and equipment for fiscal 1998
totaled $1,649,000, with approximately $1,639,000 due to the closure of the
Static Snowboards, Inc. manufacturing facility and sale of the majority of the
snowboard manufacturing assets.
FUTURE LIQUIDITY AND FINANCIAL POSITION
The Company intends to continue to focus upon building and maintaining
its existing product lines, including its new line of Quik Shade(R) instant
canopies. The Company also plans to continue to devote resources toward the
pursuit and development of new products. In addition, management continues to
explore the possibility of making selected acquisitions of other companies or
products which would offer a strategic fit with the Company's existing products
and its sourcing and distribution channels in the mass market. The Company also
is considering expanding international distribution and developing additional
distribution arrangements in order to take further advantage of growth
opportunities which management believes exist for its products outside the
United States.
Management believes that its current cash position, funds available under
existing banking arrangements, and cash generated from operations will be
sufficient to meet the Company's presently projected cash and working capital
requirements for the next fiscal year assuming continued financial performance
at present levels.
FOREIGN EXCHANGE
Management does not believe that the fluctuation in the value of the
dollar in relation to the currency of its suppliers has in the last three fiscal
years had any significant material and adverse impact on the Company's ability
to purchase products at agreed upon prices. Typically, the Company and its
suppliers negotiate prices in U.S. Dollars and payments to suppliers are also
made in U.S. Dollars. Nonetheless, there can be no assurance that the value of
the dollar will not have an impact upon the Company in the future.
ADDITIONAL FACTORS THAT COULD AFFECT OPERATING RESULTS
The following factors, together with other risk factors discussed in the
"Overview" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations and other information contained elsewhere
herein, should be considered carefully in evaluating the Company and its
business.
RELIANCE ON MAJOR CUSTOMERS. In the past three fiscal years, the
Company has had several customers which accounted for a majority of the
Company's sales. As is customary in the industry, the Company does not have
long-term contracts with any of its customers. The loss of, or a reduction in
business from, any of its major customers could have a material and adverse
effect on the Company's business results of operations and financial condition.
In addition, because a large percentage of the Company's accounts receivables
are due from the major customers, the failure of any of them to make timely
payments with respect to its account could have a material and adverse effect on
the Company's results of operations and financial condition.
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Kmart Corporation, which accounted for 15% of the Company's gross sales
for fiscal 1997, is no longer a major customer for the Company's in-line skates
and skateboards. However, due to the pricing structure for Kmart Corporation,
this event had a positive impact on the Company's gross margin for fiscal 1998.
On the other hand, 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.
However, the Company does not have a long-term contract with The Home Depot and,
accordingly, there can be no assurance that The Home Depot will become a major
customer of the Company for the balance of fiscal 1999 or thereafter.
COMPETITION FROM OTHER MANUFACTURERS/DEVELOPERS OF PRODUCTS; PRICE
SENSITIVITY OF CUSTOMERS. The Company operates in a highly competitive
environment and there are no significant technological or manufacturing barriers
to entry. While the Company believes that the principal competitive factors in
its market are price, quality of product, brand recognition, accessibility and
customer service, the Company's primary customers, mass merchandisers, are
extremely price sensitive. As a result, the Company must continually monitor and
control its costs while refining its products to maintain its market position.
There can be no assurance that the Company can 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. Many of the
Company's current and potential competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than the Company. In addition, smaller
retailers may be acquired by, receive investments from or enter into other
commercial relationships with larger, well-established and well-financed
companies. The Company also competes to a lesser degree with manufacturers of
specialty or premium priced products.
The Company's primary competitors in the mass market include First Team
Sports, Inc. (Skate Attack), Roller Derby (CAS), Seneca and certain models from
Rollerblade, Inc. (Blade Runner). In the case of athletic protective equipment,
Franklin Sports is the Company's primary competitor in the mass market. Bell
Sports Corp. (Bell and BSI), Protective Technologies, Inc. (PTI) and Troxel (Pro
Action) are the primary competitors in the bicycle safety helmet mass market.
For instant canopies, a new category introduced in 1997, the Company's primary
competitors are International E-Z Up, Inc. and KD Kanopy, Inc. In addition, the
Company may compete with its primary customers when such customers directly
source products that the Company sells.
At present, the Company believes that its products in each category,
when compared to competitors' products of comparable quality, are currently
offered at comparable or lower prices than most or all of its competitors.
However there can be no assurance that other companies, whether new enterprises
or established members of the retail or sporting goods industries, will not be
able to develop products of comparable or higher quality at lower prices, or
that the Company's price structure will not be affected by future circumstances.
SHIFTING AND UNCERTAIN CONSUMER DEMAND. The Company must continually
anticipate the emergence of, and adapt its products to, the popular demands of
consumers. In the past, a substantial amount of the Company's net sales have
been generated by sales of in-line skates, skateboards and athletic protective
equipment. Since then the Company has developed other product lines, including
safety helmets, snowboards and portable canopies. No assurance can be given,
however, that consumer demand for these products in general or the Company's
products in particular will continue into the future. A reduction in the demand
for these products could have a material and adverse effect on the Company's
results of operations.
Quik Shade/(R)/ is a line of instant portable canopies recently
introduced by the Company. No assurance can be given that the market for these
instant canopies will continue or that the Company's product offerings in this
market will become or remain competitive.
Also in fiscal 1998, Static Snowboards, Inc., the Company's wholly-
owned subsidiary, experienced operating losses, primarily due to the continuing
challenges facing the snowboard industry in general. 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 second quarter
for write-downs of fixed assets and write-off of the remaining unamortized
balance of goodwill relating to such subsidiary. During 1998 the assets of the
Static manufacturing operation were sold and the manufacturing plant was closed,
with the intention of sourcing snowboards from independent contractors.
RELIANCE ON FOREIGN SUPPLIERS TO SOURCE THE COMPANY'S PRODUCTS. The
Company's products are primarily sourced from suppliers located in Asia with
whom the Company does not have long-term contractual agreements. If the Company
were unable to develop and maintain relationships with suppliers that would
allow it to obtain sufficient quantities of merchandise on acceptable commercial
terms, its business, prospects, financial condition and results of operations
would be materially and adversely affected. Moreover, 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. Although management
presently believes that other suppliers could be
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obtained in such instances, there can be no assurance that the Company would be
able to obtain products and supplies on substantial similar terms, including
cost, in the future. In addition, purchasing products from foreign suppliers
subjects the Company to the general risks of doing business abroad. These risks
include potential delays in shipment, work stoppages, adverse fluctuations in
currency exchange rates, changes in import duties and tariffs, changes in
foreign regulations and political instability.
A significant portion of the Company's products, including various
models of its in-line skates, are manufactured in mainland China, which trades
with the United States under a Most Favored Nation ("MFN") trade status. While
the Company believes that alternative manufacturing sources could be found,
maintaining existing costs will depend upon these products continuing to be
treated under MFN tariff rates. From time to time, the U.S. has threatened to
rescind MFN tariff rates and impose trade sanctions on certain goods
manufactured in China. To date, no such sanctions have been imposed that have
affected the Company or its products, however there can be no assurance with
regard to the possible imposition of sanctions in the future.
In addition, the current market crisis in Asia may have a material and
adverse impact upon the Company's ability to procure products from suppliers.
However, the Company may be able to move production quickly to alternate sources
in response to economic or political circumstances that might arise in any
particular country.
PRODUCT LIABILITY CLAIMS; INSURANCE. Due to the nature of its products,
the Company is subject to product liability claims, including claims for serious
personal injury or death. Coverage is on a claims-made basis, and is subject to
certain deductibles. Although the Company believes that it has adequate
liability insurance for risks arising in the normal course of business,
including product liability insurance with respect to all of its products, there
can be no assurance that insurance coverage will be sufficient to cover one or
more large claims or that the applicable insurer will be solvent at the time of
any covered loss. Further, there can be no assurance that the Company will be
able to obtain insurance coverage at acceptable levels and cost in the future.
Successful assertion against the Company of one or a series of large uninsured
claims, or of one or a series of claims exceeding any insurance coverage, could
have a material and adverse effect on the Company's results of operations and
financial condition.
TRADEMARKS AND PROPRIETARY RIGHTS. There are risks inherent in the
design and development of new products and product enhancements, including those
associated with patent issues and marketability. Potential liability from patent
and other intellectual property infringements can have a material and adverse
effect on the Company's business, financial condition or results of operations.
More specifically, 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. In September
1998, the Company received a demand for defense and indemnification of Service
Merchandise Company, Inc. in that action entitled Mark C. Carter, et. al. v.
Service Merchandise Company, Inc., (Case No. C98-03274 DLJ ENB) in the United
States District Court for the Northern District of California. The complaint in
this action is virtually identical to the complaint against Service Merchandise
in the above-referenced action by Carter in the Central District of California
in Los Angeles. The Company has agreed to indemnify and defend Service
Merchandise (which is a retailer of the Company's product) in this action. The
Company and Service Merchandise filed an answer to the complaint on behalf of
Service Merchandise in the Central District of California (Los Angeles) action.
In October 1998, counsel for the Company and Service Merchandise plan to move to
dismiss the Northern District of California (Oakland) action based on another
action pending, or, in the alternative, to transfer it to the Central District
of California in Los Angeles. These 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 and 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 and adverse effect on the Company's business and
results of operations.
16
<PAGE>
With respect to the Company's own patents, service marks, trademarks,
trade secrets and similar intellectual property, the Company considers such
proprietary rights as critical to its success, and relies on patent and
trademark law, trade secret protection and confidentiality and/or license
agreements with its employees, customers, partners and others to protect its
proprietary rights. The Company holds or has pending certain design patents and
employs various trademarks, trade names, including its own logos, in the
packaging and advertising of its products. The Company has registered the
Variflex(R) and Static(R) trademarks in the United States, and has secured a
worldwide watch to alert the Company to any unauthorized use in any other parts
of the world. Registration of various other trademarks of the Company's products
are pending.
However, effective patent, trademark, service mark and trade secret
protection may not be available in every country in which the Company's products
and services are made available. There can be no assurance that the steps taken
by the Company to protect its proprietary rights will be adequate or that third
parties will not infringe or misappropriate the Company's patents, trademarks
and similar proprietary rights. In addition, there can be no assurance that
other parties will not assert infringement claims against the Company. The
Company has been subject to claims and expects to be subject to legal
proceedings and claims from time to time in the ordinary course of its business,
including claims of alleged infringement of the trademarks and other
intellectual property rights of third parties by the Company. Such claims, even
if not meritorious, could result in the expenditure of significant financial and
managerial resources.
YEAR 2000. Many computer programs were designed and developed utilizing
only two digits in date fields, thereby creating the inability to recognize the
Year 2000 or years thereafter. Beginning in the Year 2000, these date codes will
need to accept four digit entries to distinguish 21st century dates from 20th
century dates. This Year 2000 issue creates risks for the Company from
unforeseen or unanticipated problems in its internal computer systems as well as
from computer systems of third parties on which the Company's systems and
operations rely. Failures to address the Year 2000 issue could result in system
failures and the generation of erroneous data.
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. The Company has been advised by its outside
information systems consultant that the Company's primary information management
hardware and software systems have been thoroughly tested and verified to be
Year 2000 compliant. The Company believes that its secondary personal computer
based information systems will require hardware and software updating prior to
January 1, 2000 at an estimated cost of approximately $50,000. This program is
targeted for completion by the end of fiscal 1999. The Company believes that it
does not have any significant non-information technology embedded systems that
require Year 2000 assessment.
The Company is contacting its primary suppliers, customers and other
third party providers of significant services to determine that they have a
program in place to address Year 2000 issues and to monitor their progress. The
initial contacts should be completed by December 31, 1998.
The Company presently believes that the Year 2000 problem will not pose
a significant operational problem to the Company. However, there can be no
assurance that the systems of other parties upon which the Company's business
also relies, including but not limited to the Company's customers and suppliers,
will be converted on a timely basis. The Company's business, financial
condition, or results of operations could be materially adversely affected by
the failure of its systems or those of other parties to operate or properly
manage dates beyond 1999.
RISKS ASSOCIATED WITH ENTRY INTO NEW BUSINESS AREAS. The Company may
choose to expand its operations by developing and promoting new or complementary
products, expanding the breadth and depth of products and services offered or
expanding the acquisition of new or complementary businesses, products or
technologies, although it has no present understandings, commitments or
agreements with respect to any material acquisitions or investments. There can
be no assurance that the Company would be able to expand its efforts and
operations in a cost-effective or timely manner or that any such efforts would
increase overall market acceptance. Furthermore, any new business or product
line launched by the Company that is not favorably received by consumers could
damage the Company's reputation or the Variflex(R) brand. Expansion of the
Company's operations in this manner would also require significant additional
development and operations expenses and would strain the Company's management,
financial and operational resources. The lack of market acceptance of such
efforts or the Company's inability to generate satisfactory revenues from such
expanded businesses or products to offset their cost could have a material and
adverse effect on the Company's business, prospects, financial condition and
results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company's performance is substantially
dependent on the continued services and on the performance of its senior
management and other key personnel, particularly Raymond (Jay) H. Losi II, who
has entered into an employment agreement with the Company. The loss of Mr. Losi
II could have a material and adverse effect on the Company. Although the Company
carries a $5,000,000 life insurance policy on Mr. Losi II, no assurance can be
given that the
17
<PAGE>
proceeds will be sufficient to protect against such a loss. The Company's
performance also depends on the Company's ability to retain and motivate its
other officers and key employees. The loss of the services of any of its
executive officers or other key employees could have a material and adverse
effect on the Company's business, prospects, financial condition and results of
operations. Other than the aforementioned exceptions, the Company has long-term
employment agreements with only a few of its key personnel. The Company's future
success also depends on its ability to identify, attract, hire, train, retain
and motivate other highly skilled technical, managerial, merchandising,
marketing and customer service personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to
successfully attract,, assimilate or retain sufficiently qualified personnel.
The failure to retain and attract the necessary technical, managerial,
merchandising, marketing and customer service personnel could have a material
and adverse effect on the Company's business, prospects, financial condition and
results of operations.
CONSUMER REGULATION OF COMPANY PRODUCTS. Certain of the Company's
products are subject to regulation by the Federal Consumer Products Safety
Commission (the "CPSC"), and may therefore be subject to recall request by the
CPSC. Although the Company is not aware of any current proceeding by the CPSC
which would result in the recall of the Company's products, any such proceeding
could have a material and adverse effect on the Company's business, prospects,
financial condition and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and schedules included herein are listed in
Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Variflex, Inc.
We have audited the accompanying consolidated balance sheets of Variflex, Inc.
(the Company) as of July 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended July 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Variflex, Inc. at
July 31, 1998 and 1997, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended July 31, 1998, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Woodland Hills, California
October 9, 1998 /s/ Ernst & Young LLP
19
<PAGE>
VARIFLEX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
JULY 31
----------------------------------------
1998 1997
------------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,522 $ 7,823
Marketable securities available for sale 20,147 14,959
Trade accounts receivable, less allowances of $413 and
$549 as of July 31, 1998 and 1997, respectively 8,205 9,600
Inventory 6,483 9,706
Deferred income taxes - 784
Prepaid expenses and other current assets 1,809 2,131
------------- -----------
Total current assets 44,166 45,003
Property and equipment, net 501 2,154
Other assets 88 736
------------- -----------
Total assets $ 44,755 $ 47,893
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade acceptances payable $ 384 $ 570
Accounts payable 371 677
Accrued warranty 450 720
Accrued salaries and related liabilities 234 349
Accrued co-op advertising 2,481 1,859
Accrued returns and allowances 150 173
Other accrued expenses 813 445
------------- -----------
Total current liabilities 4,883 4,793
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - none - -
Common stock, $.001 par value:
Authorized shares - 40,000,000
Issued and outstanding shares - 6,025,397 as of
July 31, 1998 and 1997 9 9
Common stock warrants 702 -
Additional paid-in capital 21,023 21,023
Retained earnings 18,138 22,068
------------- -----------
Total stockholders' equity 39,872 43,100
------------- -----------
Total liabilities and stockholders' equity $ 44,755 $ 47,893
============= ===========
</TABLE>
See accompanying notes.
20
<PAGE>
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
------------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales $ 43,148 $ 51,661 $ 72,379
Cost of goods sold 36,531 44,944 60,042
---------------- ---------------- ----------------
Gross profit 6,617 6,717 12,337
---------------- ---------------- ----------------
Operating expenses:
Selling and marketing 4,880 6,344 7,671
General and administrative 4,905 4,255 4,596
Impairment write-off 995 - -
---------------- ---------------- ----------------
Total operating expenses 10,780 10,599 12,267
---------------- ---------------- ----------------
Income (loss) from operations (4,163) (3,882) 70
---------------- ---------------- ----------------
Other income (expense):
Interest expense - (39) (116)
Interest income and other 1,459 838 726
---------------- ---------------- ----------------
Total other income (expense) 1,459 799 610
---------------- ---------------- ----------------
Income (loss) before income taxes (2,704) (3,083) 680
(Benefit from) provision for income taxes 784 (1,278) 116
---------------- ---------------- ----------------
Net income (loss) $ (3,488) $ (1,805) $ 564
================ ================ ================
Net income (loss) per share of common stock:
Basic $ (0.58) $ (0.30) $ 0.09
================ ================ ================
Diluted $ (0.58) $ (0.30) $ 0.09
Weighted average shares outstanding:
Basic 6,025 6,025 6,025
================ ================ ================
Diluted 6,025 6,025 6,039
================ ================ ================
</TABLE>
See accompanying notes.
21
<PAGE>
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
COMMON ADDITIONAL
COMMON STOCK STOCK PAID-IN RETAINED
---------------------------
SHARES AMOUNT WARRANTS CAPITAL EARNINGS TOTAL
---------- ---------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1995 6,025,397 $ 9 $ - $ 21,023 $ 23,327 $ 44,359
Net unrealized holding
losses on debt securities
available for sale - - - - (111) (111)
Net income - - - - 564 564
---------- ---------- ------------ ----------- ----------- ------------
Balance at July 31, 1996 6,025,397 9 - 21,023 23,780 44,812
Net unrealized holding
gains on debt securities
available for sale - - - - 93 93
Net loss - - - - (1,805) (1,805)
---------- ---------- ------------ ----------- ----------- ------------
Balance at July 31, 1997 6,025,397 9 - 21,023 22,068 43,100
Issuance of common
stock warrants - - 702 - - 702
Net unrealized holding
losses on debt securities
available for sale - - - - (442) (442)
Net loss - - - - (3,488) (3,488)
---------- ---------- ------------ ----------- ----------- ------------
BALANCE AT JULY 31, 1998 6,025,397 $ 9 $ 702 $ 21,023 $ 18,138 $ 39,872
========== ========== ============ =========== =========== ============
</TABLE>
See accompanying notes.
22
<PAGE>
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
--------------------------------------------
1998 1997 1996
------------- ---------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (3,488) $ (1,805) $ 564
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 805 1,437 1,528
Deferred income taxes 784 (32) 536
(Gain) loss on sale of marketable securities (27) 63 -
Gain on disposal of fixed assets (38) - -
Impairment write-off 995 - -
Common stock warrants issued 702 - -
Changes in operating assets and liabilities:
Trade accounts receivable 1,395 2,447 6,204
Inventory 3,223 3,626 (2,939)
Prepaid expenses and other current assets 783 1,326 (2,255)
Accounts payable (306) 257 (746)
Other current liabilities 582 (540) (684)
Trade acceptances payable (186) 482 (754)
--------------- ---------- -----------
Net cash provided by operating activities 5,224 7,261 1,454
--------------- ---------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (308) (888) (2,317)
Proceeds from sale of assets 325 - -
Gross purchases of available-for-sale securities (26,026) (5,544) (12,885)
Gross sales of available-for-sale securities 20,348 3,636 10,225
Other assets 136 7 257
--------------- ---------- -----------
Net cash (used in) investing activities (5,525) (2,789) (4,720)
--------------- ---------- -----------
FINANCING ACTIVITIES - - -
Net increase (decrease) in cash (301) 4,472 (3,266)
Cash and cash equivalents beginning of period 7,823 3,351 6,617
--------------- ---------- -----------
Cash and cash equivalents at end of period $ 7,522 $ 7,823 $ 3,351
=============== ========== ===========
Cash paid during the period for:
Interest $ - $ 39 $ 107
Income taxes $ - $ - $ 1,545
</TABLE>
Supplemental disclosure of non-cash financing and investing 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 11.
See accompanying notes.
23
<PAGE>
VARIFLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Variflex, Inc., a
Delaware corporation, and its two wholly owned subsidiaries, Oketa Limited
(Oketa), a Hong Kong corporation, and Static Snowboards, Inc., a Delaware
corporation (collectively, the Company). The Company markets and distributes in-
line skates, skateboards, recreational safety helmets, athletic protective
equipment (such as knee pads, elbow pads and wrist guards), portable instant
canopies, snowboards and related accessories, and other products. The Company
designs and develops these products which are then manufactured to the Company's
specifications by independent contractors. The Company's products are sold
primarily to retailers, with some sales to wholesalers and distributors. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
Financial statements prepared in accordance with generally accepted accounting
principles require management to make estimates and judgments that affect
amounts and disclosures reported in the financial statements. Actual results
could differ from those estimates.
REVENUE RECOGNITION AND WARRANTY
The Company recognizes revenue from product sales upon shipment. The Company has
established programs with its customers which enable them to receive credit for
defective merchandise covered under its warranty policy. The Company's products
are generally under warranty against defects in material and workmanship for a
period of usually 60 days from date of purchase. The amount of potential credits
is estimated and provided for in the period of sale.
CONCENTRATION OF RISK
The Company performs periodic evaluation of the credit worthiness of its
customers and generally does not require collateral. Credit losses relating to
the Company's customers, mainly mass merchant retailers, have consistently been
within management's expectations and are provided for in the financial
statements.
The Company operates predominantly within one industry segment where certain
customers represent a significant portion of the Company's business. Sales to
the Company's four largest customers as a percentage of consolidated gross
sales, were 31%, 21%, 10% and 6% for fiscal 1998; 26%, 21%, 8% and 15% for
fiscal 1997; 20%, 26%, 12% and 16% for fiscal 1996. Receivables from these
customers as a percentage of the Company's total trade accounts receivable were
48%, 13%, 3% and 4% at July 31, 1998.
With the exception of snowboards, which were manufactured domestically at the
Company's factory during 1998 (see note 12), all of the Company's products are
manufactured by independent contractors located in Asia. The Company presently
knows of no circumstances that would materially affect its supply or costs of
goods; however, there can be no assurances with respect to events which may
arise in the future.
24
<PAGE>
CASH EQUIVALENTS
Short-term investments and money market funds with original maturities of three
months or less are classified as cash equivalents. The carrying value of cash
equivalents approximates market value.
MARKETABLE SECURITIES
The Company accounts for investments in marketable securities in accordance with
Statement of Financial Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Management has determined all
investments should be classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a component of retained earnings. The
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in investment income. Realized gains, losses and declines in value
judged to be other-than-temporary on available-for-sale securities are included
in interest income. The cost of securities is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out method) or market
and consists of the following:
<TABLE>
<CAPTION>
JULY 31
----------------------------------
1998 1997
------------ --------------
(In thousands)
<S> <C> <C>
Raw material and work-in-process $ 585 $ 1,908
Finished goods 5,898 7,798
------------ --------------
$ 6,483 $ 9,706
============ ==============
</TABLE>
LONG LIVED ASSETS
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company
records impairment losses on long-lived assets (including goodwill) used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. The impairment loss
is measured by comparing the fair value of the asset to its carrying amount.
See note 12.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets or,
for leasehold improvements, over the terms of the related leases, if shorter.
See note 12 for discussion of write-down of property and equipment.
GOODWILL
Goodwill arising from the acquisitions described in Note 10 is amortized on a
straight-line basis over a period of 15 years and was included net of
amortization as a component of other assets in 1997. Accumulated amortization of
goodwill as of July 31, 1998 and 1997 amounted to $-0- and $69,000,
respectively. As discussed in note 12, unamortized goodwill of $495,000 was
written down during fiscal 1998.
25
<PAGE>
EARNINGS (LOSS) PER SHARE
Statement of Financial Accounting Standard No. 128, "Earnings per Share" (SFAS
128) was issued in February 1997 and adopted by the Company starting with the
quarter ended January 31, 1998. Basic earnings (loss) per share is computed
based on the weighted average number of shares of common stock outstanding
during the period. Dilutive earnings (loss) per share is based on the weighted
average number of shares of common stock outstanding, and common stock
equivalents, when dilutive. Common stock equivalents represent the dilutive
effect of the assumed exercise of certain outstanding options. Such common stock
equivalents are excluded from the computation for the year ended July 31, 1998
and 1997 because their effect is antidilutive. For fiscal 1996 the number of
shares used in the calculation of diluted earnings per share included 14,000
shares issuable under stock options using the treasury stock method.
Options to purchase 185,629, 165,129, and 280,000 shares of common stock at a
weighted average exercise price of $4.77, $4.66, and $15.50, were outstanding at
July 31, 1998, 1997 and 1996, respectively, but were not included in the
computation of dilutive earnings (loss) per share either because the option
exercise price was greater than the average market price and/or the Company
incurred a loss for the period and, therefore, the effect would be antidulitive.
For fiscal 1997, basic and dilutive earnings (loss) per share and for fiscal
1996 dilutive earnings per share were the same as primary earnings per share.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs for the years
ended July 31, 1998, 1997 and 1996 amounted to $2,490,000, $3,845,000, and
$4,542,000, respectively.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation," was recently issued and encourages but does not require companies
to record compensation expenses for stock options at fair value. The Company has
chosen to continue to account for stock options using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, the Company has
computed the pro forma disclosures of the earnings per share as determined under
the provision of SFAS No. 123.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income," and Statement of Financial Accounting Standards No. 131
("SFAS No. 131"), "Disclosures about Segments of an Enterprise and Related
Information," were issued in June 1997. SFAS No. 130 and SFAS No. 131 are
effective for fiscal years beginning subsequent to December 15, 1997, and
therefore, will be adopted by the Company for the 1999 fiscal year. The Company
does not expect the adoption of SFAS No. 130 or SFAS No. 131 to result in any
material changes in its disclosure and these statements will have no impact on
the Company's consolidated results of operations, financial position or cash
flows.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform with the 1998 presentation.
26
<PAGE>
2. INVESTMENTS
Available-for-sale securities consist of the following:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
-----------------------------------------------------------------------------------
GROSS ESTIMATED
UNREALIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------- ----------------- ------------------- -----------------
(In thousands)
<S> <C> <C> <C> <C>
July 31, 1998
Corporate and high-yield bond mutual funds $20,542 $ - $395 $20,147
=============== ================= =================== =================
July 31, 1997:
State and municipal debt securities $14,912 $47 $ - $14,959
=============== ================= =================== =================
</TABLE>
The Company experienced a net realized gain of $27,000 and a net realized loss
of $63,000 on sales of available-for-sale securities during the fiscal years
ended July 31, 1998 and 1997, respectively. There were no realized gains or
losses during the fiscal year ended July 31, 1996. The net adjustments to
unrealized holding gains and losses on available-for-sale securities as of July
31, 1998 and 1997 are reflected in retained earnings. The Company's investments
consist of bond mutual funds and are subject to risks associated with changes in
the various financial markets, changes in interest rates, and the condition of
the United States and world economies and many other factors. Due to the
continued volatility in the financial market since July 31, 1998, the unrealized
loss on the Company's marketable securities owned at July 31, 1998 increased
from $395,000 to approximately $2,450,000 as of October 9, 1998.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JULY 31
---------------------------------------------
1998 1997
--------------- -------------------
(In thousands)
<S> <C> <C>
Computer equipment $ 460 $ 463
Trade show assets 162 187
Machinery and equipment 227 1,516
Furniture and fixtures 191 225
Leasehold improvements 154 214
Transportation equipment 54 57
Molds, dies and tooling equipment 3,665 3,631
--------------- ------------------
4,913 6,293
Less accumulated depreciation and amortization (4,412) (4,139)
--------------- ------------------
$ 501 $ 2,154
=============== ==================
</TABLE>
4. REVOLVING LINE OF CREDIT
The Company has a $7,500,000 revolving line of credit with a major bank for the
issuance of commercial letters of credit. The credit line matures on December
31, 1998. The agreement requires the Company to comply with certain financial
ratios and covenants.
As of July 31, 1998, letters of credit in the amount of $1,279,000 were open for
the receipt of future merchandise. Of this amount, $895,000 has not been
reflected on these financial statements since title to the merchandise has not
yet passed to the Company.
27
<PAGE>
5. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases warehouse and office facilities under an operating lease that
requires minimum monthly payments of $34,000, and also provides for the lessee
to pay property taxes, insurance, repairs and maintenance and utilities. The
lease expires on December 31, 2000. The Company also subleases additional
warehouse and office space in an adjacent building under a separate operating
lease requiring minimum monthly payments of $8,000, which amount includes
property taxes and utilities, but which provides for the Company to pay
insurance and repairs and maintenance costs. This agreement expires June 30,
1999. The Company's subsidiary, Static Snowboards, Inc., leases office and
manufacturing facilities under an operating lease that requires monthly payments
of $12,000 and expires in September 2000.
The Company has no capital leases as of July 31, 1998. Annual future minimum
lease payments under existing operating leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
------------
(In thousands)
Years ending July 31:
<S> <C>
1999 $ 702
2000 602
2001 231
2002 34
2003 and thereafter -
============
Total minimum lease payments $ 1,569
============
</TABLE>
Total rent expense was $775,000, $687,000 and $725,000 for the fiscal years
ended July 31, 1998, 1997 and 1996, respectively.
LITIGATION
The Company is involved in various claims arising primarily from sales of
products in the normal course of business. Management has recorded a $120,000
allowance for product liability losses at July 31, 1998 ($111,000 at July 31,
1997). In addition, the Company carries product liability insurance on its
products. In the opinion of management, any additional liability to the Company
arising under any pending product liability litigation would not materially
affect its financial position, cash flow or results of operations.
In March 1998, the Company was served with two lawsuits alleging that the
Company's Quik Shade/(R)/ product infringes on patents owned by the plaintiffs.
The Company has filed counterclaims in both lawsuits. In September 1998, the
Company received a demand for defense and indemnification which is virtually
identical to one of the March 1998 lawsuits. The Company believes it has
meritorious defenses for all of these actions, intends to conduct a vigorous
defense and vigorously pursue its counterclaims. The Company currently believes
the outcome of these matters would not have a materially adverse effect on its
financial position or cash flow, but the defense of such litigation may involve
considerable costs which could have a material adverse effect on the Company's
results of operations. However, there can be no assurance that an adverse
outcome of these matters will not have a material adverse effect on the
Company's business prospects and financial condition.
EMPLOYMENT AGREEMENTS
The Company has employment and consulting agreements in effect with certain of
its employees. The agreements provide for varying terms of employment
aggregating $864,000 and $155,000 in base compensation during the fiscal years
ended July 31, 1999 and 2000, respectively.
28
<PAGE>
6. PENSION PLAN
During fiscal 1997 the Company had a defined benefit pension plan (the Pension
Plan) covering substantially all of its employees. The benefits were based on
years of service and the employee's compensation during the last five years of
employment. The Company's funding policy was generally to contribute annually
the minimum amount that could be deducted for federal income tax purposes.
Contributions were intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future. During
1997 the Company amended the Pension Plan to provide for its termination
effective July 31, 1997. Accordingly, included in net periodic pension expense
for the year ended July 31, 1997 is a curtailment gain of $219,000 resulting
from the reduction of the projected benefit obligation due to the termination of
the Pension Plan. The assets of the Pension Plan were used to settle the pension
obligation in fiscal 1998
The following table sets forth the Pension Plan's funded status and amounts
recognized in the Company's consolidated balance sheet at July 31, 1997.
<TABLE>
<CAPTION>
1997
-----------------
(In thousands)
<S> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $2,704 at July 31, 1996 $(2,704)
-----------------
Projected benefit obligation for service rendered to date (2,704)
Plan assets at fair market value, primarily listed U.S. stocks and U.S. bonds 2,769
-----------------
Plan assets in excess of projected benefit obligation 65
Unrecognized net gains (losses) from past experience different from that assumed
and effects of changes in assumptions 89
Prior service cost not yet recognized in net periodic pension cost (406)
Unrecognized net obligation as of July 31, 1989 317
-----------------
Prepaid pension costs included in other assets $ 65
=================
</TABLE>
Net pension cost for the fiscal years ended July 31, 1997 and 1996 included the
following components:
<TABLE>
<CAPTION>
1997 1996
------------------ -----------------
(In thousands)
<S> <C> <C>
Service costs - benefits earned during the period $ 262 $ 233
Interest cost on projected benefit obligations 191 209
Actual return on plan assets (720) (325)
Net amortization and deferral 505 39
Curtailment gain (219) -
------------------ -----------------
Net periodic pension cost $ 19 $ 156
================== =================
</TABLE>
The weighted-average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations was 6 percent and zero percent in 1997, and 8
percent and 5 percent in 1996, respectively. The expected long-term rate of
return on assets and the increase in cost of living assumption used in computing
the periodic pension cost was zero percent and zero percent, respectively, for
1997 and was 8 percent and 3 percent, respectively, for fiscal 1996. The
change in the assumptions during 1997 are due to the termination of the plan as
previously discussed.
Effective August 1, 1997, the Company established a defined contribution pension
plan covering substantially all of its employees. Company contributions are
determined at the discretion of the Company. Contributions for fiscal 1998 were
approximately $40,000.
29
<PAGE>
7. INCOME TAXES
The (benefit from) provision for income taxes for the fiscal years ended July
31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- -------------- ---------------
(In thousands)
<S> <C> <C> <C>
Current (benefit) provision:
Federal $ - $ (1,246) $(442)
State - - 22
--------------- -------------- ---------------
Total current (benefit) provision - (1,246) (420)
Deferred provision (benefit):
Federal (750) (29) 510
State (3) (3) 26
--------------- -------------- ---------------
Total deferred provision (benefit) (753) (32) 536
--------------- -------------- ---------------
Valuation allowance 1,537 - -
--------------- -------------- ---------------
$ 784 $ (1,278) $ 116
=============== ============== ===============
</TABLE>
Deferred income taxes consist of the tax effect of timing differences related to
the following components:
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Warranty allowances $ 183 $ 299
Allowances for losses on receivables 574 241
Inventory valuation allowances 304 214
Sales return allowances 61 71
Product liability 49 49
Other 684 334
--------------- ----------------
Total deferred tax assets 1,855 1,208
Deferred tax liabilities:
Unremitted earnings of Oketa (143) (190)
State taxes - (79)
Prepaid Insurance (78) (140)
Other (97) (15)
--------------- ----------------
Total deferred tax liabilities (318) (424)
--------------- ----------------
Net deferred tax assets 1,537 784
Valuation Allowance (1,537) -
--------------- ----------------
$ - $ 784
=============== ================
</TABLE>
Due to the continuing net operating losses, the Company established a valuation
allowance against the prior year deferred tax asset of $784,000 and the fiscal
1998 net deferred tax benefit of $753,000 in accordance with Statement of
Financial Accounting Standard No. 109 "Accounting for Income Taxes."
30
<PAGE>
A reconciliation of the statutory federal income tax rate to the effective tax
rate, as a percentage of income before taxes based on income, follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Statutory federal income tax rate (35%) (35%) 35%
State taxes, net of federal tax benefit - - 6
Valuation allowance 56 - -
Tax exempt interest income (6) (7) (30)
Non-deductible stock warrants 9 - -
Other non-deductible expenses 5 1 6
---------- ---------- ----------
29% (41%) 17%
========== ========== ==========
</TABLE>
Pretax income earned by Oketa amounted to $431,000, $215,000 and $1,393,000 in
fiscal 1998, 1997 and 1996, respectively, and is not subject to Hong Kong tax as
provided under that country's taxation requirements. The Company provides
deferred taxes on Oketa's income until such income is repatriated to the United
States.
8. STOCK OPTION PLANS
In April 1993, the Company established a non-qualified stock option plan (the
Plan) to grant stock options to one of its officers. Under the Plan, stock
options were granted each April through April 1997, and each grant shall vest
cumulatively at 20% per year over five years. The options are exercisable over
ten years at an exercise price of $0.0004 per share. The number of shares
granted at each grant date will have an aggregate fair market value of $20,000
as of such grant date. In April 1995, 1996 and 1997, the Company granted options
to purchase 1,379, 2,667 and 3,951 shares, respectively, and in sum the Company
has granted options to purchase a total of 20,129 shares of the Company's common
stock under the Plan. The Company has recorded compensation expense related to
these options.
On April 1, 1994, the stockholders of the Company approved the 1994 Variflex
Stock Plan (the 1994 Stock Plan) which became effective at the initial public
offering date of June 17, 1994. Under the 1994 Stock Plan, options, stock
appreciation rights (SARS) and bonus stock may be granted for the purpose of
attracting and motivating deserving employees and directors of the Company. The
exercise price of the options is to be not less than the market price of the
common stock at the time of grant with respect to incentive stock options, and
not less than 85% of the market price of the common stock at the time of grant
with respect to non-qualified options. The maximum number of shares reserved for
issuance under the 1994 Stock Plan is 200,000. At July 31, 1998, 42,500 shares
are available for grant under the 1994 Stock Plan. Effective August 1, 1998,
the Company increased the maximum number of shares reserved for issuance under
the 1994 Stock Plan to 600,000.
In June 1997, the Company terminated certain incentive stock option plans and
stock options granted in April 1994 for the purchase of 280,000 shares of common
stock at $15.50 per share. In connection with the termination of these stock
options and stock option plans the Company granted to certain officers and
employees of the Company incentive stock options, under the 1994 Stock Plan, for
the purchase of an aggregated amount of 145,000 shares of the Company's common
stock. The options vest over the next two to five years, carry exercise prices
ranging from $5.00 to $5.50 per share and are exercisable over 10 years from the
date of grant.
On March 16, 1998, the Company established the 1998 Stock Option Plan for Non-
Employee Directors (The 1998 Stock Plan) for the purpose of attracting and
retaining experienced and knowledgeable non-employee directors of the Company.
Under the1998 Stock Plan, each non-employee director receives an option to
purchase 4,000 shares of common stock of the Company upon being appointed or
elected as a director, and an option to purchase 2,000 shares as an annual
retainer upon being re-appointed or re-elected as a director. The exercise
price of the options is to be not less than the market price of the common stock
at the time of grant. The options vest on the first business day prior to the
first anniversary of the date of grant and are exercisable over 10 years from
the date of grant. The maximum number of shares reserved for issuance under the
1998 Stock Plan is 250,000. At July 31, 1998, 242,000 shares are available for
grant under the 1998 Stock Plan.
31
<PAGE>
There were no options exercised in the years ended July 31, 1998, 1997 and 1996
and no options were canceled in the year ended July 31, 1996.
A summary of stock option activity and data is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------
NUMBER WEIGHTED
OF SHARES AVERAGE PRICE
---------------- -------------------
<S> <C> <C>
Balance at July 31, 1995 293,511 $14.7865
Granted 2,667 0.0004
---------------- -------------------
Balance at July 31, 1996 296,178 14.6534
Granted 148,951 5.1695
Canceled (280,000) -
---------------- -------------------
Balance at July 31, 1997 165,129 4.6631
Granted 33,000 5.3788
Canceled (12,500) 5.0000
---------------- -------------------
Balance at July 31, 1998 185,629 $ 4.7676
================ ===================
</TABLE>
Information regarding stock options outstanding as of July 31, 1998 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------ -------------------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE EXERCISE
PRICE RANGE OF SHARES LIFE EXERCISE PRICE OF SHARES PRICE
- ------------------------------------------------------------------------ -------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.0004 20,129 6 years $0.0004 14,558 $0.0004
$5.00 to $5.50 165,500 9 years $5.3474 50,000 $5.1800
</TABLE>
FAIR VALUE DISCLOSURES
The weighted average exercise prices and fair market value of stock options and
warrants (see note 11) using the Black-Scholes option valuation model were as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------ ---------------------------
FAIR EXERCISE FAIR EXERCISE
VALUE PRICE VALUE PRICE
------------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Exercise price equals market value of stock at date of grant $1.95 $5.38 $1.25 $ 5.00
Exercise price exceeds market value of stock at date of grant 1.55 5.10 1.49 5.50
Exercise price is less than market value of stock at date of grant - - 5.06 .0004
</TABLE>
32
<PAGE>
The weighted average fair values of 1998 and 1997 stock option and warrant
grants were estimated at the date of grant using the Black-Scholes option
valuation model and the following average actuarial assumptions:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- ------------------
WARRANTS OPTIONS
----------------- -----------------
<S> <C> <C> <C>
Risk-free interest range 7.5 5.5 5.0%
Expected life 7.0 4.0 4.3 years
Expected volatility .271 .337 .271
Expected dividend yield NONE NONE None
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options. The Company's employee stock options have
characteristics significantly different from those of traded options such as
vesting restrictions and extremely limited transferability. In addition, the
assumptions used in option valuation models (see above) are highly subjective,
particularly the expected stock price volatility of the underlying stock.
Because changes in these subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not provide
a reliable single measure of the fair value of its employee stock options.
For purposes of the pro forma disclosure of net income (loss), the estimated
fair value of the stock options and warrants granted in 1996, 1997 and 1998 is
amortized as compensation expense over the options' vesting period. Pro forma
net loss and pro forma diluted loss per share for fiscal 1988 would have been
$3,243,000 and $(0.54), respectively. Pro forma net loss and pro forma diluted
loss per share for fiscal 1997 would have been $1,790,000 and $(0.30),
respectively. However, the pro forma effect on net income for 1998 and 1997 is
not representative of the pro forma effect on net income in future years because
it does not take into consideration pro forma compensation expense related to
grants prior to 1997. Pro forma information in future years may reflect the
amortization of a larger number of stock options granted in several succeeding
years.
9. QUARTERLY OPERATING DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
--------------- -------------- ------------- --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Year ended July 31, 1998:
Net sales $13,659 $10,645 $10,558 $ 8,286
Gross profit 2,161 1,757 2,042 657
Net income (loss) (21) (2,788)* 20 (699)
Net income (loss) per share:
Basic - (.46)* - (.12)
Diluted - (.46) - (.12)
Year ended July 31, 1997:
Net sales $12,277 $13,844 $14,567 $10,973
Gross profit 2,070 2,239 1,726 682
Net loss (261) (269) (380) (895)
Net loss per share:
Basic (.04) (.04) (.06) (.15)
Diluted (.04) (.04) (.06) (.15)
</TABLE>
* Includes $702,000 for non-cash consulting expenses in connection with
issuance of stock warrants per note 11 and $995,000 impairment loss per note 12.
33
<PAGE>
10. ACQUISITIONS
In April 1995, the Company formed a new wholly owned subsidiary, Static
Snowboards, Inc., for the purpose of acquiring the assets of Plunkett
Snowboards, Inc., an existing snowboard manufacturer. The acquisition was
completed in May 1995, in exchange for $100,000 in cash and 25,397 shares of
Variflex, Inc. common stock which had a market value of $302,000. See note 12.
In June 1996, Static Snowboards, Inc. entered into an agreement with another
company for the joint manufacture, marketing and distribution of Barfoot
snowboards. The joint agreement contained a purchase option, which the Company
exercised in May 1997, thereby acquiring all rights to the Barfoot brand name in
exchange for $85,000 in cash.
The Company recorded each of the acquisitions referred to above using the
purchase method of accounting. In each case, substantially all of the purchase
price was recorded by the Company as goodwill, to be amortized over 15 years.
11. STOCK WARRANTS
In November 1997, in connection with the acquisition of approximately 28% of the
Company's outstanding common stock from existing shareholders 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,
all of which are currently exercisable until November 2004. The Company
recognized in general and administrative expenses 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.
Also in connection with the Remy common stock acquisition, Raymond H. Losi, II,
the Company's Chief Executive Officer, received warrants to purchase 100,000
shares of the Company's common stock for $5.10 per share, all of which are
currently exercisable until November 2004.
12. IMPAIRMENT AND SALE OF CERTAIN 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 had 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 for write-downs of fixed assets and write-off of the remaining
unamortized balance of goodwill relating to such subsidiary.
In May 1998, the Company entered into a Purchase and Sale Agreement to sell
certain assets of Static Snowboards, Inc. resulting in no significant gain or
loss. The Company closed its manufacturing factory in California, with the
intention of sourcing snowboards from independent contractors located in Asia.
34
<PAGE>
VARIFLEX, INC.
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED JULY 31, 1998
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED WRITE-OFFS BALANCE
BEGINNING TO CHARGED TO AT END
OF PERIOD EXPENSE ALLOWANCE OF PERIOD
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Year ended July 31, 1998:
Reserves and allowances deducted from asset accounts:
Allowance for uncollectable accounts $549,000 $(24,000) $112,000 $413,000
Year ended July 31, 1997:
Reserves and allowances deducted from asset accounts:
Allowance for uncollectable accounts $555,000 $100,000 $106,000 $549,000
Year ended July 31, 1996:
Reserves and allowances deducted from asset accounts:
Allowance for uncollectable accounts $911,000 $ - $356,000 $555,000
</TABLE>
35
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Except as noted in the following paragraph, the information required by
Items 10, 11, 12 and 13 is included in the Company's definitive Proxy Statement
to be filed pursuant to Regulation 14(A) not later than 120 days after the close
of fiscal 1998 in connection with the Company's 1998 Annual Meeting of
Stockholders, and is therefore incorporated herein by reference.
The information called for by Item 10 with respect to executive
officers of the Registrant appears following Item 4 under Part I of this Report
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS
The following financial statements are included in Part II, Item 8 of
this Annual Report on Form 10-K:
Independent Auditors' Report on Consolidated Financial Statements
and Schedules
Consolidated Balance Sheets as of July 31, 1998 and 1997
Consolidated Statements of Operations for the years ended July 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
July 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended July 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES
The following schedules are included in Part II, Item 8 of this Annual
Report on Form 10-K:
Schedule II. Valuation and Qualifying Accounts
Schedules I and III through V are omitted for the reason that they
are not applicable, not required or the information is presented in
the consolidated financial statements or related notes.
REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on November 26, 1997.
36
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Note No.
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
3.1 Certificate of Incorporation of the Company (1)
3.2 By-laws of the Company (1)
9.1 Voting Agreement dated November 18, 1997, by and among Raymond H. Losi, Raymond H. Losi, II, (4)
Raymond H. Losi, as Trustee of the 1989 Raymond H. Losi Revocable Trust under Declaration of Trust
dated January 23, 1989, Losi Enterprises Limited Partnership, Raymond H. Losi, II and Kathy Losi,
as Co-Trustees of the Jay and Kathy Losi Revocable Trust dated January 1, 1989, EML Enterprises,
L.P., Eileen Losi, as Trustee of the Eileen Losi Revocable Trust under Declaration of Trust dated
October 13, 1993, Barbara Losi, as Trustee of the 1989 Barbara Losi Revocable Trust under
Declaration of Trust dated January 31, 1989, The BL 1995 Limited Partnership, Raymond H. Losi, as
Trustee of the Diane K. Losi Trust and Remy Capital Partners IV, L.P.
10.1 Lease for property located at 5152 North Commerce Avenue, Moorpark, California, (1)
dated June 8, 1992
10.2 First Amendment, dated March 20, 1995, to the June 8, 1992 lease for property located (3)
at 5152 North Commerce Avenue, Moorpark, California
10.3 Second Amendment, dated November 18, 1996, to the June 8, 1992 lease for property located (3)
at 5152 North Commerce Avenue, Moorpark, California
*10.4 Employment agreement dated April 1, 1994 with Raymond H. Losi II (1)
*10.5 Employment agreement dated April 1, 1994 with Warren Marr (1)
*10.6 Employment agreement dated April 1, 1994 with Rocco Attolico (1)
*10.7 Employment agreement dated April 1, 1994 with Paula Coffman (formerly Paula Montez) (1)
*10.8 Employment agreement dated May 11, 1998 with Roger M. Wasserman (5)
*10.9 Employment agreement dated August 24, 1998 with Steven Muellner (5)
*10.10 Consulting Agreement dated November 18, 1997, by and between Variflex, Inc. and Remy Capital (4)
Partners IV, L.P.
*10.11 Consulting Agreement dated November 18, 1997, by and between Variflex, Inc. and Raymond H. Losi (4)
*10.12 Indemnification agreement dated April 1, 1994 with Raymond H. Losi (1)
*10.13 Indemnification agreement dated April 1, 1994 with Raymond H. Losi II (1)
*10.14 Indemnification agreement dated April 1, 1994 with Loren Hildebrand (1)
*10.15 Indemnification agreement dated September 17, 1998 with Mark S. Siegel (5)
*10.16 Indemnification agreement dated September 17, 1998 with Randall L. Bishop (5)
*10.17 Indemnification agreement dated September 17, 1998 with Michael T. Carr (5)
*10.18 Indemnification agreement dated September 17, 1998 with Steven Muellner (5)
*10.19 Indemnification agreement dated September 17, 1998 with Roger M. Wasserman (5)
10.20 License Agreement with Rollerblade, Inc. dated September 1, 1993 (1)
10.21 1994 Variflex Stock Plan dated April 1, 1994 (1)
10.22 Asset Purchase Agreement dated May 19, 1995, by and between Plunkett Snowboards, Inc., Michael (2)
Plunkett and Bert Kronfeld, Static Snowboards, Inc. and Variflex, Inc.
10.23 Business Loan Agreement dated January 23, 1998, between Bank of America National Trust and Savings (5)
Association and Variflex, Inc.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Note No.
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.24 Stock Purchase Agreement dated November 18, 1997, by and between Remy Capital Partners IV, L.P., (4)
The RHL Limited Partnership, EML Enterprises, L.P. and The BL 1995 Limited Partnership
10.25 Registration Rights Agreement dated November 18, 1997, by and among Variflex, Inc., Remy Capital (4)
Partners IV, L.P. and Raymond H. Losi, II
10.26 Warrant to purchase Variflex, Inc. Common Stock issued to Remy Capital Partners IV, L.P. (4)
10.27 Warrant to purchase Variflex, Inc. Common Stock issued to Raymond H. Losi (4)
10.28 Warrant to purchase Variflex, Inc. Common Stock issued to Raymond H. Losi, II (4)
10.29 1994 Stock Option Plan, as amended (5)
10.30 Non-Employee Directors Compensation Plan (5)
21.1 Subsidiaries of the registrant (2)
27.1 Financial Data Schedule (5)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Previously filed together with the Company's Registration Statement on Form
S-1, Reg. No. 33-77362.
(2) Previously filed together with the Company's annual report on Form 10-K
(file no.: 0-24338) on October 24, 1995.
(3) Previously filed together with the Company's annual report on Form 10-K
(file no.: 0-24338) on November 4, 1997.
(4) Previously filed together with the Company's report on Form 8-K (file no.:0-
24338) on November 26, 1997.
(5) Filed herewith the Company's annual report on Form 10-K (file no.: 0-24338)
on October 29, 1998.
* Management contract, compensatory plan or arrangement.
38
<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.
October 29, 1998 By /s/ RAYMOND H. LOSI, II
-------------------------------------
Raymond H. Losi II
Chief Executive Officer (Principal
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
October 29, 1998 /s/ MARK S. SIEGEL
---------------------------------------
Mark S. Siegel
Chairman of the Board
October 29, 1998 /s/ RAYMOND H. LOSI II
---------------------------------------
Raymond H. Losi II
Chief Executive Officer (Principal
Executive Officer) and Director
October 29, 1998 /s/ STEVEN L. MUELLNER
---------------------------------------
Steven L. Muellner
President
October 29, 1998 /s/ ROGER M. WASSERMAN
----------------------------------------
Roger M. Wasserman
Chief Financial Officer (Principal
Financial and Accounting Officer)
October 29, 1998 /s/ RANDALL L. BISHOP
----------------------------------------
Randall L. Bishop
Director
October 29, 1998 /s/ MICHAEL T. CARR
----------------------------------------
Michael T. Carr
Director,
October 29, 1998 /s/ LOREN HILDEBRAND
----------------------------------------
Loren Hildebrand
Director
October 29, 1998 /s/ RAYMOND H. LOSI
----------------------------------------
Raymond H. Losi
Director
39
<PAGE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement"), which is dated as of May 11, 1998,
is made by and between VARIFLEX, INC., a Delaware corporation, located at 5152
North Commerce Avenue, Moorpark, California, 93021 and hereinafter referred to
as "Company", and ROGER M. WASSERMAN, whose address is ________________________
__________________________________, hereinafter referred to as "Executive",
based upon the following:
RECITALS
--------
WHEREAS, Company wishes to retain the services of Executive as its Chief
Financial Officer and to set forth in this Agreement the duties and
responsbilities Executive has agreeed to undertake on behalf of Company; and
WHEREAS, Executive wishes to render services to Company as its Chief
Financial Officer and to have set forth in this Agreement the duties and
responsibilities he has agreed to undertake on behalf of Company; and
THEREFORE, in consideration of the foregoing and of the mutual promises
contained in this Agreement, Company and Executive (who are sometimes
individually referred to as a "party" and collectively referred to as the
"parties") agree as follows:
AGREEMENT
---------
1. "COMPANY" DEFINED.
-----------------
The term "Company" as used in this Agreement shall mean Variflex, Inc.
2. SPECIFIED PERIOD.
----------------
(a) INITIAL TERM. Subject to paragraphs 10 and 11, Company hereby
------------
employs Executive pursuant to the terms of this Agreement and Executive hereby
accepts employment with Company pursuant to the terms of this Agreement for the
period beginning on May 11, 1998 ("Commencement Date") and ending on the day
before the first anniversary of the Commencement Date.
(b) RENEWAL OF TERM. Subject to paragraphs 10 and 11, this
---------------
Agreement will be automatically renewed for an additional one (1) year term on
the anniversary date of the Commencement Date, unless either party gives written
notice to the other, at least sixty (60) days prior to the expiration of the
then term of this Agreement, that the party desires to terminate this Agreement.
3. GENERAL DUTIES.
--------------
Executive shall report only to Company's Board of Directors (the
"Board"). Executive shall devote his entire productive time, ability, and
attention to Company's business
<PAGE>
during the term of this Agreement. Unless otherwise modified by the Board,
Executive shall serve as the Chief Financial Officer of the Company. In this
capacity, Executive shall do and perform all services, acts, or things necessary
or advisable to discharge his duties under this Agreement, including, but not
limited to, acting as immediate manager and supervisor of Company's accounting
department, maintaining the Company's financial reporting systems, acting as the
Company's liaison with its certified public accountants so that all financial
information required to be prepared and filed with the Securities and Exchange
Commission or other regulatory agencies will be done in a correct and timely
manner, assisting with the preparation of filings required by any federal or
state taxing authority, acting as the Company's liaison with its investors,
managing the Company's cash in accordance with those standards set forth by the
Board, maintaining internal accounting controls and rendering to the Board, at
its meetings or when the Board otherwise requests, an account or report of the
financial condition of the Company. Executive shall perform such other duties as
are commonly performed by the Chief Financial Officer of a publicly traded
corporation or which may from time to time be prescribed by the Board. Executive
shall not work for any other person, firm or entity during the Term of this
Agreement.
4. NONCOMPETITION, NONSOLICITATION AND NONINTERFERENCE AND PROPRIETARY
-------------------------------------------------------------------
PROPERTY AND CONFIDENTIAL INFORMATION PROVISIONS.
------------------------------------------------
(a) NONCOMPETITION.
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(1) "Applicable Definitions" - For purposes of this paragraph 4,
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the following capitalized terms shall have the definitions set forth below:
i. "Business Segments" - The term "Business Segment" is
-----------------
defined as each portion of the Company's (or Company's affiliates') business,
including, without limitation, the production, distribution, marketing, and
sales of the Company's (or Company's affiliates') products or product lines, and
the purchasing of raw materials and supplies in connection therewith.
ii. "Competitive Business" - The term "Competitive Business"
--------------------
is defined as any business that is or may be competitive with or similar to or
adverse to any of Company's (or Company's affiliates') Business Segments,
whether such business is conducted by a proprietorship, partnership, corporation
or other entity or venture.
iii. "Territory" - The term "Territory" is defined as the
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geographic area (both within the United States and internationally) in which any
Business Segment is carried on including, by way of example and not limitation,
the entire geographic area in which Company conducts various phases of any such
Business Segment, including purchasing, production, distribution, promotional
and marketing activities, sales, and location of plants and warehouses.
(2) Covenant Not to Compete. Executive hereby covenants and
-----------------------
agrees that during the term of this Agreement, and for a period of one (1) year
from the date this
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Agreement is terminated or expires, Executive shall not, with respect to any
Business Segment and within the boundaries of the Territory applicable to such
Business Segment, without the prior written consent of Company (which consent
may be withheld in the sole and absolute discretion of Company), directly or
indirectly, either alone or in association or in connection with or on behalf of
any person, firm, partnership, corporation or other entity or venture now
existing or hereafter created: (i) be or become interested or engaged in,
directly or indirectly, with any Competitive Business including, without
limitation, being or becoming an organizer, investor, lender, partner, joint
venturer, stockholder, officer, director, employee, manager, independent sales
representative , associate, consultant, agent, supplier, vendor, vendee, lessor,
or lessee to any Competitive Business, or (ii) in any manner associate with, or
aid or abet or give information or financial assistance to any Competitive
Business, or (iii) use or permit the use of Executive's name or any part thereof
to be used or employed in connection with any Competitive Business (collectively
and severally, the "Noncompetition Covenants"). Notwithstanding the foregoing,
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the provisions of this paragraph 4(a)(2) shall not be deemed to prevent the
purchase or ownership by Executive as a passive investment of no more than 5% of
the outstanding capital shares of any publicly held corporation, so long as any
other obligation or duty under the Noncompetition Covenants are not breached.
(3) Separate Covenants. The Noncompetition Covenants shall be
------------------
construed to be divided into separate and distinct Noncompetition Covenants with
respect to (i) each Business Segment and (ii) each matter or type of conduct
described therein. Each of such divided Noncompetition Covenants shall be
separate and distinct from all such other Noncompetition Covenants with respect
to the same or any other Business Segment.
(4) Acknowledgments. Executive acknowledges that: (i) the covenants
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and the restrictions contained in the Noncompetition Covenants are necessary,
fundamental, and required for the protection of Company's business; (ii) the
Noncompetition Covenants relate to matters which are of a special, unique and
extraordinary value; and (iii) a breach of any of the Noncompetition Covenants
will result in irreparable harm and damages which cannot be adequately
compensated by a monetary award.
(5) Judicial Limitation. Notwithstanding the foregoing, if at any
-------------------
time a court of competent jurisdiction holds that any portion of any
Noncompetition Covenant is unenforceable by reason of its extending for too
great a period of time or over too great a geographical area or by reason of its
being too extensive in any other respect, such Noncompetition Covenant shall be
interpreted to extend only over the maximum period of time, maximum geographical
area, or maximum extent in all other respects, as the case may be, as to which
it may be enforceable, all as determined by such court in such action.
(b) NONSOLICITATION AND NONINTERFERENCE.
-----------------------------------
(1) Covenants. Executive hereby covenants and agrees that during the
---------
term of this Agreement, and for a period of one (1) year from the date this
Agreement terminates or expires, Executive shall not, either for Executive's own
account or directly or indirectly in conjunction with or on behalf of any
person, partnership, corporation or other entity or venture:
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i. Solicit or employ or attempt to solicit or employ any person who
is then or has, within twelve (12) months prior thereto, been an officer,
partner, manager, agent or employee of Company or any affiliate of Company
whether or not such a person would commit a breach of that person's contract of
employment with Company or any affiliate of Company, if any, by reason of
leaving the service of Company or any affiliate of Company (the "Nonsolicitation
---------------
Covenant"); or
- --------
ii. On behalf of, directly or indirectly, any Competitive Business
(as such term is defined in paragraph 4(a)1.ii.), or for the purpose of or with
the reasonably foreseeable effect of harming the business of Company, solicit
the business of any person, firm or company which is then, or has been at any
time during the preceding twelve (12) months prior to such solicitation, a
customer, client, contractor, supplier or vendor of Company or any affiliate of
Company (the "Noninterference Covenant").
------------------------
(2) Acknowledgments. Each of the parties acknowledges that: (i) the
---------------
covenants and the restrictions contained in the Nonsolicitation and
Noninterference Covenants are necessary, fundamental, and required for the
protection of the business of Company; (ii) such Covenants relate to matters
which are of a special, unique and extraordinary value; and (iii) a breach of
either of such Covenants will result in irreparable harm and damages which
cannot be adequately compensated by a monetary award.
(3) Judicial Limitation. Notwithstanding the foregoing, if at any time,
-------------------
despite the express agreement of Company and Executive, a court of competent
jurisdiction holds that any portion of any Nonsolicitation or Noninterference
Covenant is unenforceable by reason of its extending for too great a period of
time or by reason of its being too extensive in any other respect, such Covenant
shall be interpreted to extend only over the maximum period of time or to the
maximum extent in all other respects, as the case may be, as to which it may be
enforceable, all as determined by such court in such action.
(c) PROPRIETARY PROPERTY; CONFIDENTIAL INFORMATION.
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(1) "Applicable Definitions" For purposes of this paragraph 4(c), the
----------------------
following capitalized terms shall have the definitions set forth below:
i. "Confidential Information" - The term "Confidential
------------------------
Information" is collectively and severally defined as any information, matter or
thing of a secret, confidential or private nature, whether or not so labeled,
which is connected with Company's business, Business Segments, or methods of
operation or concerning any of Company's suppliers, customers, licensors,
licensees or others with whom Company has a business relationship, and which has
current or potential value to Company or the unauthorized disclosure of which
could be detrimental to Company. Confidential Information shall be broadly
defined and shall include, by way of example and not limitation: (i) matters of
a business nature available only to management and owners of Company of which
Executive may become aware (such as information concerning customers, vendors
and suppliers, including their names, addresses, credit or financial status,
buying or selling habits, practices, requirements, and any arrangements or
contracts that Company may have with such parties, Company's marketing
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<PAGE>
methods, plans and strategies, the costs of materials, the prices Company
obtains or has obtained or at which Company sells or has sold its products or
services, Company's manufacturing and sales costs, the amount of compensation
paid to employees of Company and other terms of their employment, financial
information such as financial statements, budgets and projections, and the terms
of any contracts or agreements Company has entered into) and (ii) matters of a
technical nature (such as product information, trade secrets, know-how,
formulae, innovations, inventions, devices, discoveries, techniques, formats,
processes, methods, specifications, designs, patterns, schematics, data,
compilation of information, test results, and research and development
projects). For purposes of the foregoing, the term "trade secrets" shall mean
the broadest and most inclusive interpretation of trade secrets as defined by
Section 3426.1(d) of the California Civil Code (the Uniform Trade Secrets Act)
---------------------
and cases interpreting the scope of said Section.
ii. "Proprietary Property" - The term "Proprietary Property" is
--------------------
collectively and severally defined as any written or tangible property owned or
used by Company in connection with Company's business, whether or not such
property also qualifies as Confidential Information. Proprietary Property shall
be broadly defined and shall include, by way of example and not limitation,
products, samples, equipment, files, lists, books, notebooks, records,
documents, memoranda, reports, patterns, schematics, compilations, designs,
drawings, data, test results, contracts, agreements, literature, correspondence,
spread sheets, computer programs and software, computer print outs, other
written and graphic records, and the like, whether originals, copies, duplicates
or summaries thereof, affecting or relating to the business of Company,
financial statements, budgets, projections, invoices.
(2) Ownership of Proprietary Property. Executive acknowledges that all
---------------------------------
Proprietary Property which Executive may prepare, use, observe, come into
possession of and/or control shall, at all times, remain the sole and exclusive
property of Company. Executive shall, upon demand by Company at any time, or
upon the cessation of Executive's employment, irrespective of the time, manner,
cause or lack of cause of such cessation, immediately deliver to Company or its
designated agent, in good condition, ordinary wear and tear and damage by any
cause beyond the reasonable control of Executive excepted, all items of the
Proprietary Property which are or have been in Executive's possession or under
his control, as well as a statement describing the disposition of all items of
the Proprietary Property beyond Executive's possession or control in the event
Executive has not previously returned such items of the Proprietary Property to
Company.
(3) Agreement Not to Use or Divulge Confidential Information. Executive
--------------------------------------------------------
agrees that he will not, at any time, in any fashion, form or manner, unless
specifically consented to in writing by Company, either directly or indirectly
use, divulge, transmit or otherwise disclose or cause to be used, divulged,
transmitted or otherwise disclosed to any person, firm or corporation, in any
manner whatsoever (other than in Executive's performance of duties for Company
or except as required by law) any Confidential Information of any kind, nature
or description. The foregoing provisions shall not be construed to prevent
Executive from making use of or disclosing information which is in the public
domain through no fault of Executive, provided, however, specific information
shall not be deemed to be in the public
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domain merely because it is encompassed by some general information that is
published or in the public domain or in Executive's possession prior to
Executive's employment with Company.
(4) Acknowledgment of Secrecy. Executive acknowledges that the
-------------------------
Confidential Information is not generally known to the public or to other
persons who can obtain economic value from its disclosure or use and that the
Confidential Information derives independent economic value thereby, and
Executive agrees that he shall take all efforts reasonably necessary to maintain
the secrecy and confidentiality of the Confidential Information and to otherwise
comply with the terms of this Agreement.
(5) Inventions, Discoveries. Executive acknowledges that any inventions,
-----------------------
discoveries or trade secrets, whether patentable or not, made or found by
Executive in the scope of his employment with Company constitute property of
Company and that any rights therein now held or hereafter acquired by Executive
individually or in any capacity are hereby transferred and assigned to Company,
and agrees to execute and deliver any confirmatory assignments, documents or
instruments of any nature necessary to carry out the intent of this paragraph
when requested by Company without further compensation therefor, whether or not
Executive is at the time employed by Company. Provided, however,
notwithstanding the foregoing, Executive shall not be required to assign his
rights in any invention which qualifies fully under the provisions of Section
2870(a) of the California Labor Code, which provides, in pertinent part, that
---------------------
the requirement to assign "shall not apply to any invention that the employee
developed entirely on his or her own time without using employer's equipment,
supplies, facilities or trade secret information except for those inventions
that either:
(i) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or
(ii) Result from any work performed by the employee for the
employer."
Executive understands that he bears the full burden of proving to Company
that an invention qualifies fully under Section 2870(a). By signing this
Agreement, Executive acknowledges receipt of a copy of this Agreement and of
written notification of the provisions of Section 2870.
5. COMPLIANCE WITH SECURITIES LAWS.
-------------------------------
Executive acknowledges that, the Company is a publicly reporting company,
and that Company and Executive are subject to the provisions of Sections
10(b)(5), 16(a) and 16(b) of the Securities Exchange Act of 1934. Executive
acknowledges that Section 16(a) of the Securities Exchanges Act requires
Executive to report the ownership or transfer of his stock or other securities
in Company to the Securities and Exchange Commission and that Sections 10(b)(5)
and 16(b) can prohibit Executive from selling or transferring his stock or
securities in Company. Executive agrees that he will comply with Company's
policies, as stated from time to time, relating to selling or transferring his
stock or securities in Company.
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<PAGE>
6. COMPENSATION.
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(a) SALARY. During the term of this Agreement, Company shall pay to
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Executive a salary of One Hundred Twenty-Five Thousand Dollars ($125,000) per
year. Executive's annual salary shall be reviewed periodically by Company for
the purpose of determining whether Executive's salary shall be increased. In no
event shall this review take place less frequently than annually. Executive
shall be entitled to receive such bonuses as the Company may, in its discretion,
award.
(b) EMPLOYEE BENEFIT PLANS. Except as otherwise herein provided,
----------------------
Executive shall be entitled, during the specified period of this Agreement, to
participate in any retirement, pension, profit-sharing, insurance, or other
plans which may now be in effect or which may be adopted by Company. With
respect to the Company medical plans, Executive intends to obtain COBRA coverage
from the Commencement Date until the date Executive becomes eligible to
participate in the Company's medical plans ("Eligibility Date"), which is
anticipated to be within 90 days after the Commencement Date. Company shall
reimburse Executive for the difference, if any, between the cost incurred by
Executive for such COBRA coverage from the Commencement Date through the
Eligibility Date and the cost which Executive would have paid for the Company
PPO medical plan from the Commencement Date through the Eligibility Date;
provided, however, that the maximum amount of such reimbursement will be
$2,500.00.
(c) STOCK OPTIONS. Within thirty (30) days after the date of this
-------------
Agreement, the Company will prepare and deliver to Executive, a stock option
agreement which shall provide the following: (i) Executive shall be granted
incentive options, pursuant to the 1994 Variflex Stock Plan, to purchase an
aggregate of twenty-five thousand (25,000) shares of Company's common stock at a
price per share equal to the closing price of the Company's common stock as
listed by NASDAQ as of the end of the first business day immediately preceding
the option grant date; (ii) the option grant date shall be the Commencement
Date; (iii) options to purchase shall vest one-fifth on the first anniversary of
the Commencement Date, and thereafter one-fifth on each subsequent anniversary
of the Commencement Date, so long as Executive continues his employment with
Company; (iv) options shall expire five years following the grant date, except
that vested options shall terminate earlier in certain circumstances and
unvested options shall terminate upon termination of Executive's employment; (v)
Executive shall be entitled to pay for the stock in cash, in stock of Company
with a fair market value equal to the exercise price, and (vi) stock issued
pursuant to this plan shall be restricted stock, although Company shall reserve
the right to issue registered shares if it so decides. Executive agrees to be
bound by the terms of the stock option agreement as adopted, and the provisions
of this paragraph shall be limited by and subject to the terms of that
agreement.
7. REIMBURSEMENT OF BUSINESS EXPENSES. Company shall promptly reimburse
----------------------------------
Executive for all reasonable business expenses incurred by Executive in
connection with the business of Company. However, each such expenditure shall
be reimbursable only if Executive furnishes to Company adequate records and
other documentary evidence required by
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<PAGE>
federal and state statutes and regulations issued by the appropriate taxing
authorities for the substantiation of each such expenditure as an income tax
deduction.
8. ANNUAL VACATION.
---------------
Executive shall be entitled to three (3) weeks vacation time each year
without loss of compensation.
9. TERMINATION FOR CAUSE.
---------------------
(a) TERMINATION BY COMPANY. Company reserves the right to declare
----------------------
Executive in default of this Agreement and terminate Executive if Executive (i)
breaches or habitually neglects the duties which he is required to perform under
the terms of this Agreement; or (ii) fails to adhere to any written Company
policy if the Executive has been given a reasonable opportunity to comply with
such policy or cure his failure to comply (which reasonable opportunity must be
granted during the ten-day period preceding termination of this Agreement); or
(iii) appropriates (or attempts to appropriate) a material business opportunity
of the Company, including attempting to secure or securing any personal profit
in connection with any transaction entered into on behalf of the Company; or
(iv) misappropriates (or attempts to misappropriate) any of the Company's funds
or property; or (v) is convicted of, indicted for (or its procedural
equivalent), or enters a guilty plea or plea of no contest with respect to, a
felony, the equivalent thereof, or any other crime; or (vi) commits such acts of
dishonesty, fraud, or misrepresentation as would prevent the effective
performance of his duties or results in material harm to Company's business,
taken as a whole. Company may terminate this Agreement for cause by giving
written notice of termination to Executive. With the exception of the covenants
included in paragraphs 4 and 5 above, upon such termination the obligations of
Executive and Company under this Agreement shall immediately cease. Such
termination shall be without prejudice to any other remedy to which Company may
be entitled either at law, in equity, or under this Agreement. If Executive's
employment is terminated pursuant to this paragraph, Company shall pay to
Executive, within two (2) business days of such termination, any deferred or
unpaid compensation to which Executive is entitled at the time of such
termination.
(b) TERMINATION BY EXECUTIVE. Executive may terminate this Agreement
------------------------
upon written notice to Company if the Company has: (i) materially breached this
Agreement; or (ii) required Executive to participate in any felony or other
serious crime.
10. TERMINATION UPON DEATH OR DISABILITY.
------------------------------------
(a) DEATH. Executive's employment shall terminate upon the death of
-----
Executive. Upon such termination, the obligations of Executive and Company
under this Agreement shall immediately cease.
(b) DISABILITY. Company reserves the right to terminate Executive's
----------
employment upon ten (10) days written notice if, for a period of thirty (30)
days, Executive is prevented from discharging his duties under this Agreement
due to any physical or mental disability. With the exception of the covenants
included in paragraphs 4 and 5 above, upon such
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termination the obligations of Executive and Company under this Agreement shall
immediately cease.
11. MISCELLANEOUS.
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(a) PREPARATION OF AGREEMENT. It is acknowledged by each party that
------------------------
such party either had separate and independent advice of counsel or the
opportunity to avail itself or himself of same. In light of these facts it is
acknowledged that no party shall be construed to be solely responsible for the
drafting hereof, and therefore any ambiguity shall not be construed against any
party as the alleged draftsman of this Agreement.
(b) COOPERATION. Each party agrees, without further consideration,
-----------
to cooperate and diligently perform any further acts, deeds and things and to
execute and deliver any documents that may from time to time be reasonably
necessary or otherwise reasonably required to consummate, evidence, confirm
and/or carry out the intent and provisions of this Agreement, all without undue
delay or expense.
(c) INTERPRETATION.
--------------
(i) Entire Agreement/No Collateral Representations. Each party
----------------------------------------------
expressly acknowledges and agrees that this Agreement, including all exhibits
attached hereto: (1) is the final, complete and exclusive statement of the
agreement of the parties with respect to the subject matter hereof; (2)
supersedes any prior to contemporaneous agreements, promises, assurances,
guarantees, representations, understandings, conduct, proposals, conditions,
commitments, acts, course of dealing, warranties, interpretations or terms of
any kind, oral or written (collectively and severally, the "Prior Agreements"),
and that any such Prior Agreements are of no force or effect except as expressly
set forth herein; and (3) may not be varied, supplemented or contradicted by
evidence of Prior Agreements, or by evidence of subsequent oral agreements. Any
agreement hereafter made shall be ineffective to modify, supplement or discharge
the terms of this Agreement, in whole or in part, unless such agreement is in
writing and signed by the party against whom enforcement of the modification or
supplement is sought.
(ii) Waiver. No breach of any agreement or provision herein
------
contained, or of any obligation under this Agreement, may be waived, nor shall
any extension of time for performance of any obligations or acts be deemed an
extension of time for performance of any other obligations or acts contained
herein, except by written instrument signed by the party to be charged or as
otherwise expressly authorized herein. No waiver of any breach of any agreement
or provision herein contained shall be deemed a waiver of any preceding or
succeeding breach thereof, or a waiver or relinquishment of any other agreement
or provision or right or power herein contained.
(iii) Remedies Cumulative. The remedies of each party under this
-------------------
Agreement are cumulative and shall not exclude any other remedies to which such
party may be lawfully entitled.
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<PAGE>
(iv) Severability. If any term or provision of this Agreement
------------
or the application thereof to any person or circumstance shall, to any extent,
be determined to be invalid, illegal or unenforceable under present or future
laws effective during the term of this Agreement, then and, in that event: (A)
the performance of the offending term or provision (but only to the extent its
application is invalid, illegal or unenforceable) shall be excused as if it had
never been incorporated into this Agreement, and, in lieu of such excused
provision, there shall be added a provision as similar in terms and amount to
such excused provision as may be possible and be legal, valid and enforceable,
and (B) the remaining part of this Agreement (including the application of the
offending term or provision to persons or circumstances other than those as to
which it is held invalid, illegal or unenforceable) shall not be affected
thereby and shall continue in full force and effect to the fullest extent
provided by law.
(v) Time is of the Essence. It is expressly understood and
----------------------
agreed that time of performance is strictly of the essence with respect to each
and every term, condition, obligation and provision hereof and that the failure
to timely perform any of the terms, conditions, obligations or provisions hereof
by any party shall constitute a material breach and a noncurable (but waivable)
default under this Agreement by the party so failing to perform.
(vi) No Third Party Beneficiary. Notwithstanding anything
--------------------------
else herein to the contrary, the parties specifically disavow any desire or
intention to create any third party beneficiary obligations, and specifically
declare that no person or entity, other than as set forth in this Agreement,
shall have any rights hereunder or any right of enforcement hereof.
(vii) No Reliance Upon Prior Representation. The parties
-------------------------------------
acknowledge that no other party has made any oral representation or promise
which would induce them prior to executing this Agreement to change their
position to their detriment, partially perform, or part with value in reliance
upon such representation or promise; the parties acknowledge that they have
taken such action at their own risk; and the parties represent that they have
not so changed their position, performed or parted with value prior to the time
of their execution of this Agreement.
(viii) Headings; References; Incorporation; Gender. The
-------------------------------------------
headings used in this Agreement are for convenience and reference purposes only,
and shall not be used in construing or interpreting the scope or intent of this
Agreement or any provision hereof. References to this Agreement shall include
all amendments or renewals thereof. All cross-references in this Agreement,
unless specifically directed to another agreement or document, shall be
construed only to refer to provisions within this Agreement, and shall not be
construed to be referenced to the overall transaction or to any other agreement
or document. Any exhibit referenced in this Agreement shall be construed to be
incorporated in this Agreement. As used in this Agreement, each gender shall be
deemed to include the other gender, including neutral genders or genders
appropriate for entities, if applicable, and the singular shall be deemed to
include the plural, and vice versa, as the context requires.
(d) ENFORCEMENT.
-----------
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<PAGE>
(i) Applicable Law. This Agreement and the rights and remedies of
--------------
each party arising out of or relating to this Agreement (including, without
limitation, equitable remedies) shall be solely governed by, interpreted under,
and construed and enforced in accordance with the laws (without regard to the
conflicts of law principles thereof) of the State of California, as if this
agreement were made, and as if its obligations are to be performed, wholly
within the State of California.
(ii) Consent to Jurisdiction; Service of Process. Any action or
-------------------------------------------
proceeding arising out of or related to this Agreement shall be filed in and
heard and litigated solely before the state courts of California located within
the County of Ventura. Each party generally and unconditionally accepts the
exclusive jurisdiction of such courts and to venue therein, consents to the
service of process in any such action or proceeding by certified or registered
mailing of the summons and complaint in accordance with the notice provisions of
this Agreement, and waives any defense or right to object to venue in said
courts based upon the doctrine of "Forum Non Conveniens". Each party irrevocably
agrees to be bound by any judgment rendered thereby in connection with this
Agreement.
(iii) Waiver of Right to Jury Trial. Each party hereby waives such
-----------------------------
party's respective right to a jury trial of any claim or cause of action based
upon or arising out of this Agreement. Each party acknowledges that this wavier
is a material inducement to each other party hereto to enter into the
transaction contemplated hereby, that each other party has already relied upon
this waiver in entering into this Agreement, and that each other party will
continue to rely on this wavier in their future dealings. Each party warrants
and represents that such party has reviewed this waiver with such party's legal
counsel or has been afforded an ample opportunity to do so, and that such party
has knowingly and voluntarily waived its jury trial rights.
(iv) Consent to Specific Performance and Injunctive Relief and
---------------------------------------------------------
Waiver of Bond or Security. Each party acknowledges that Company may, as a
- --------------------------
result of Executive's breach of the covenants and obligations included in
paragraph 4 of this Agreement, sustain immediate and long-term substantial and
irreparable injury and damage which cannot be reasonably or adequately
compensated by damages at law. Each party agrees that in the event of
Executive's breach or threatened breach of the covenants and obligations
included in paragraph 4, Company shall be entitled to obtain from a court of
competent jurisdiction or arbitration, as the case may be under this Agreement,
equitable relief, including, without limitation, enforcement of all of the
provisions of this Agreement by specific performance and/or temporary,
preliminary and/or permanent injunctions enforcing any of Company's rights,
requiring performance by Executive, or enjoining any breach by Executive, all
without proof of any actual damages that have been or may be caused to Company
by such breach or threatened breach and without the posting of bond or other
security in connection therewith. Executive waives the claim or defense that
Company has an adequate, remedy at law and Excessive shall not allege or
otherwise assert the legal position that any such remedy at law exists. Each
party agrees and acknowledges: (1) that the terms of this paragraph are fair,
reasonable and necessary to protect the legitimate interests of the other party;
(2) that this waiver is a material inducement to the other party to enter into
the transaction contemplated hereby; (3) that the other party has
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<PAGE>
already relied upon this waiver in entering into this agreement; and (4) that
each party will continue to rely on this wavier in their future dealings. Each
party warrants and represents that such party has reviewed this provision with
such party's legal counsel or has been afforded an ample opportunity to do so,
and that such party has knowingly and voluntarily waived its rights.
(v) Attorneys' Fees and Costs. If any party institutes or should the
-------------------------
parties otherwise become a party to any Action Or Proceeding (as defined below)
based upon or arising out of this Agreement including, without limitation, to
enforce or interpret this Agreement or any provision hereof, or for damages by
reason of any alleged breach of this Agreement or any provision hereof, or for a
declaration of rights in connection herewith, or for any other relief, including
equitable relief, in connection herewith, the Prevailing Party (as defined
below) in any such Action Or Proceeding, whether or not such Action Or
Proceeding proceeds to final judgment or determination, shall be entitled to
receive from the non-Prevailing Party as a cost of suit, and not as damages, all
Costs And Expenses (as defined below) of prosecuting or defending the Action Or
Proceeding, as the case may be, including, without limitation, reasonable
Attorneys' And Other Fees.
(vi) Definitions. The term "Action Or Proceeding" is defined as any
-----------
and all claims, suits, actions, notices, inquiries, proceedings, hearings,
arbitrations or other similar proceedings, including appeals and petitions
therefrom, whether formal or informal, governmental or non-governmental, or
civil or criminal. The term "Prevailing Party" is defined as the party who is
determined to prevail by the Court after its consideration of all damages and
equities in the Action Or Proceeding, whether or not the Action Or Proceeding
proceeds to final judgment. The Court shall retain the discretion to determine
that no party is the Prevailing Party in which case no party shall be entitled
to recover its Costs And Expenses under this subparagraph 12(d). The term
"Attorneys' And Other Fees" is defined as attorneys' fees, accountants' fees,
fees of other professionals, witness fees (including experts engaged by the
parties, but excluding shareholders, officers, employees or partners of the
parties), and any and all other similar fees incurred in the prosecution or
defense of the Action Or Proceeding. The term "Costs And Expenses" is defined
as the cost to take depositions, the cost to arbitrate this dispute, if
applicable, and the costs and expenses of travel and lodging incurred with
respect to the Action or Proceeding, provided, however, the party incurring said
travel and lodging expense must ordinarily travel over one hundred (100) miles,
one way, from his or her residence in incurring such expense.
(e) NO ASSIGNMENT OF RIGHTS OR DELEGATION OF DUTIES BY EXECUTIVE.
------------------------------------------------------------
Executive's rights and benefits under this Agreement are personal to him and
therefore (i) no such right or benefit shall be subject to voluntary or
involuntary alienation, assignment or transfer; and (ii) Executive may not
delegate his duties or obligations hereunder.
(f) NOTICES. Unless otherwise specifically provided in this Agreement,
-------
all notices, demands, requests, consents, approvals or other communications
(collectively and severally called "Notices") required or permitted to be given
hereunder, or which are given with respect to this Agreement, shall be in
writing, and shall be given by: (A) personal delivery (which form of Notice
shall be deemed to have been given upon delivery), (B) by telegraph or by
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<PAGE>
private airborne/overnight delivery service (which forms of Notice shall be
deemed to have been given upon confirmed delivery by the delivery agency), (C)
by facsimile transmission (which forms of Notice shall be deemed delivered upon
receipt by the sending party of a confirmation of transmission issued by
sender's facsimile machine), or (D) by mailing in the United States mail by
registered or certified mail, return receipt requested, postage prepaid (which
forms of Notice shall be deemed to have been given upon the fifth (5th) business
day following the date mailed). Each party, and their respective counsel,
hereby agree that any such Notice may be given hereunder by such party's Counsel
and such counsel may communicate directly with all principals, as required to
comply with the foregoing notice provisions. Notices shall be addressed to the
address hereinabove set forth in the introductory paragraph of this Agreement,
or to such other address as the receiving party shall have specified most
recently by like Notice, with a copy to the other parties hereto. Any Notice
given to the estate of a party shall be sufficient if addressed to the party as
provided in this subparagraph.
(g) COUNTERPARTS. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, and all of which together shall constitute
one and the same instrument, binding on all parties hereto. Any signature page
of this Agreement may be detached from any counterpart of this Agreement and
reattached to any other counterpart of this Agreement identical in form hereto
by having attached to it one or more additional signature pages.
(h) EXECUTION BY ALL PARTIES REQUIRED TO BE BINDING: ELECTRONICALLY
----------------------------------------------------------------
TRANSMITTED DOCUMENTS. This Agreement shall not be construed to be an offer and
- ---------------------
shall have no force and effect until this Agreement is fully executed by all
parties hereto. If a copy or counterpart of this Agreement is originally
executed and such copy or counterpart is thereafter transmitted electronically
by facsimile or similar device, such facsimile document shall for all purposes
be treated as if manually signed by the party whose facsimile signature appears.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
COMPANY:
VARIFLEX, INC., a Delaware corporation
By: /s/ Raymond (Jay) H. Losi II
---------------------------------
Raymond (Jay) H. Losi II
Chief Executive Officer and
Chief Operating Officer
EXECUTIVE:
/s/ Roger M. Wasserman
------------------------------------
Roger M. Wasserman
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<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement"), which is dated as of August 24,
1998, is made by and between VARIFLEX, INC., a Delaware corporation, located at
5152 North Commerce Avenue, Moorpark, California, 93021 and hereinafter referred
to as "Company", and STEVEN MUELLNER, whose address is 10056 Toluca Lake Avenue,
Toluca Lake, California 91602, hereinafter referred to as "Executive", based
upon the following:
RECITALS
--------
WHEREAS, Company wishes to retain the services of Executive as its
President and to set forth in this Agreement the duties and responsbilities
Executive has agreeed to undertake on behalf of Company; and
WHEREAS, Executive wishes to render services to Company as its President
and to have set forth in this Agreement the duties and responsibilities he has
agreed to undertake on behalf of Company; and
THEREFORE, in consideration of the foregoing and of the mutual promises
contained in this Agreement, Company and Executive (who are sometimes
individually referred to as a "party" and collectively referred to as the
"parties") agree as follows:
AGREEMENT
---------
1. "COMPANY" DEFINED.
-----------------
The term "Company" as used in this Agreement shall mean Variflex, Inc.
2. SPECIFIED PERIOD.
----------------
(a) INITIAL TERM. Subject to paragraphs 9, 10 and 11, Company hereby
------------
employs Executive pursuant to the terms of this Agreement and Executive hereby
accepts employment with Company pursuant to the terms of this Agreement for the
period beginning on August 24, 1998 ("Commencement Date") and ending on February
23, 2001 (the "Initial Expiration Date"), the day before the two and one-half
(2.5) year anniversary of the Commencement Date.
(b) RENEWAL OF TERM. Subject to paragraphs 9, 10 and 11, this Agreement
---------------
will be automatically renewed for an additional one (1) year term on the Initial
Expiration Date and on each anniversary date of the Initial Expiration Date
occurring thereafter, unless either party gives written notice to the other, at
least ninety (90) days prior to the Initial Expiration Date or prior to the date
of expiration of the then applicable renewal term of this Agreement (the
"Renewal Expiration Date"), as applicable, that the party desires to terminate
this Agreement.
(c) TERM. For purposes of this Agreement, "Term" shall mean the period
----
beginning on the Commencement Date and ending on the earlier of (i) the date on
which Executive's employment is terminated pursuant to paragraphs 9, 10 or 11 of
this Agreement, (ii)
<PAGE>
the Initial Expiration Date if this Agreement is not automatically renewed
pursuant to paragraph 2(b) above, or (iii) the then applicable Renewal
Expiration Date if the then renewal term is not automatically renewed for an
additional one (1) year period pursuant to paragraph 2(b) above.
3. GENERAL DUTIES.
--------------
Executive shall report only to the Company's Chief Executive Officer and
the Company's Board of Directors (the "Board"). Executive shall devote his
entire productive time, ability, and attention to Company's business during the
term of this Agreement. Unless otherwise modified by the Board with the consent
of the Executive, the Executive shall serve as the President of the Company. In
this capacity, Executive shall be responsible for the general supervision,
direction and control of the day-to-day business and affairs of Company.
Executive shall perform such other duties as are commonly performed by the
President of a publicly traded corporation (who is not also the Chief Executive
Officer) or which may from time to time be prescribed by the Board or the Chief
Executive Officer consistent with such duties. Executive shall not work for any
other person, firm or entity during the Term of this Agreement.
4. NONCOMPETITION, NONSOLICITATION AND NONINTERFERENCE AND PROPRIETARY
-------------------------------------------------------------------
PROPERTY AND CONFIDENTIAL INFORMATION PROVISIONS.
------------------------------------------------
(a) NONCOMPETITION.
--------------
(1) "Applicable Definitions" - For purposes of this paragraph 4, the
----------------------
following capitalized terms shall have the definitions set forth below:
i. "Business Segments" - The term "Business Segment" is defined as
-----------------
each portion of the Company's (or Company's affiliates') business, including,
without limitation, the production, distribution, marketing, and sales of the
Company's (or Company's affiliates') products or product lines, and the
purchasing of raw materials and supplies in connection therewith.
ii. "Competitive Business" - The term "Competitive Business" is
--------------------
defined as any business that is or may be competitive with or similar to or
adverse to any of Company's (or Company's affiliates') Business Segments,
whether such business is conducted by a proprietorship, partnership, corporation
or other entity or venture.
iii. "Territory" - The term "Territory" is defined as the
---------
geographic area (both within the United States and internationally) in which any
Business Segment is carried on including, by way of example and not limitation,
the entire geographic area in which Company conducts various phases of any such
Business Segment, including purchasing, production, distribution, promotional
and marketing activities, sales, and location of plants and warehouses.
(2) Covenant Not to Compete. Executive hereby covenants and agrees that
-----------------------
during the term of this Agreement, and (A) if and so long as Executive is being
paid
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<PAGE>
severance of $93,750.00 pursuant to paragraph 10 of this Agreement, for a
period of four and one-half (4.5) months following the date this Agreement is
terminated or (B) if and so long as Executive is being paid severance of
$125,000.00 pursuant to paragraph 10 of this Agreement, for a period of six (6)
months following the date this Agreement is terminated, Executive shall not,
with respect to any Business Segment and within the boundaries of the Territory
applicable to such Business Segment, without the prior written consent of
Company (which consent may be withheld in the sole and absolute discretion of
Company), directly or indirectly, either alone or in association or in
connection with or on behalf of any person, firm, partnership, corporation or
other entity or venture now existing or hereafter created: (i) be or become
interested or engaged in, directly or indirectly, with any Competitive Business
including, without limitation, being or becoming an organizer, investor, lender,
partner, joint venturer, stockholder, officer, director, employee, manager,
independent sales representative , associate, consultant, agent, supplier,
vendor, vendee, lessor, or lessee to any Competitive Business, or (ii) in any
manner associate with, or aid or abet or give information or financial
assistance to any Competitive Business, or (iii) use or permit the use of
Executive's name or any part thereof to be used or employed in connection with
any Competitive Business (collectively and severally, the "Noncompetition
---------------
Covenants"). Notwithstanding the foregoing, the provisions of this paragraph
- ---------
4(a)(2) shall not be deemed to prevent the purchase or ownership by Executive as
a passive investment of no more than 5% of the outstanding capital shares of any
publicly held corporation, so long as any other obligation or duty under the
Noncompetition Covenants are not breached. Executive shall have the right to
waive his entitlement to all of the severance benefits otherwise required to be
paid to him pursuant to paragraph 10 of this Agreement, in which event
paragraphs (a)(2)(A) and (a)(2)(B) of this paragraph 6(a)(2) shall not apply.
(3) Separate Covenants. The Noncompetition Covenants shall be construed
------------------
to be divided into separate and distinct Noncompetition Covenants with respect
to (i) each Business Segment and (ii) each matter or type of conduct described
therein. Each of such divided Noncompetition Covenants shall be separate and
distinct from all such other Noncompetition Covenants with respect to the same
or any other Business Segment.
(4) Acknowledgments. Executive acknowledges that: (i) the covenants and
---------------
the restrictions contained in the Noncompetition Covenants are necessary,
fundamental, and required for the protection of Company's business; (ii) the
Noncompetition Covenants relate to matters which are of a special, unique and
extraordinary value; and (iii) a breach of any of the Noncompetition Covenants
will result in irreparable harm and damages which cannot be adequately
compensated by a monetary award.
(5) Judicial Limitation. Notwithstanding the foregoing, if at any time
-------------------
a court of competent jurisdiction holds that any portion of any Noncompetition
Covenant is unenforceable by reason of its extending for too great a period of
time or over too great a geographical area or by reason of its being too
extensive in any other respect, such Noncompetition Covenant shall be
interpreted to extend only over the maximum period of time, maximum geographical
area, or maximum extent in all other respects, as the case may be, as to which
it may be enforceable, all as determined by such court in such action.
-3-
<PAGE>
(b) NONSOLICITATION AND NONINTERFERENCE.
-----------------------------------
(1) Covenants. Executive hereby covenants and agrees that during the
---------
term of this Agreement, and for a period of one (1) year from the date this
Agreement terminates or expires, Executive shall not, either for Executive's own
account or directly or indirectly in conjunction with or on behalf of any
person, partnership, corporation or other entity or venture:
i. Solicit or employ or attempt to solicit or employ any person
who is then or has, within twelve (12) months prior thereto, been an officer,
partner, manager, agent or employee of Company or any affiliate of Company
whether or not such a person would commit a breach of that person's contract of
employment with Company or any affiliate of Company, if any, by reason of
leaving the service of Company or any affiliate of Company (the "Nonsolicitation
---------------
Covenant"); or
- --------
ii. On behalf of, directly or indirectly, any Competitive Business
(as such term is defined in paragraph 4(a)(1)ii., or for the purpose of or with
the reasonably foreseeable effect of harming the business of Company, solicit
the business of any person, firm or company which is then, or has been at any
time during the preceding twelve (12) months prior to such solicitation, a
customer, client, contractor, supplier or vendor of Company or any affiliate of
Company (the "Noninterference Covenant").
------------------------
(2) Acknowledgments. Each of the parties acknowledges that: (i) the
---------------
covenants and the restrictions contained in the Nonsolicitation and
Noninterference Covenants are necessary, fundamental, and required for the
protection of the business of Company; (ii) such Covenants relate to matters
which are of a special, unique and extraordinary value; and (iii) a breach of
either of such Covenants will result in irreparable harm and damages which
cannot be adequately compensated by a monetary award.
(3) Judicial Limitation. Notwithstanding the foregoing, if at any time,
-------------------
despite the express agreement of Company and Executive, a court of competent
jurisdiction holds that any portion of any Nonsolicitation or Noninterference
Covenant is unenforceable by reason of its extending for too great a period of
time or by reason of its being too extensive in any other respect, such Covenant
shall be interpreted to extend only over the maximum period of time or to the
maximum extent in all other respects, as the case may be, as to which it may be
enforceable, all as determined by such court in such action.
(c) PROPRIETARY PROPERTY; CONFIDENTIAL INFORMATION.
----------------------------------------------
(1) "Applicable Definitions" For purposes of this paragraph 4(c), the
----------------------
following capitalized terms shall have the definitions set forth below:
i. "Confidential Information" - The term "Confidential
------------------------
Information" is collectively and severally defined as any information, matter or
thing of a secret, confidential or private nature, whether or not so labeled,
which is connected with Company's business, Business Segments, or methods of
operation or concerning any of Company's suppliers, customers, licensors,
licensees or others with whom Company has a business
-4-
<PAGE>
relationship, and which has current or potential value to Company or the
unauthorized disclosure of which could be detrimental to Company. Confidential
Information shall be broadly defined and shall include, by way of example and
not limitation: (i) matters of a business nature available only to management
and owners of Company of which Executive may become aware (such as information
concerning customers, vendors and suppliers, including their names, addresses,
credit or financial status, buying or selling habits, practices, requirements,
and any arrangements or contracts that Company may have with such parties,
Company's marketing methods, plans and strategies, the costs of materials, the
prices Company obtains or has obtained or at which Company sells or has sold its
products or services, Company's manufacturing and sales costs, the amount of
compensation paid to employees of Company and other terms of their employment,
financial information such as financial statements, budgets and projections, and
the terms of any contracts or agreements Company has entered into) and (ii)
matters of a technical nature (such as product information, trade secrets, know-
how, formulae, innovations, inventions, devices, discoveries, techniques,
formats, processes, methods, specifications, designs, patterns, schematics,
data, compilation of information, test results, and research and development
projects). For purposes of the foregoing, the term "trade secrets" shall mean
the broadest and most inclusive interpretation of trade secrets as defined by
Section 3426.1(d) of the California Civil Code (the Uniform Trade Secrets Act)
---------------------
and cases interpreting the scope of said Section. "Confidential Information"
does not include information which (i) is or becomes generally available to the
public through no wrongful act of Executive, or (ii) was available to or
otherwise in the possession of Executive prior to the date of this Agreement,
provided Executive acquired such information through lawful means and from a
source who or which was not under a duty of non-disclosure.
ii. "Proprietary Property" - The term "Proprietary Property" is
--------------------
collectively and severally defined as any written or tangible property owned or
used by Company in connection with Company's business, whether or not such
property also qualifies as Confidential Information. Proprietary Property shall
be broadly defined and shall include, by way of example and not limitation,
products, samples, equipment, files, lists, books, notebooks, records,
documents, memoranda, reports, patterns, schematics, compilations, designs,
drawings, data, test results, contracts, agreements, literature, correspondence,
spread sheets, computer programs and software, computer print outs, other
written and graphic records, and the like, whether originals, copies, duplicates
or summaries thereof, affecting or relating to the business of Company,
financial statements, budgets, projections, invoices.
(2) Ownership of Proprietary Property. Executive acknowledges that all
---------------------------------
Proprietary Property which Executive may prepare, use, observe, come into
possession of and/or control shall, at all times, remain the sole and exclusive
property of Company. Executive shall, upon demand by Company at any time, or
upon the cessation of Executive's employment, irrespective of the time, manner,
cause or lack of cause of such cessation, immediately deliver to Company or its
designated agent, in good condition, ordinary wear and tear and damage by any
cause beyond the reasonable control of Executive excepted, all items of the
Proprietary Property which are or have been in Executive's
-5-
<PAGE>
possession or under his control, as well as a statement describing the
disposition of all items of the Proprietary Property previously in Executive's
possession in the event Executive has not previously returned such items of the
Proprietary Property to Company.
(3) Agreement Not to Use or Divulge Confidential Information. Executive
--------------------------------------------------------
agrees that he will not, at any time, in any fashion, form or manner, unless
specifically consented to in writing by Company, either directly or indirectly
use, divulge, transmit or otherwise disclose or cause to be used, divulged,
transmitted or otherwise disclosed to any person, firm or corporation, in any
manner whatsoever (other than in Executive's performance of duties for Company
or except as required by law) any Confidential Information of any kind, nature
or description. The foregoing provisions shall not be construed to prevent
Executive from making use of or disclosing information which is in the public
domain through no fault of Executive, provided, however, specific information
shall not be deemed to be in the public domain merely because it is encompassed
by some general information that is published or in the public domain or in
Executive's possession prior to Executive's employment with Company.
(4) Acknowledgment of Secrecy. Executive acknowledges that the
-------------------------
Confidential Information is not generally known to the public or to other
persons who can obtain economic value from its disclosure or use and that the
Confidential Information derives independent economic value thereby, and
Executive agrees that he shall take all efforts reasonably necessary to maintain
the secrecy and confidentiality of the Confidential Information and to otherwise
comply with the terms of this Agreement.
(5) Inventions, Discoveries. Executive acknowledges that any inventions,
-----------------------
discoveries or trade secrets, whether patentable or not, made or found by
Executive in the scope of his employment with Company constitute property of
Company and that any rights therein now held or hereafter acquired by Executive
individually or in any capacity are hereby transferred and assigned to Company,
and agrees to execute and deliver any confirmatory assignments, documents or
instruments of any nature necessary to carry out the intent of this paragraph
when requested by Company without further compensation therefor, whether or not
Executive is at the time employed by Company. Provided, however,
notwithstanding the foregoing, Executive shall not be required to assign his
rights in any invention which qualifies fully under the provisions of Section
2870(a) of the California Labor Code, which provides, in pertinent part, that
---------------------
the requirement to assign "shall not apply to any invention that the employee
developed entirely on his or her own time without using employer's equipment,
supplies, facilities or trade secret information except for those inventions
that either:
(i) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or
(ii) Result from any work performed by the employee for the
employer."
Executive understands that he bears the full burden of proving to Company
that an invention qualifies fully under Section 2870(a). By signing this
Agreement,
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<PAGE>
Executive acknowledges receipt of a copy of this Agreement and of written
notification of the provisions of Section 2870.
5. COMPLIANCE WITH SECURITIES LAWS.
-------------------------------
Executive acknowledges that, the Company is a publicly reporting company,
and that Company and Executive are subject to the provisions of Sections 10(b),
16(a) and 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act").
Executive acknowledges that Section 16(a) of the Exchange Act requires Executive
to report the ownership or transfer of his stock or other securities in Company
to the Securities and Exchange Commission and that Sections 10(b) and 16(b) can
prohibit Executive from selling or transferring his stock or securities in
Company. Executive agrees that he will comply with Company's policies, as
stated from time to time in writing, relating to selling or transferring his
stock or securities in Company.
6. COMPENSATION.
------------
(a) SALARY. During the term of this Agreement, Company shall pay to
------
Executive a base salary of Two Hundred Fifty Thousand Dollars ($250,000) per
year. Executive's annual salary shall be reviewed periodically by Company for
the purpose of determining whether Executive's salary shall be increased. In no
event shall this review take place less frequently than annually. Executive
shall be entitled to receive such bonuses as the Company may, in its discretion,
award of up to fifty percent (50%) of Executive's base salary.
(b) EMPLOYEE BENEFIT PLANS. Except as otherwise herein provided,
----------------------
Executive shall be entitled, during the specified period of this Agreement, to
participate in any retirement, pension, profit-sharing, insurance, or other
plans which may now be in effect or which may be adopted by Company, including,
without limitation, all such benefits generally available to Company's other
senior executive employees.
(c) STOCK OPTIONS. Within thirty (30) days after the date of this
-------------
Agreement, the Company will prepare and deliver to Executive, a stock option
agreement which shall provide the following: (i) Executive shall be granted
incentive options, pursuant to the 1994 Variflex Stock Plan, to purchase an
aggregate of one hundred twenty-five thousand (125,000) shares of Company's
common stock at a price per share equal to the closing price of the Company's
common stock as listed by NASDAQ as of the end of the first business day
immediately preceding the option grant date; (ii) the option grant date shall be
the Commencement Date; (iii) options to purchase shall vest over a five year
period according to the vesting schedule in the stock option agreement, so long
as Executive continues his employment with Company; (iv) options shall expire
five years following the grant date, except that vested options shall terminate
earlier in certain circumstances and unvested options shall terminate upon
termination of Executive's employment; (v) Executive shall be entitled to pay
for the stock in cash, in stock of Company with a fair market value equal to the
exercise price, and (vi) stock issued pursuant to this plan shall be restricted
stock, although Company shall reserve the right to issue registered shares if it
so decides. Executive agrees to be bound by the terms of the stock option
agreement as adopted, and the provisions of this paragraph shall be limited by
and subject to the terms of that agreement.
-7-
<PAGE>
(d) OTHER BENEFITS. The Executive shall be entitled to a car
--------------
allowance of up to $1,000 per month for so long as Executive's employment under
this Agreement has not been terminated by the Company or by Executive.
7. REIMBURSEMENT OF BUSINESS EXPENSES. Company shall promptly reimburse
----------------------------------
Executive for all reasonable business expenses incurred by Executive in
connection with the business of Company. However, each such expenditure shall
be reimbursable only if Executive furnishes to Company such records and other
documentary evidence as are required by the policies adopted from time to time
by the Company for reimbursement of expenses.
8. ANNUAL VACATION; PLACE OF PERFORMANCE; AND INSURANCE.
(a) VACATION. Executive shall be entitled to three (3) weeks vacation
--------
time each year without loss of compensation. The Executive shall be entitled to
such period of vacation immediately upon effectiveness of this Agreement, and
such vacation need not be taken in consecutive periods. If Executive does not
take all such vacation time in any given calendar year, such unused time shall
carry over to the next year during the Term. Executive shall also be entitled
to all paid holidays provided by the Company to its other senior executive
employees.
(b) PLACE OF PERFORMANCE. In connection with his employment by the
--------------------
Company pursuant to this Agreement, the Executive shall be based at the
principal executive office of the Company in Southern California, except for
travel reasonably required for Company business.
(c) INSURANCE. During the Term, and for twenty-four (24) months
---------
thereafter, Company shall maintain in effect a directors and officers liability
insurance policy with a minimum coverage amount of Five Million Dollars
($5,000,000.00) with related commercially reasonable deductibles or, if Company
cannot obtain such minimum coverage amount of Five Million Dollars
($5,000,000.00) without unreasonable cost or expense or deductibles, taking into
account the size of the Company, whatever minimum coverage is commercially
reasonably available.
9. TERMINATION BY COMPANY FOR CAUSE.
--------------------------------
Company reserves the right to terminate Executive and Executive's
employment hereunder for cause. For purposes of this Agreement, the term
"cause" shall be deemed to exist if Executive (a) breaches or habitually
neglects the duties which he is required to perform under the terms of this
Agreement and such breach or neglect remains uncured after ten (10) days
following the delivery of written notice from the Company asserting such breach
or neglect; or (b) fails to adhere to any written Company policy if the
Executive has been given a reasonable opportunity to comply with such policy or
cure his failure to comply (which reasonable opportunity must be granted during
the ten-day period preceding the proposed termination of this Agreement for such
failure); or (c) appropriates (or attempts to appropriate) for himself or others
a material business opportunity of the Company, including attempting to secure
or securing any personal profit in connection with any transaction entered into
on behalf of the Company; or (d) appropriates (or attempts to misappropriate)
for himself or others any of the Company's funds or
-8-
<PAGE>
property; or (e) is convicted of, indicted for (or its procedural equivalent),
or enters a guilty plea or plea of no contest with respect to, a felony, the
equivalent thereof, or any other crime involving moral turpitude; or (f) commits
such acts of dishonesty, fraud, or misrepresentation as would prevent the
effective performance of his duties or results in material harm to Company's
business, taken as a whole. Company may terminate this Agreement for cause by
giving written notice of termination to Executive. With the exception of the
covenants included in paragraphs 4 and 5 above, upon such termination the
obligations of Executive and Company under this Agreement shall immediately
cease. Such termination shall be without prejudice to any other remedy to which
Company may be entitled either at law, in equity, or under this Agreement. If
Executive's employment is terminated pursuant to this paragraph, Company shall
pay to Executive, within two (2) business days of such termination, any deferred
or unpaid compensation and benefits to which Executive has earned and vested and
is otherwise entitled at the time of such termination.
10. TERMINATION WITHOUT CAUSE.
-------------------------
(a) BY COMPANY. Company shall have the right to terminate this
----------
Agreement and Executive's employment hereunder without cause at any time. If
Company terminates Executive without cause before the first anniversary of the
Commencement Date, Executive shall be entitled to a severance benefit equal to
Ninety Three Thousand Seven Hundred and Fifty Dollars ($93,750.00). If Company
terminates Executive without cause after the first anniversary of the
Commencement Date, Executive shall be entitled to a severance benefit equal to
One Hundred and Twenty Five Thousand Dollars ($125,000.00); provided, however,
that Executive shall not be entitled to any severance if (i) this Agreement is
terminated by Company pursuant to paragraph 2(b) above or the Company gives
written notice of non renewal pursuant to paragraph 2(b) above, or (ii) this
Agreement is terminated by Executive pursuant to paragraph 2(b) above or
paragraph 10(b) below or the Executive gives written notice of non-renewal
pursuant to paragraph 2(b) above, or (iii) this Agreement and Executive's
employment hereunder is terminated for cause pursuant to paragraph 9 above, or
(iv) Executive's employment is terminated by reason of the death or disability
of Executive as provided in paragraph 11 below. In the event the Executive is
"constructively terminated" (as defined below) by the Company, such constructive
termination shall constitute termination without cause for purposes of the
severance payments under this paragraph 10(a). The term "constructively
terminated" shall mean any action by the Company (other than actual termination
of Executive's employment) taken without "cause" (as this term is defined in
paragraph 9 above) which results in a material diminution in Executive's
position (including status, title and reporting requirements), authority, duties
or responsibilities from that which is consistent with the status, title,
reporting requirements, authority, duties or responsibilities of a President of
a similarly situated public company (who is not also the Chief Executive
Officer). The severance payment shall be subject to applicable tax withholding
and shall be paid in a lump sum within ten (10) business days following the
effective date of the event giving rise to Executive's being terminated without
cause.
(b) BY EXECUTIVE. Executive shall have the right to terminate this
------------
Agreement and Executive's employment hereunder without cause at any time upon
least sixty (60) days
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<PAGE>
advance written notice to the Company. If Executive fails for any reason to give
the Company at least sixty (60) days advance written notice of termination of
his employment with the Company, such failure shall constitute a breach of this
Agreement by Executive .
11. TERMINATION UPON DEATH OR DISABILITY.
------------------------------------
(a) DEATH. Executive's employment shall terminate upon the death of
-----
Executive. Upon such termination, the obligations of Executive and Company
under this Agreement shall immediately cease.
(b) DISABILITY. Company reserves the right to terminate Executive's
----------
employment upon ten (10) days written notice ("Disability Termination Notice")
if, for a period of sixty (60) days, Executive is prevented from discharging his
duties under this Agreement due to any physical or mental disability. With the
exception of the covenants included in paragraphs 4 and 5 above, upon such
termination the obligations of Executive and Company under this Agreement shall
immediately cease. If the Executive shall not agree with a determination to
terminate his employment because of disability, he must send a written notice of
objection ("Disability Objection Notice") to the Company within ten (10) days
after the date of the Disability Termination Notice. If for any reason
Executive fails or neglects to send a Disability Objection Notice within such
ten (10) day period, Executive shall be deemed to have waived his right to
object to his termination for disability. If Executive does send a Disability
Objection Notice to the Company within said ten (10) day period, then the
question of the Executive's disability within the meaning of this Agreement
shall be subject to the certification of a qualified medical doctor agreed to by
the Company and the Executive. If a qualified medical doctor cannot be mutually
agreed upon within ten (10) days following the date of the Disability Objection
Notice, each party shall nominate a medical doctor by written notice to each
other within fifteen (15) days after the date of the Disability Objection Notice
and those two doctors shall select a third doctor within twenty (20) days after
the date of the Disability Objection Notice, who shall make the final
determination as to disability and send a reasonably detailed written report of
such determination to the Company and Executive not later than the forty-fifth
(45th) day following the date of the Disability Objection Notice. If Executive
sends a Disability Objection Notice within the time period specified herein,
then during the period from the date of such Notice until the earlier of the
date of the written report of the third medical doctor setting forth his
determination or the forty-fifth (45th) day following the date of the Disability
Objection Notice, Executive shall continue to receive full compensation and
other benefits called for hereunder.
12. MISCELLANEOUS.
-------------
(a) PREPARATION OF AGREEMENT. It is acknowledged by each party that
------------------------
such party either had separate and independent advice of counsel or the
opportunity to avail itself or himself of same. In light of these facts it is
acknowledged that no party shall be construed to be solely responsible for the
drafting hereof, and therefore any ambiguity shall not be construed against any
party as the alleged draftsman of this Agreement.
-10-
<PAGE>
(b) COOPERATION. Each party agrees, without further consideration,
-----------
to cooperate and diligently perform any further acts, deeds and things and to
execute and deliver any documents that may from time to time be reasonably
necessary or otherwise reasonably required to consummate, evidence, confirm
and/or carry out the intent and provisions of this Agreement, all without undue
delay or expense.
(c) INTERPRETATION.
--------------
(i) Entire Agreement/No Collateral Representations. Each party
----------------------------------------------
expressly acknowledges and agrees that this Agreement, including all exhibits
attached hereto: (1) is the final, complete and exclusive statement of the
agreement of the parties with respect to the subject matter hereof; (2)
supersedes any prior to contemporaneous agreements, promises, assurances,
guarantees, representations, understandings, conduct, proposals, conditions,
commitments, acts, course of dealing, warranties, interpretations or terms of
any kind, oral or written (collectively and severally, the "Prior Agreements"),
and that any such Prior Agreements are of no force or effect except as expressly
set forth herein; and (3) may not be varied, supplemented or contradicted by
evidence of Prior Agreements, or by evidence of subsequent oral agreements. Any
agreement hereafter made shall be ineffective to modify, supplement or discharge
the terms of this Agreement, in whole or in part, unless such agreement is in
writing and signed by the party against whom enforcement of the modification or
supplement is sought.
(ii) Waiver. No breach of any agreement or provision herein
------
contained, or of any obligation under this Agreement, may be waived, nor shall
any extension of time for performance of any obligations or acts be deemed an
extension of time for performance of any other obligations or acts contained
herein, except by written instrument signed by the party to be charged or as
otherwise expressly authorized herein. No waiver of any breach of any agreement
or provision herein contained shall be deemed a waiver of any preceding or
succeeding breach thereof, or a waiver or relinquishment of any other agreement
or provision or right or power herein contained.
(iii) Remedies Cumulative. The remedies of each party under this
-------------------
Agreement are cumulative and shall not exclude any other remedies to which such
party may be lawfully entitled.
(iv) Severability. If any term or provision of this Agreement or
------------
the application thereof to any person or circumstance shall, to any extent, be
determined to be invalid, illegal or unenforceable under present or future laws
effective during the term of this Agreement, then and, in that event: (A) the
performance of the offending term or provision (but only to the extent its
application is invalid, illegal or unenforceable) shall be excused as if it had
never been incorporated into this Agreement, and, in lieu of such excused
provision, there shall be added a provision as similar in terms and amount to
such excused provision as may be possible and be legal, valid and enforceable,
and (B) the remaining part of this Agreement (including the application of the
offending term or provision to persons or circumstances other than those as to
which it is held invalid, illegal or unenforceable) shall not be affected
thereby and shall continue in full force and effect to the fullest extent
provided by law.
-11-
<PAGE>
(v) Time is of the Essence. It is expressly understood and agreed
----------------------
that time of performance is strictly of the essence with respect to each and
every term, condition, obligation and provision hereof and that the failure to
timely perform any of the terms, conditions, obligations or provisions hereof by
any party shall constitute a material breach and a noncurable (but waivable)
default under this Agreement by the party so failing to perform.
(vi) No Third Party Beneficiary. Notwithstanding anything else
--------------------------
herein to the contrary, the parties specifically disavow any desire or intention
to create any third party beneficiary obligations, and specifically declare that
no person or entity, other than as set forth in this Agreement, shall have any
rights hereunder or any right of enforcement hereof.
(vii) No Reliance Upon Prior Representation. The parties
-------------------------------------
acknowledge that no other party has made any oral representation or promise
which would induce them prior to executing this Agreement to change their
position to their detriment, partially perform, or part with value in reliance
upon such representation or promise; the parties acknowledge that they have
taken such action at their own risk; and the parties represent that they have
not so changed their position, performed or parted with value prior to the time
of their execution of this Agreement.
(viii) Headings; References; Incorporation; Gender. The headings
-------------------------------------------
used in this Agreement are for convenience and reference purposes only, and
shall not be used in construing or interpreting the scope or intent of this
Agreement or any provision hereof. References to this Agreement shall include
all amendments or renewals thereof. All cross-references in this Agreement,
unless specifically directed to another agreement or document, shall be
construed only to refer to provisions within this Agreement, and shall not be
construed to be referenced to the overall transaction or to any other agreement
or document. Any exhibit referenced in this Agreement shall be construed to be
incorporated in this Agreement. As used in this Agreement, each gender shall be
deemed to include the other gender, including neutral genders or genders
appropriate for entities, if applicable, and the singular shall be deemed to
include the plural, and vice versa, as the context requires.
(d) ENFORCEMENT.
-----------
(i) Applicable Law. This Agreement and the rights and remedies of
--------------
each party arising out of or relating to this Agreement (including, without
limitation, equitable remedies) shall be solely governed by, interpreted under,
and construed and enforced in accordance with the laws (without regard to the
conflicts of law principles thereof) of the State of California, as if this
agreement were made, and as if its obligations are to be performed, wholly
within the State of California.
(ii) Consent to Jurisdiction; Service of Process. Any action or
-------------------------------------------
proceeding arising out of or related to this Agreement shall be filed in and
heard and litigated solely before the state courts of California located within
the County of Ventura. Each party generally and unconditionally accepts the
exclusive jurisdiction of such courts and to venue therein, consents to the
service of process in any such action or proceeding by certified or registered
mailing of the summons and complaint in accordance with the notice provisions of
this
-12-
<PAGE>
Agreement, and waives any defense or right to object to venue in said courts
based upon the doctrine of "Forum Non Conveniens". Each party irrevocably agrees
to be bound by any judgment rendered thereby in connection with this Agreement.
(iii) Consent to Specific Performance and Injunctive Relief and
---------------------------------------------------------
Waiver of Bond or Security. Each party acknowledges that Company may, as a
- --------------------------
result of Executive's breach of the covenants and obligations included in
paragraph 4 of this Agreement, sustain immediate and long-term substantial and
irreparable injury and damage which cannot be reasonably or adequately
compensated by damages at law. Each party agrees that in the event of
Executive's breach or threatened breach of the covenants and obligations
included in paragraph 4, Company shall be entitled to obtain from a court of
competent jurisdiction or arbitration, as the case may be under this Agreement,
equitable relief, including, without limitation, enforcement of all of the
provisions of this Agreement by specific performance and/or temporary,
preliminary and/or permanent injunctions enforcing any of Company's rights,
requiring performance by Executive, or enjoining any breach by Executive, all
without proof of any actual damages that have been or may be caused to Company
by such breach or threatened breach and without the posting of bond or other
security in connection therewith. Executive waives the claim or defense that
Company has an adequate, remedy at law and Excessive shall not allege or
otherwise assert the legal position that any such remedy at law exists. Each
party agrees and acknowledges: (1) that the terms of this paragraph are fair,
reasonable and necessary to protect the legitimate interests of the other party;
(2) that this waiver is a material inducement to the other party to enter into
the transaction contemplated hereby; (3) that the other party has already relied
upon this waiver in entering into this agreement; and (4) that each party will
continue to rely on this wavier in their future dealings. Each party warrants
and represents that such party has reviewed this provision with such party's
legal counsel or has been afforded an ample opportunity to do so, and that such
party has knowingly and voluntarily waived its rights.
(iv) Attorneys' Fees and Costs. If any party institutes or should
-------------------------
the parties otherwise become a party to any Action Or Proceeding (as defined
below) based upon or arising out of this Agreement including, without
limitation, to enforce or interpret this Agreement or any provision hereof, or
for damages by reason of any alleged breach of this Agreement or any provision
hereof, or for a declaration of rights in connection herewith, or for any other
relief, including equitable relief, in connection herewith, the Prevailing Party
(as defined below) in any such Action Or Proceeding, whether or not such Action
Or Proceeding proceeds to final judgment or determination, shall be entitled to
receive from the non-Prevailing Party as a cost of suit, and not as damages, all
Costs And Expenses (as defined below) of prosecuting or defending the Action Or
Proceeding, as the case may be, including, without limitation, reasonable
Attorneys' And Other Fees.
(v) Definitions. The term "Action Or Proceeding" is defined as any
-----------
and all claims, suits, actions, notices, inquiries, proceedings, hearings,
arbitrations or other similar proceedings, including appeals and petitions
therefrom, whether formal or informal, governmental or non-governmental, or
civil or criminal. The term "Prevailing Party" is defined as the party who is
determined to prevail by the Court after its consideration of all damages and
equities in the Action Or Proceeding, whether or not the Action Or Proceeding
proceeds to final
-13-
<PAGE>
judgment. The Court shall retain the discretion to determine that no party is
the Prevailing Party in which case no party shall be entitled to recover its
Costs And Expenses under this subparagraph 12(d). The term "Attorneys' And Other
Fees" is defined as attorneys' fees, accountants' fees, fees of other
professionals, witness fees (including experts engaged by the parties, but
excluding shareholders, officers, employees or partners of the parties), and any
and all other similar fees incurred in the prosecution or defense of the Action
Or Proceeding. The term "Costs And Expenses" is defined as the cost to take
depositions, the cost to arbitrate this dispute, if applicable, and the costs
and expenses of travel and lodging incurred with respect to the Action or
Proceeding, provided, however, the party incurring said travel and lodging
expense must ordinarily travel over one hundred (100) miles, one way, from his
or her residence in incurring such expense.
(e) NO ASSIGNMENT OF RIGHTS OR DELEGATION OF DUTIES BY EXECUTIVE.
------------------------------------------------------------
Executive's rights and benefits under this Agreement are personal to him and
therefore (i) no such right or benefit shall be subject to voluntary or
involuntary alienation, assignment or transfer; and (ii) Executive may not
delegate his duties or obligations hereunder. This Agreement will be binding
upon and inure to the benefit of the Company and any successor to the Company by
merger, consolidation, reorganization, sale of all or substantially all of the
assets or otherwise (and such successor shall thereafter be deemed the "Company"
for the purposes of this Agreement), but will not otherwise be assignable,
transferable or delegable by the Company.
(f) NOTICES. Unless otherwise specifically provided in this
-------
Agreement, all notices, demands, requests, consents, approvals or other
communications (collectively and severally called "Notices") required or
permitted to be given hereunder, or which are given with respect to this
Agreement, shall be in writing, and shall be given by: (A) personal delivery
(which form of Notice shall be deemed to have been given upon delivery), (B) by
telegraph or by private airborne/overnight delivery service (which forms of
Notice shall be deemed to have been given upon confirmed delivery by the
delivery agency), (C) by facsimile transmission (which forms of Notice shall be
deemed delivered upon receipt by the sending party of a confirmation of
transmission issued by sender's facsimile machine), or (D) by mailing in the
United States mail by registered or certified mail, return receipt requested,
postage prepaid (which forms of Notice shall be deemed to have been given upon
the fifth (5th) business day following the date mailed). Each party, and their
respective counsel, hereby agree that any such Notice may be given hereunder by
such party's Counsel and such counsel may communicate directly with all
principals, as required to comply with the foregoing notice provisions. Notices
shall be addressed to the address hereinabove set forth in the introductory
paragraph of this Agreement, or to such other address as the receiving party
shall have specified most recently by like Notice, with a copy to the other
parties hereto. Any Notice given to the estate of a party shall be sufficient
if addressed to the party as provided in this subparagraph.
(g) COUNTERPARTS. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, and all of which together shall
constitute one and the same instrument, binding on all parties hereto. Any
signature page of this Agreement may be detached from any counterpart of this
Agreement and reattached to any other counterpart of this
-14-
<PAGE>
Agreement identical in form hereto by having attached to it one or more
additional signature pages.
(h) EXECUTION BY ALL PARTIES REQUIRED TO BE BINDING: ELECTRONICALLY
----------------------------------------------------------------
TRANSMITTED DOCUMENTS. This Agreement shall not be construed to be an offer and
- ---------------------
shall have no force and effect until this Agreement is fully executed by all
parties hereto. If a copy or counterpart of this Agreement is originally
executed and such copy or counterpart is thereafter transmitted electronically
by facsimile or similar device, such facsimile document shall for all purposes
be treated as if manually signed by the party whose facsimile signature appears.
(i) NO OBLIGATION TO MITIGATE. Absent a breach of this Agreement by
-------------------------
Executive, the Executive is under no obligation to mitigate the amount of any
payment provided for hereunder by seeking other employment or otherwise.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
COMPANY:
VARIFLEX, INC., a Delaware corporation
By: /s/ Raymond (Jay) H. Losi II
--------------------------------
Raymond (Jay) H. Losi II
Chief Executive Officer and
Chief Operating Officer
EXECUTIVE:
/s/ Steven Muellner
-------------------
Steven Muellner
-15-
<PAGE>
INDEMNIFICATION AGREEMENT
-------------------------
THIS AGREEMENT is entered into as of September 17, 1998 between Variflex,
Inc. a Delaware corporation (the "Company"), and Mark S. Siegel ("Indemnitee").
RECITALS
--------
WHEREAS, it is essential to the best interests of the Company to attract
and retain highly capable persons to serve as directors and/or officers of the
Company;
WHEREAS, Indemnitee is or has been appointed or elected to be a director
and/or officer of the Company;
WHEREAS, the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers of
corporations; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability, in order to enhance Indemnitee's continued service
to the Company, and in order to induce Indemnitee to continue to provide
services to the Company as a director and/or officer, the Company wishes to
provide in this Agreement for the indemnification of and the advancement of
expenses to Indemnitee to the fullest extent permitted by law and as set forth
in this Agreement, and to the extent applicable insurance is maintained, for the
coverage of Indemnitee under the Company's policies of directors' and officers'
liability insurance.
NOW THEREFORE, IN CONSIDERATION of the foregoing, the mutual covenants and
promises contained herein and of Indemnitee's continuing to provide services to
the Company the parties agree as follows:
SECTION 1. DEFINITIONS.
-----------
a. BOARD: the board of directors of the Company.
b. CHANGE IN CONTROL: a state of affairs that shall be deemed to have
occurred if:
(i) any person's or entity's beneficial ownership of the total
voting power of the Company's then outstanding voting securities increases,
either directly or indirectly, by twenty percent (20%); or
(ii) during any period of three (3) consecutive years, individuals
who, at the beginning of such period, constituted the Board, together with any
new director whose election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds (2/3) of
the directors then in office who either were directors at the beginning of the
three (3) year period, or whose election or nomination was previously so
approved, cease for any reason to constitute a majority of the Board; or
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation that would result in the outstanding voting securities of the
Company immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least eighty percent (80%) of the total
outstanding
1
<PAGE>
voting power represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation.
c. EXPENSES:
(i) any costs, expenses, fees or losses actually and reasonable
incurred, including, but not limited to, attorneys' fees, judgements, fines,
damages, penalties and amounts paid or to be paid in settlement;
(ii) any interest, assessments, or other charges imposed on any of
the items in part (i) of this subsection (c); and
(iii) any federal, state, local or foreign taxes imposed as a result
of the actual or deemed receipt of any payments under this Agreement that are
paid or incurred in connection with investigating, defending, being a witness
in, or participating in (including on appeal) or preparing for any of the
foregoing in any Proceeding relating to an Indemnifiable Event, as defined
hereinbelow.
d. INDEMNIFIABLE EVENT: any Proceeding that takes place either before or
after the execution of this Agreement and that is related to or arises out of:
(i) the fact that Indemnitee is or was a director and/or officer of
the Company or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise; or
(ii) actions taken or not taken by Indemnitee in his capacity as a
director and/or officer (subject to Section 2b. hereof).
e. INDEPENDENT COUNSEL: the person or body described in Section 4.
f. POTENTIAL CHANGE IN CONTROL: a state of affairs that shall be deemed
to exist if:
(i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control; or
(ii) any person or entity announces an intention to take or to
consider taking actions that, if consummated, would constitute a Change in
Control; or
(iii) the Board adopts a resolution to the effect that, for purposes
of this Agreement, a Potential Change in Control has occurred.
g. PROCEEDING: any threatened, pending, or completed action, suit, or
proceeding, or any injury, hearing, or investigation, whether conducted by the
Company or any other party, that an Indemnitee in good faith believes might lead
to the institution of any such action, suit, or proceeding, whether civil,
criminal, administrative, investigative or other.
h. REVIEWING PARTY: the person or body appointed in accordance with
Section 4.
i. VOTING SECURITIES: any securities of the Company that have the right
to vote generally in the election of directors.
2
<PAGE>
SECTION 2. GENERAL AGREEMENT; PROHIBITED INDEMNIFICATION.
---------------------------------------------
a. GENERAL AGREEMENT. In the event Indemnitee was, is, or is threatened
to be made a participant in, an Indemnifiable Event, the Company shall indemnify
Indemnitee from and against any and all Expenses to the fullest extent permitted
by law, including but not limited to Section 145 of the Delaware General
Corporation Law, as the same exists or may hereafter be amended or interpreted
(but in the case of any such amendment or interpretation, only to the extent
that such amendment or interpretation permits the Company to provide broader
indemnification rights than were permitted prior to that amendment or
interpretation). The parties to this Agreement intend that this Agreement shall
provide for indemnification in excess of that expressly permitted by statute,
including, without limitation, any indemnification provided by the Company's
Articles of Incorporation, its Bylaws, a vote of its shareholders or
disinterested directors or applicable law. The indemnification provided under
this Agreement shall continue for Indemnitee even though Indemnitee may have
ceased to serve in such capacity at the time of any Proceeding. Notwithstanding
anything in this Agreement to the contrary, Indemnitee shall not be entitled to
indemnification under this Agreement in connection with any Proceeding initiated
by Indemnitee against the Company or any director or officer of the Company
unless:
(i) the Company has joined in or the Board has consented to the
initiation of the Proceeding; or
(ii) the Proceeding is one to enforce indemnification rights or any
other terms under this Agreement.
b. PROHIBITED INDEMNIFICATION. The following shall not be
Indemnifiable by the Company:
(i) A Proceeding in which judgement is rendered against Indemnitee
for an accounting or profits made from the purchase or sale by Indemnitee of
securities of the Company under the provisions of Section 16(b) of the
Securities Exchange Act, or similar provision of any federal, state or local
laws;
(ii) Any breach of the director's duty of loyalty to the Company or
its shareholders;
(iii) Acts or omissions not in good faith or which involve
intentional misconduct or a knowing and violation of law;
(iv) Unlawful payment of dividends or unlawful stock purchase or
redemption pursuant to Section 174 of the Delaware General Corporation Law; and
(v) Any transaction from which the director derived an improper
personal benefit.
SECTION 3. INDEMNIFICATION PROCESS.
------------------------
a. DEFENSE OF ACTION. Indemnitee shall notify the Company in writing
within a reasonable amount of time of becoming aware of the commencement of an
Indemnifiable Event (the "Event Notice"). The Event Notice shall also set forth
whether Indemnitee desires to be indemnified by the Company and whether
Indemnitee desires the Company to defend the Indemnifiable Event. The Company
shall defend the Indemnifiable Event with counsel reasonably satisfactory to
Indemnitee, provided, however, Indemnitee reserves the right to appoint separate
counsel in the event of a conflict of interest with the interests of Indemnitee
or
3
<PAGE>
in the event the Company fails to timely and adequately defend the Indemnifiable
Event. In the event Indemnitee elects to defend the Indemnifiable Event, such
election shall not constitute a waiver by Indemnitee of his rights against the
Company for Expenses or to later demand that the Company assume the defense of
Indemnitee. Counsel defending the Indemnifiable Event on behalf of either party
shall diligently defend the matter and shall keep the other parties fully
informed of its status including all pertinent facts and information pertaining
to the Indemnifiable Event and the strategy to be followed. The Company shall
not settle any Proceeding in any manner without Indemnitee's written consent.
b. ADVANCE OF EXPENSES. If requested by Indemnitee, the Company shall, in
accordance with this Agreement and within ten (10) business days of a written
request by Indemnitee, advance to Indemnitee the Expenses that are reasonably
anticipated to be incurred by Indemnitee and reimburse Indemnitee for the
Expenses that are actually incurred by Indemnitee in connection with any claim
asserted against or action brought by Indemnitee for:
(i) indemnification by the Company under this Agreement, or any
other agreement, or under applicable law, or the Company's Articles of
Incorporation or Bylaws now or hereafter in effect relating to indemnification
for Indemnifiable Events, and/or
(ii) recovery under directors' and officers' liability insurance
policies maintained by the Company.
c. PROHIBITED INDEMNIFICATION; REIMBURSEMENT TO THE COMPANY.
To the extent that a Reviewing Party determines that an Indemnitee is not
permitted to be indemnified under applicable law and Section 2b. hereinabove,
the Company shall be entitled to be reimbursed by Indemnitee for all Expenses
advanced and/or incurred, and Indemnitee hereby agrees to reimburse the Company
promptly for the same, provided, however, that if Indemnitee has commenced legal
proceedings in a court of competent jurisdiction to secure a determination that
Indemnitee should be indemnified under applicable law, as provided in Section
2d. hereinabove, any determination made by the Reviewing Party that Indemnitee
would not be permitted to be indemnified under applicable law shall not be
binding, and Indemnitee shall not be required to reimburse the Company for any
advance of Expenses until a final judicial determination is made with respect
thereto and all rights of appeal therefrom have been exhausted or have lapsed.
Indemnitee's obligation to reimburse the Company for Expenses advances shall be
unsecured and no interest shall be charged thereon.
d. INDEMNIFICATION ENFORCEMENT RIGHTS. If Indemnitee has not received
full indemnification within thirty (30) days after making a demand for Expenses,
Indemnitee shall have the right to enforce its indemnification rights under this
Agreement by commencing litigation in any court in the State of California
seeking an initial determination by the court or challenging any determination
by the Reviewing Party or any aspect thereof. The Company hereby consents to
service of process and to appear in any such proceeding. Any determination by
the Reviewing Party not challenged by Indemnitee shall be binding on the Company
and Indemnitee. The remedy provided for in this section 2(d) shall be in
addition to any other remedies available to Indemnitee in law or equity.
e. COMPANY DEFENSES. It shall be a defense to any action brought by
Indemnitee against the Company to enforce this Agreement (other than an action
brought to enforce a claim for Expenses incurred in defending a Proceeding in
advance of its final disposition) that it is not permissible, under this
Agreement or applicable law, for the Company to indemnify Indemnitee for the
amount claimed. In connection with any such action, the burden of proving such
a defense shall be on the Company. The failure of a Reviewing Party to have
made an Indemnification Determination (as defined below) before the commencement
of such action by
4
<PAGE>
Indemnitee that indemnification is proper under the circumstances shall not be a
defense to the action. For purposes of this Agreement, the termination of any
Indemnifiable Event by judgment, order, settlement (whether with or without
court approval), conviction or upon a plea of nolo contendere or its equivalent
(a "Termination Event"), shall not, of itself, create a presumption that
Indemnitee did not meet any particular standard of conduct or have any
particular belief or that a court had determined that indemnification is not
permitted by applicable law.
SECTION 4. INDEMNIFICATION REVIEW PROCEDURE; REVIEWING PARTY.
-------------------------------------------------
a. INDEMNIFICATION REVIEW PROCEDURE. Within five (5) days of the
occurrence of a Termination Event, Indemnitee shall provide written notice to
the Company of the Termination Event (the "Termination Event Notice"). In the
Event that Indemnitee has been successful on the merits or otherwise in defense
of the Indemnifiable Event, indemnification by the Company of Indemnitee shall
be mandatory. In the event that Indemnitee loses a judgement on the merits or
otherwise in defense of the Indemnifiable Event, or where there is no judicial
determination of the actual merits of the defense raised, whether due to
settlement, dismissal of the Complaint before trial, or upon a plea of nolo
contendere or its equivalent, the Company shall submit the Termination Event
Notice to the applicable Reviewing Party (as set forth below). The Reviewing
Party shall make a determination whether or not Indemnitee is entitled to be
indemnified pursuant to this Agreement and applicable law (the "Indemnification
Determination"). The Indemnification Determination shall be made within twenty-
five (25) days of the receipt of the Termination Event Notice. In connection
with any Indemnification Determination, the burden of proof shall be on the
Company.
b. REVIEWING PARTY. The Reviewing Party that shall make an
Indemnification Determination shall be, at Indemnitee's option, either:
(i) A majority of a quorum of the board of directors of the Company
consisting of directors who are not parties to the Indemnifiable Event (a
"Quorum"); or
(ii) An Independent Counsel.
If the Reviewing Party is an Independent Counsel, such Independent Counsel
shall be selected by Indemnitee and approved by the Company (which approval
shall not be unreasonably withheld), and shall not have otherwise performed
services for the Company or Indemnitee within the previous five (5) years. An
Independent Counsel shall not include any person who, under the applicable
standards of professional conduct then prevailing, would have a conflict of
interest in representing either the Company or Indemnitee in an action to
determine Indemnitee's rights under this Agreement. An Independent Counsel,
among other things, shall render a written opinion to the Company and Indemnitee
on whether and to what extent Indemnitee should be permitted to be indemnified
under applicable law. The Company agrees to pay the reasonable fees of an
Independent Counsel and to fully indemnify an Independent Counsel against any
and all expenses, including attorneys' fees, claims, liabilities, losses and
damages arising out of or relating to this Agreement or the engagement of an
Independent Counsel under this Agreement.
SECTION 5. ESTABLISHMENT OF TRUST.
----------------------
In the event of a Change in Control or a Potential Change in Control, the
Company shall, on written request by Indemnitee, create a trust for the benefit
of Indemnitee (the "Trust") and from time to time on written request of
Indemnitee (a "Trust Request"), shall fund the Trust with an amount sufficient
to satisfy any and all Expenses reasonably anticipated to be incurred in
connection with investigating, preparing for, participating in, and/or defending
any Indemnifiable
5
<PAGE>
Event. The individual selected to be trustee shall be agreed upon by both
Indemnitee and the Company (the "Trustee"). The terms of the Trust shall provide
that upon a Change in Control:
a. The Trust shall not be revoked or the principal invaded without the
written consent of Indemnitee;
b. The Trust shall continue to be funded by the Company in accordance with
the funding obligation set forth in this Section 5;
c. The Trustee shall promptly pay to Indemnitee all amounts for which
Indemnitee shall be entitled under this Agreement or otherwise; and
d. All unexpended funds in the Trust shall revert to the Company on a
final determination by a Reviewing Party or a court of competent jurisdiction
that Indemnitee has been fully indemnified under the terms of this Agreement.`
Nothing in this Section 5 shall relieve the Company of any of its
obligations under this Agreement. The Company shall pay all costs of
establishing and maintaining the Trust and shall indemnify the Trustee against
any and all expenses, including attorneys' fees, claims, liabilities, losses and
damages arising out of or relating to this Agreement or the establishment and
maintenance of the Trust.
SECTION 6. NONEXCLUSIVITY.
--------------
The rights of Indemnitee under this Agreement shall be in addition to any
other rights Indemnitee may have under the Company's Articles of Incorporation,
Bylaws, applicable law or otherwise. To the extent that a change in applicable
law (whether by statute or judicial decision) permits greater indemnification by
agreement than would be afforded currently under the Company's Articles of
Incorporation, Bylaws, applicable law or this Agreement, it is the intent of the
parties that Indemnitee enjoy by this Agreement the greater benefits afforded by
such change.
SECTION 7. LIABILITY INSURANCE.
-------------------
To the extent the Company maintains an insurance policy or policies
providing directors' and officers' liability insurance, Indemnitee shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any Company director and/or
officer.
SECTION 8. PERIOD OF LIMITATIONS.
---------------------
No legal action shall be brought, and no cause of action shall be asserted,
by or on behalf of the Company or any affiliate of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives, after the expiration of two (2) years from the date of accrual
of such cause of action, or such longer period as may be required by state law
under the circumstances. Any claim or cause of action of the Company or its
affiliate shall be extinguished and deemed released unless asserted by the
timely filing of a legal action within such period; provided, however, that if
any shorter period of limitations is otherwise applicable to any such cause of
action, the shorter period shall govern.
SECTION 9. AMENDMENT OF THIS AGREEMENT; WAIVER.
-----------------------------------
No supplement, modification, or amendment of this Agreement shall be
binding unless executed in writing by both of the parties hereto. No waiver of
any of the provisions of this
6
<PAGE>
Agreement shall operate as a waiver of any other provisions of this Agreement
(whether or not similar), nor shall such waiver constitute a continuing waiver.
Except as specifically provided in this Agreement, no failure to exercise or
delay in exercising any right or remedy under it shall constitute a waiver of
the right or remedy.
SECTION 10. SUBROGATION.
-----------
In the event of payment under this Agreement, the Company shall be
subrogated to the extent of that payment to all of the rights of recovery of
Indemnitee, who shall execute all papers required and shall do everything that
may be necessary to secure such rights, including the execution of any documents
necessary to enable the Company effectively to bring suit to enforce such
rights.
SECTION 11. NO DUPLICATION OF PAYMENTS.
--------------------------
The Company shall not be liable under this Agreement to make any payment in
connection with any claim made against Indemnitee to the extent Indemnitee has
otherwise obtained payment (under any insurance policy, bylaw or otherwise) of
the amounts otherwise indemnifiable under this Agreement.
SECTION 12. BINDING EFFECT.
--------------
This Agreement shall be binding on and inure to the benefit of and be
enforceable by the parties to it and their respective successors (including any
direct or indirect successor by purchase, merger, consolidation, or otherwise to
all or substantially all of the Company's business or assets or both), assigns,
spouses, heirs, and personal and legal representatives. The Company shall
require and cause any successor (whether direct or indirect, by purchase,
merger, consolidation, or otherwise) to all, substantially all, or a substantial
part, of the Company's business or assets or both, by written agreement in form
and substance satisfactory to Indemnitee, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform if no such succession had taken place.
SECTION 13. SEVERABILITY.
------------
If any term or provision of this Agreement or the application thereof to
any person or circumstance shall, to any extent, be determined to be invalid,
illegal or unenforceable under present or future laws effective during the term
of this Agreement, then and, in that event: (A) the performance of the offending
term or provision (but only to the extent its application is invalid, illegal or
unenforceable) shall be excused as if it had never been incorporated into this
Agreement, and, in lieu of such excused provision, there shall be added a
provision as similar in terms to such excused provision as may be possible and
be legal, valid and enforceable, and (B) the remaining part of this Agreement
(including the application of the offending term or provision to persons or
circumstances other than those as to which it is held invalid, illegal or
unenforceable) shall not be affected thereby and shall continue in full force
and effect to the fullest extent provided by law.
SECTION 14. GOVERNING LAW.
-------------
This Agreement and the rights and remedies of each party arising out of or
relating to this Agreement (including, without limitation, equitable remedies)
shall be solely governed by, interpreted under, and construed and enforced in
accordance with the internal laws of the state of Delaware, without regard to
conflicts of laws principles as if this Agreement were made, and as if its
obligations are to be performed, wholly within the state of Delaware.
7
<PAGE>
SECTION 15. CONSENT TO JURISDICTION.
-----------------------
Any action or proceeding arising out of or relating to this Agreement shall
be filed in and heard and litigated solely before the state courts of California
located within the county of Ventura. Each party generally and unconditionally
accepts the exclusive jurisdiction of such courts and waives any defense or
right to object to venue in said courts based upon the doctrine of "forum non
conveniens". Each party irrevocably agrees to be bound by any judgement
rendered thereby in connection with this Agreement.
SECTION 16. NOTICES.
-------
All notices, demands, and other communications required or permitted under
this Agreement shall be made in writing and shall be deemed to have been duly
given if delivered by hand, against receipt, or mailed, certified or registered
mail, return receipt requested, and addressed to the Company at:
Variflex, Inc.
5152 North Commerce Avenue
Moorpark, California 93021
Attn: Mr. Raymond "Jay" H. Losi, II
and to counsel at:
Morrison & Foerster LLP
555 West Fifth Street
Los Angeles, California 90013
Attn: Michael C. Cohen
and to Indemnitee at: ________________________________________
________________________________________
________________________________________
Notice of change of address shall be effective only when given in
accordance with this Section. All notices complying with this Section shall be
deemed to have been received on the date of delivery.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the date set forth above.
COMPANY:
Variflex, Inc., a Delaware corporation
/s/ Raymond (Jay) H. Losi II
----------------------------
Raymond (Jay) H. Losi II
Chief Executive Officer and Chief
Operating Officer
Indemnitee:
/s/ Mark S. Siegel
------------------
Mark S. Siegel
9
<PAGE>
INDEMNIFICATION AGREEMENT
-------------------------
THIS AGREEMENT is entered into as of September 17, 1998 between Variflex,
Inc. a Delaware corporation (the "Company"), and Randall L. Bishop
("Indemnitee").
RECITALS
--------
WHEREAS, it is essential to the best interests of the Company to attract
and retain highly capable persons to serve as directors and/or officers of the
Company;
WHEREAS, Indemnitee is or has been appointed or elected to be a director
and/or officer of the Company;
WHEREAS, the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers of
corporations; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability, in order to enhance Indemnitee's continued service
to the Company, and in order to induce Indemnitee to continue to provide
services to the Company as a director and/or officer, the Company wishes to
provide in this Agreement for the indemnification of and the advancement of
expenses to Indemnitee to the fullest extent permitted by law and as set forth
in this Agreement, and to the extent applicable insurance is maintained, for the
coverage of Indemnitee under the Company's policies of directors' and officers'
liability insurance.
NOW THEREFORE, IN CONSIDERATION of the foregoing, the mutual covenants and
promises contained herein and of Indemnitee's continuing to provide services to
the Company the parties agree as follows:
SECTION 1. DEFINITIONS.
-----------
a. BOARD: the board of directors of the Company.
b. CHANGE IN CONTROL: a state of affairs that shall be deemed to have
occurred if:
(i) any person's or entity's beneficial ownership of the total voting
power of the Company's then outstanding voting securities increases, either
directly or indirectly, by twenty percent (20%); or
(ii) during any period of three (3) consecutive years, individuals
who, at the beginning of such period, constituted the Board, together with any
new director whose election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds (2/3) of
the directors then in office who either were directors at the beginning of the
three (3) year period, or whose election or nomination was previously so
approved, cease for any reason to constitute a majority of the Board; or
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation that would result in the outstanding voting securities of the
Company immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least eighty percent (80%) of the total
outstanding
1
<PAGE>
voting power represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation.
c. EXPENSES:
(i) any costs, expenses, fees or losses actually and reasonable
incurred, including, but not limited to, attorneys' fees, judgments, fines,
damages, penalties and amounts paid or to be paid in settlement;
(ii) any interest, assessments, or other charges imposed on any of the
items in part (i) of this subsection (c); and
(iii) any federal, state, local or foreign taxes imposed as a result
of the actual or deemed receipt of any payments under this Agreement that are
paid or incurred in connection with investigating, defending, being a witness
in, or participating in (including on appeal) or preparing for any of the
foregoing in any Proceeding relating to an Indemnifiable Event, as defined
hereinbelow.
d. INDEMNIFIABLE EVENT: any Proceeding that takes place either before or
after the execution of this Agreement and that is related to or arises out of:
(i) the fact that Indemnitee is or was a director and/or officer of
the Company or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise; or
(ii) actions taken or not taken by Indemnitee in his capacity as a
director and/or officer (subject to Section 2b. hereof).
e. INDEPENDENT COUNSEL: the person or body described in Section 4.
f. POTENTIAL CHANGE IN CONTROL: a state of affairs that shall be deemed
to exist if:
(i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control; or
(ii) any person or entity announces an intention to take or to
consider taking actions that, if consummated, would constitute a Change in
Control; or
(iii) the Board adopts a resolution to the effect that, for purposes
of this Agreement, a Potential Change in Control has occurred.
g. PROCEEDING: any threatened, pending, or completed action, suit, or
proceeding, or any injury, hearing, or investigation, whether conducted by the
Company or any other party, that an Indemnitee in good faith believes might lead
to the institution of any such action, suit, or proceeding, whether civil,
criminal, administrative, investigative or other.
h. REVIEWING PARTY: the person or body appointed in accordance with
Section 4.
i. VOTING SECURITIES: any securities of the Company that have the right
to vote generally in the election of directors.
2
<PAGE>
SECTION 2. GENERAL AGREEMENT; PROHIBITED INDEMNIFICATION.
---------------------------------------------
a. GENERAL AGREEMENT. In the event Indemnitee was, is, or is threatened
to be made a participant in, an Indemnifiable Event, the Company shall indemnify
Indemnitee from and against any and all Expenses to the fullest extent permitted
by law, including but not limited to Section 145 of the Delaware General
Corporation Law, as the same exists or may hereafter be amended or interpreted
(but in the case of any such amendment or interpretation, only to the extent
that such amendment or interpretation permits the Company to provide broader
indemnification rights than were permitted prior to that amendment or
interpretation). The parties to this Agreement intend that this Agreement shall
provide for indemnification in excess of that expressly permitted by statute,
including, without limitation, any indemnification provided by the Company's
Articles of Incorporation, its Bylaws, a vote of its shareholders or
disinterested directors or applicable law. The indemnification provided under
this Agreement shall continue for Indemnitee even though Indemnitee may have
ceased to serve in such capacity at the time of any Proceeding. Notwithstanding
anything in this Agreement to the contrary, Indemnitee shall not be entitled to
indemnification under this Agreement in connection with any Proceeding initiated
by Indemnitee against the Company or any director or officer of the Company
unless:
(i) the Company has joined in or the Board has consented to the
initiation of the Proceeding; or
(ii) the Proceeding is one to enforce indemnification rights or any
other terms under this Agreement.
b. PROHIBITED INDEMNIFICATION. The following shall not be Indemnifiable
by the Company:
(i) A Proceeding in which judgement is rendered against Indemnitee
for an accounting or profits made from the purchase or sale by Indemnitee of
securities of the Company under the provisions of Section 16(b) of the
Securities Exchange Act, or similar provision of any federal, state or local
laws;
(ii) Any breach of the director's duty of loyalty to the Company or
its shareholders;
(iii) Acts or omissions not in good faith or which involve
intentional misconduct or a knowing and violation of law;
(iv) Unlawful payment of dividends or unlawful stock purchase or
redemption pursuant to Section 174 of the Delaware General Corporation Law; and
(v) Any transaction from which the director derived an improper
personal benefit.
SECTION 3. INDEMNIFICATION PROCESS.
------------------------
a. DEFENSE OF ACTION. Indemnitee shall notify the Company in writing
within a reasonable amount of time of becoming aware of the commencement of an
Indemnifiable Event (the "Event Notice"). The Event Notice shall also set forth
whether Indemnitee desires to be indemnified by the Company and whether
Indemnitee desires the Company to defend the Indemnifiable Event. The Company
shall defend the Indemnifiable Event with counsel reasonably satisfactory to
Indemnitee, provided, however, Indemnitee reserves the right to appoint separate
counsel in the event of a conflict of interest with the interests of Indemnitee
or
3
<PAGE>
in the event the Company fails to timely and adequately defend the Indemnifiable
Event. In the event Indemnitee elects to defend the Indemnifiable Event, such
election shall not constitute a waiver by Indemnitee of his rights against the
Company for Expenses or to later demand that the Company assume the defense of
Indemnitee. Counsel defending the Indemnifiable Event on behalf of either party
shall diligently defend the matter and shall keep the other parties fully
informed of its status including all pertinent facts and information pertaining
to the Indemnifiable Event and the strategy to be followed. The Company shall
not settle any Proceeding in any manner without Indemnitee's written consent.
b. ADVANCE OF EXPENSES. If requested by Indemnitee, the Company shall,
in accordance with this Agreement and within ten (10) business days of a written
request by Indemnitee, advance to Indemnitee the Expenses that are reasonably
anticipated to be incurred by Indemnitee and reimburse Indemnitee for the
Expenses that are actually incurred by Indemnitee in connection with any claim
asserted against or action brought by Indemnitee for:
(i) indemnification by the Company under this Agreement, or any other
agreement, or under applicable law, or the Company's Articles of Incorporation
or Bylaws now or hereafter in effect relating to indemnification for
Indemnifiable Events, and/or
(ii) recovery under directors' and officers' liability insurance
policies maintained by the Company.
c. PROHIBITED INDEMNIFICATION; REIMBURSEMENT TO THE COMPANY.
To the extent that a Reviewing Party determines that an Indemnitee is not
permitted to be indemnified under applicable law and Section 2b. hereinabove,
the Company shall be entitled to be reimbursed by Indemnitee for all Expenses
advanced and/or incurred, and Indemnitee hereby agrees to reimburse the Company
promptly for the same, provided, however, that if Indemnitee has commenced legal
proceedings in a court of competent jurisdiction to secure a determination that
Indemnitee should be indemnified under applicable law, as provided in Section
2d. hereinabove, any determination made by the Reviewing Party that Indemnitee
would not be permitted to be indemnified under applicable law shall not be
binding, and Indemnitee shall not be required to reimburse the Company for any
advance of Expenses until a final judicial determination is made with respect
thereto and all rights of appeal therefrom have been exhausted or have lapsed.
Indemnitee's obligation to reimburse the Company for Expenses advances shall be
unsecured and no interest shall be charged thereon.
d. INDEMNIFICATION ENFORCEMENT RIGHTS. If Indemnitee has not received
full indemnification within thirty (30) days after making a demand for Expenses,
Indemnitee shall have the right to enforce its indemnification rights under this
Agreement by commencing litigation in any court in the State of California
seeking an initial determination by the court or challenging any determination
by the Reviewing Party or any aspect thereof. The Company hereby consents to
service of process and to appear in any such proceeding. Any determination by
the Reviewing Party not challenged by Indemnitee shall be binding on the Company
and Indemnitee. The remedy provided for in this section 2(d) shall be in
addition to any other remedies available to Indemnitee in law or equity.
e. COMPANY DEFENSES. It shall be a defense to any action brought by
Indemnitee against the Company to enforce this Agreement (other than an action
brought to enforce a claim for Expenses incurred in defending a Proceeding in
advance of its final disposition) that it is not permissible, under this
Agreement or applicable law, for the Company to indemnify Indemnitee for the
amount claimed. In connection with any such action, the burden of proving such
a defense shall be on the Company. The failure of a Reviewing Party to have
made an Indemnification Determination (as defined below) before the commencement
of such action by
4
<PAGE>
Indemnitee that indemnification is proper under the circumstances shall not be a
defense to the action. For purposes of this Agreement, the termination of any
Indemnifiable Event by judgment, order, settlement (whether with or without
court approval), conviction or upon a plea of nolo contendere or its equivalent
(a "Termination Event"), shall not, of itself, create a presumption that
Indemnitee did not meet any particular standard of conduct or have any
particular belief or that a court had determined that indemnification is not
permitted by applicable law.
SECTION 4. INDEMNIFICATION REVIEW PROCEDURE; REVIEWING PARTY.
-------------------------------------------------
a. INDEMNIFICATION REVIEW PROCEDURE. Within five (5) days of the
occurrence of a Termination Event, Indemnitee shall provide written notice to
the Company of the Termination Event (the "Termination Event Notice"). In the
Event that Indemnitee has been successful on the merits or otherwise in defense
of the Indemnifiable Event, indemnification by the Company of Indemnitee shall
be mandatory. In the event that Indemnitee loses a judgement on the merits or
otherwise in defense of the Indemnifiable Event, or where there is no judicial
determination of the actual merits of the defense raised, whether due to
settlement, dismissal of the Complaint before trial, or upon a plea of nolo
contendere or its equivalent, the Company shall submit the Termination Event
Notice to the applicable Reviewing Party (as set forth below). The Reviewing
Party shall make a determination whether or not Indemnitee is entitled to be
indemnified pursuant to this Agreement and applicable law (the "Indemnification
Determination"). The Indemnification Determination shall be made within twenty-
five (25) days of the receipt of the Termination Event Notice. In connection
with any Indemnification Determination, the burden of proof shall be on the
Company.
b. REVIEWING PARTY. The Reviewing Party that shall make an
Indemnification Determination shall be, at Indemnitee's option, either:
(i) A majority of a quorum of the board of directors of the Company
consisting of directors who are not parties to the Indemnifiable Event (a
"Quorum"); or
(ii) An Independent Counsel.
If the Reviewing Party is an Independent Counsel, such Independent
Counsel shall be selected by Indemnitee and approved by the Company (which
approval shall not be unreasonably withheld), and shall not have otherwise
performed services for the Company or Indemnitee within the previous five (5)
years. An Independent Counsel shall not include any person who, under the
applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either the Company or Indemnitee in an
action to determine Indemnitee's rights under this Agreement. An Independent
Counsel, among other things, shall render a written opinion to the Company and
Indemnitee on whether and to what extent Indemnitee should be permitted to be
indemnified under applicable law. The Company agrees to pay the reasonable fees
of an Independent Counsel and to fully indemnify an Independent Counsel against
any and all expenses, including attorneys' fees, claims, liabilities, losses and
damages arising out of or relating to this Agreement or the engagement of an
Independent Counsel under this Agreement.
SECTION 5. ESTABLISHMENT OF TRUST.
----------------------
In the event of a Change in Control or a Potential Change in Control, the
Company shall, on written request by Indemnitee, create a trust for the benefit
of Indemnitee (the "Trust") and from time to time on written request of
Indemnitee (a "Trust Request"), shall fund the Trust with an amount sufficient
to satisfy any and all Expenses reasonably anticipated to be incurred in
connection with investigating, preparing for, participating in, and/or defending
any Indemnifiable
5
<PAGE>
Event. The individual selected to be trustee shall be agreed upon by both
Indemnitee and the Company (the "Trustee"). The terms of the Trust shall provide
that upon a Change in Control:
a. The Trust shall not be revoked or the principal invaded without the
written consent of Indemnitee;
b. The Trust shall continue to be funded by the Company in accordance with
the funding obligation set forth in this Section 5;
c. The Trustee shall promptly pay to Indemnitee all amounts for which
Indemnitee shall be entitled under this Agreement or otherwise; and
d. All unexpended funds in the Trust shall revert to the Company on a
final determination by a Reviewing Party or a court of competent jurisdiction
that Indemnitee has been fully indemnified under the terms of this Agreement.`
Nothing in this Section 5 shall relieve the Company of any of its
obligations under this Agreement. The Company shall pay all costs of
establishing and maintaining the Trust and shall indemnify the Trustee against
any and all expenses, including attorneys' fees, claims, liabilities, losses and
damages arising out of or relating to this Agreement or the establishment and
maintenance of the Trust.
SECTION 6. NONEXCLUSIVITY.
--------------
The rights of Indemnitee under this Agreement shall be in addition to any
other rights Indemnitee may have under the Company's Articles of Incorporation,
Bylaws, applicable law or otherwise. To the extent that a change in applicable
law (whether by statute or judicial decision) permits greater indemnification by
agreement than would be afforded currently under the Company's Articles of
Incorporation, Bylaws, applicable law or this Agreement, it is the intent of the
parties that Indemnitee enjoy by this Agreement the greater benefits afforded by
such change.
SECTION 7. LIABILITY INSURANCE.
-------------------
To the extent the Company maintains an insurance policy or policies
providing directors' and officers' liability insurance, Indemnitee shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any Company director and/or
officer.
SECTION 8. PERIOD OF LIMITATIONS.
---------------------
No legal action shall be brought, and no cause of action shall be asserted,
by or on behalf of the Company or any affiliate of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives, after the expiration of two (2) years from the date of accrual
of such cause of action, or such longer period as may be required by state law
under the circumstances. Any claim or cause of action of the Company or its
affiliate shall be extinguished and deemed released unless asserted by the
timely filing of a legal action within such period; provided, however, that if
any shorter period of limitations is otherwise applicable to any such cause of
action, the shorter period shall govern.
SECTION 9. AMENDMENT OF THIS AGREEMENT; WAIVER.
-----------------------------------
No supplement, modification, or amendment of this Agreement shall be
binding unless executed in writing by both of the parties hereto. No waiver of
any of the provisions of this
6
<PAGE>
Agreement shall operate as a waiver of any other provisions of this Agreement
(whether or not similar), nor shall such waiver constitute a continuing waiver.
Except as specifically provided in this Agreement, no failure to exercise or
delay in exercising any right or remedy under it shall constitute a waiver of
the right or remedy.
SECTION 10. SUBROGATION.
-----------
In the event of payment under this Agreement, the Company shall be
subrogated to the extent of that payment to all of the rights of recovery of
Indemnitee, who shall execute all papers required and shall do everything that
may be necessary to secure such rights, including the execution of any documents
necessary to enable the Company effectively to bring suit to enforce such
rights.
SECTION 11. NO DUPLICATION OF PAYMENTS.
--------------------------
The Company shall not be liable under this Agreement to make any payment in
connection with any claim made against Indemnitee to the extent Indemnitee has
otherwise obtained payment (under any insurance policy, bylaw or otherwise) of
the amounts otherwise indemnifiable under this Agreement.
SECTION 12. BINDING EFFECT.
--------------
This Agreement shall be binding on and inure to the benefit of and be
enforceable by the parties to it and their respective successors (including any
direct or indirect successor by purchase, merger, consolidation, or otherwise to
all or substantially all of the Company's business or assets or both), assigns,
spouses, heirs, and personal and legal representatives. The Company shall
require and cause any successor (whether direct or indirect, by purchase,
merger, consolidation, or otherwise) to all, substantially all, or a substantial
part, of the Company's business or assets or both, by written agreement in form
and substance satisfactory to Indemnitee, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform if no such succession had taken place.
SECTION 13. SEVERABILITY.
------------
If any term or provision of this Agreement or the application thereof to
any person or circumstance shall, to any extent, be determined to be invalid,
illegal or unenforceable under present or future laws effective during the term
of this Agreement, then and, in that event: (A) the performance of the offending
term or provision (but only to the extent its application is invalid, illegal or
unenforceable) shall be excused as if it had never been incorporated into this
Agreement, and, in lieu of such excused provision, there shall be added a
provision as similar in terms to such excused provision as may be possible and
be legal, valid and enforceable, and (B) the remaining part of this Agreement
(including the application of the offending term or provision to persons or
circumstances other than those as to which it is held invalid, illegal or
unenforceable) shall not be affected thereby and shall continue in full force
and effect to the fullest extent provided by law.
SECTION 14. GOVERNING LAW.
-------------
This Agreement and the rights and remedies of each party arising out of or
relating to this Agreement (including, without limitation, equitable remedies)
shall be solely governed by, interpreted under, and construed and enforced in
accordance with the internal laws of the state of Delaware, without regard to
conflicts of laws principles as if this Agreement were made, and as if its
obligations are to be performed, wholly within the state of Delaware.
7
<PAGE>
SECTION 15. CONSENT TO JURISDICTION.
-----------------------
Any action or proceeding arising out of or relating to this Agreement shall
be filed in and heard and litigated solely before the state courts of California
located within the county of Ventura. Each party generally and unconditionally
accepts the exclusive jurisdiction of such courts and waives any defense or
right to object to venue in said courts based upon the doctrine of "forum non
conveniens". Each party irrevocably agrees to be bound by any judgement
rendered thereby in connection with this Agreement.
SECTION 16. NOTICES.
-------
All notices, demands, and other communications required or permitted under
this Agreement shall be made in writing and shall be deemed to have been duly
given if delivered by hand, against receipt, or mailed, certified or registered
mail, return receipt requested, and addressed to the Company at:
Variflex, Inc.
5152 North Commerce Avenue
Moorpark, California 93021
Attn: Mr. Raymond "Jay" H. Losi, II
and to counsel at:
Morrison & Foerster LLP
555 West Fifth Street
Los Angeles, California 90013
Attn: Michael C. Cohen
and to Indemnitee at: ________________________________________
________________________________________
________________________________________
Notice of change of address shall be effective only when given in
accordance with this Section. All notices complying with this Section shall be
deemed to have been received on the date of delivery.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the date set forth above.
COMPANY:
Variflex, Inc., a Delaware corporation
/s/ Raymond (Jay) H. Losi II
----------------------------
Raymond (Jay) H. Losi II
Chief Executive Officer and Chief Operating
Officer
Indemnitee:
/s/ Randall L. Bishop
---------------------
Randall L. Bishop
9
<PAGE>
INDEMNIFICATION AGREEMENT
-------------------------
THIS AGREEMENT is entered into as of September 17, 1998 between Variflex,
Inc. a Delaware corporation (the "Company"), and Michael T. Carr ("Indemnitee").
RECITALS
--------
WHEREAS, it is essential to the best interests of the Company to attract
and retain highly capable persons to serve as directors and/or officers of the
Company;
WHEREAS, Indemnitee is or has been appointed or elected to be a director
and/or officer of the Company;
WHEREAS, the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers of
corporations; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability, in order to enhance Indemnitee's continued service
to the Company, and in order to induce Indemnitee to continue to provide
services to the Company as a director and/or officer, the Company wishes to
provide in this Agreement for the indemnification of and the advancement of
expenses to Indemnitee to the fullest extent permitted by law and as set forth
in this Agreement, and to the extent applicable insurance is maintained, for the
coverage of Indemnitee under the Company's policies of directors' and officers'
liability insurance.
NOW THEREFORE, IN CONSIDERATION of the foregoing, the mutual covenants and
promises contained herein and of Indemnitee's continuing to provide services to
the Company the parties agree as follows:
SECTION 1. DEFINITIONS.
-----------
a. BOARD: the board of directors of the Company.
b. CHANGE IN CONTROL: a state of affairs that shall be deemed to have
occurred if:
(i) any person's or entity's beneficial ownership of the total
voting power of the Company's then outstanding voting securities increases,
either directly or indirectly, by twenty percent (20%); or
(ii) during any period of three (3) consecutive years, individuals
who, at the beginning of such period, constituted the Board, together with any
new director whose election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds (2/3) of
the directors then in office who either were directors at the beginning of the
three (3) year period, or whose election or nomination was previously so
approved, cease for any reason to constitute a majority of the Board; or
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation that would result in the outstanding voting securities of the
Company immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least eighty percent (80%) of the total
outstanding
1
<PAGE>
voting power represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation.
c. EXPENSES:
(i) any costs, expenses, fees or losses actually and reasonable
incurred, including, but not limited to, attorneys' fees, judgments, fines,
damages, penalties and amounts paid or to be paid in settlement;
(ii) any interest, assessments, or other charges imposed on any of
the items in part (i) of this subsection (c); and
(iii) any federal, state, local or foreign taxes imposed as a result
of the actual or deemed receipt of any payments under this Agreement that are
paid or incurred in connection with investigating, defending, being a witness
in, or participating in (including on appeal) or preparing for any of the
foregoing in any Proceeding relating to an Indemnifiable Event, as defined
hereinbelow.
d. INDEMNIFIABLE EVENT: any Proceeding that takes place either before or
after the execution of this Agreement and that is related to or arises out of:
(i) the fact that Indemnitee is or was a director and/or officer of
the Company or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise; or
(ii) actions taken or not taken by Indemnitee in his capacity as a
director and/or officer (subject to Section 2b. hereof).
e. INDEPENDENT COUNSEL: the person or body described in Section 4.
f. POTENTIAL CHANGE IN CONTROL: a state of affairs that shall be deemed
to exist if:
(i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control; or
(ii) any person or entity announces an intention to take or to
consider taking actions that, if consummated, would constitute a Change in
Control; or
(iii) the Board adopts a resolution to the effect that, for purposes
of this Agreement, a Potential Change in Control has occurred.
g. PROCEEDING: any threatened, pending, or completed action, suit, or
proceeding, or any injury, hearing, or investigation, whether conducted by the
Company or any other party, that an Indemnitee in good faith believes might lead
to the institution of any such action, suit, or proceeding, whether civil,
criminal, administrative, investigative or other.
h. REVIEWING PARTY: the person or body appointed in accordance with
Section 4.
i. VOTING SECURITIES: any securities of the Company that have the right
to vote generally in the election of directors.
2
<PAGE>
SECTION 2. GENERAL AGREEMENT; PROHIBITED INDEMNIFICATION.
---------------------------------------------
a. GENERAL AGREEMENT. In the event Indemnitee was, is, or is
threatened to be made a participant in, an Indemnifiable Event, the Company
shall indemnify Indemnitee from and against any and all Expenses to the fullest
extent permitted by law, including but not limited to Section 145 of the
Delaware General Corporation Law, as the same exists or may hereafter be amended
or interpreted (but in the case of any such amendment or interpretation, only to
the extent that such amendment or interpretation permits the Company to provide
broader indemnification rights than were permitted prior to that amendment or
interpretation). The parties to this Agreement intend that this Agreement shall
provide for indemnification in excess of that expressly permitted by statute,
including, without limitation, any indemnification provided by the Company's
Articles of Incorporation, its Bylaws, a vote of its shareholders or
disinterested directors or applicable law. The indemnification provided under
this Agreement shall continue for Indemnitee even though Indemnitee may have
ceased to serve in such capacity at the time of any Proceeding. Notwithstanding
anything in this Agreement to the contrary, Indemnitee shall not be entitled to
indemnification under this Agreement in connection with any Proceeding initiated
by Indemnitee against the Company or any director or officer of the Company
unless:
(i) the Company has joined in or the Board has consented to the
initiation of the Proceeding; or
(ii) the Proceeding is one to enforce indemnification rights or any
other terms under this Agreement.
b. PROHIBITED INDEMNIFICATION. The following shall not be Indemnifiable
by the Company:
(i) A Proceeding in which judgement is rendered against Indemnitee
for an accounting or profits made from the purchase or sale by Indemnitee of
securities of the Company under the provisions of Section 16(b) of the
Securities Exchange Act, or similar provision of any federal, state or local
laws;
(ii) Any breach of the director's duty of loyalty to the Company or
its shareholders;
(iii) Acts or omissions not in good faith or which involve
intentional misconduct or a knowing and violation of law;
(iv) Unlawful payment of dividends or unlawful stock purchase or
redemption pursuant to Section 174 of the Delaware General Corporation Law; and
(v) Any transaction from which the director derived an improper
personal benefit.
SECTION 3. INDEMNIFICATION PROCESS.
------------------------
a. DEFENSE OF ACTION. Indemnitee shall notify the Company in writing
within a reasonable amount of time of becoming aware of the commencement of an
Indemnifiable Event (the "Event Notice"). The Event Notice shall also set forth
whether Indemnitee desires to be indemnified by the Company and whether
Indemnitee desires the Company to defend the Indemnifiable Event. The Company
shall defend the Indemnifiable Event with counsel reasonably satisfactory to
Indemnitee, provided, however, Indemnitee reserves the right to appoint separate
counsel in the event of a conflict of interest with the interests of Indemnitee
or
3
<PAGE>
in the event the Company fails to timely and adequately defend the Indemnifiable
Event. In the event Indemnitee elects to defend the Indemnifiable Event, such
election shall not constitute a waiver by Indemnitee of his rights against the
Company for Expenses or to later demand that the Company assume the defense of
Indemnitee. Counsel defending the Indemnifiable Event on behalf of either party
shall diligently defend the matter and shall keep the other parties fully
informed of its status including all pertinent facts and information pertaining
to the Indemnifiable Event and the strategy to be followed. The Company shall
not settle any Proceeding in any manner without Indemnitee's written consent.
b. ADVANCE OF EXPENSES. If requested by Indemnitee, the Company shall, in
accordance with this Agreement and within ten (10) business days of a written
request by Indemnitee, advance to Indemnitee the Expenses that are reasonably
anticipated to be incurred by Indemnitee and reimburse Indemnitee for the
Expenses that are actually incurred by Indemnitee in connection with any claim
asserted against or action brought by Indemnitee for:
(i) indemnification by the Company under this Agreement, or any other
agreement, or under applicable law, or the Company's Articles of Incorporation
or Bylaws now or hereafter in effect relating to indemnification for
Indemnifiable Events, and/or
(ii) recovery under directors' and officers' liability insurance
policies maintained by the Company.
c. PROHIBITED INDEMNIFICATION; REIMBURSEMENT TO THE COMPANY.
To the extent that a Reviewing Party determines that an Indemnitee is not
permitted to be indemnified under applicable law and Section 2b. hereinabove,
the Company shall be entitled to be reimbursed by Indemnitee for all Expenses
advanced and/or incurred, and Indemnitee hereby agrees to reimburse the Company
promptly for the same, provided, however, that if Indemnitee has commenced legal
proceedings in a court of competent jurisdiction to secure a determination that
Indemnitee should be indemnified under applicable law, as provided in Section
2d. hereinabove, any determination made by the Reviewing Party that Indemnitee
would not be permitted to be indemnified under applicable law shall not be
binding, and Indemnitee shall not be required to reimburse the Company for any
advance of Expenses until a final judicial determination is made with respect
thereto and all rights of appeal therefrom have been exhausted or have lapsed.
Indemnitee's obligation to reimburse the Company for Expenses advances shall be
unsecured and no interest shall be charged thereon.
d. INDEMNIFICATION ENFORCEMENT RIGHTS. If Indemnitee has not received
full indemnification within thirty (30) days after making a demand for Expenses,
Indemnitee shall have the right to enforce its indemnification rights under this
Agreement by commencing litigation in any court in the State of California
seeking an initial determination by the court or challenging any determination
by the Reviewing Party or any aspect thereof. The Company hereby consents to
service of process and to appear in any such proceeding. Any determination by
the Reviewing Party not challenged by Indemnitee shall be binding on the Company
and Indemnitee. The remedy provided for in this section 2(d) shall be in
addition to any other remedies available to Indemnitee in law or equity.
e. COMPANY DEFENSES. It shall be a defense to any action brought by
Indemnitee against the Company to enforce this Agreement (other than an action
brought to enforce a claim for Expenses incurred in defending a Proceeding in
advance of its final disposition) that it is not permissible, under this
Agreement or applicable law, for the Company to indemnify Indemnitee for the
amount claimed. In connection with any such action, the burden of proving such
a defense shall be on the Company. The failure of a Reviewing Party to have
made an Indemnification Determination (as defined below) before the commencement
of such action by
4
<PAGE>
Indemnitee that indemnification is proper under the circumstances shall not be a
defense to the action. For purposes of this Agreement, the termination of any
Indemnifiable Event by judgment, order, settlement (whether with or without
court approval), conviction or upon a plea of nolo contendere or its equivalent
(a "Termination Event"), shall not, of itself, create a presumption that
Indemnitee did not meet any particular standard of conduct or have any
particular belief or that a court had determined that indemnification is not
permitted by applicable law.
SECTION 4. INDEMNIFICATION REVIEW PROCEDURE; REVIEWING PARTY.
-------------------------------------------------
a. INDEMNIFICATION REVIEW PROCEDURE. Within five (5) days of the
occurrence of a Termination Event, Indemnitee shall provide written notice to
the Company of the Termination Event (the "Termination Event Notice"). In the
Event that Indemnitee has been successful on the merits or otherwise in defense
of the Indemnifiable Event, indemnification by the Company of Indemnitee shall
be mandatory. In the event that Indemnitee loses a judgement on the merits or
otherwise in defense of the Indemnifiable Event, or where there is no judicial
determination of the actual merits of the defense raised, whether due to
settlement, dismissal of the Complaint before trial, or upon a plea of nolo
contendere or its equivalent, the Company shall submit the Termination Event
Notice to the applicable Reviewing Party (as set forth below). The Reviewing
Party shall make a determination whether or not Indemnitee is entitled to be
indemnified pursuant to this Agreement and applicable law (the "Indemnification
Determination"). The Indemnification Determination shall be made within twenty-
five (25) days of the receipt of the Termination Event Notice. In connection
with any Indemnification Determination, the burden of proof shall be on the
Company.
b. REVIEWING PARTY. The Reviewing Party that shall make an
Indemnification Determination shall be, at Indemnitee's option, either:
(i) A majority of a quorum of the board of directors of the Company
consisting of directors who are not parties to the Indemnifiable Event (a
"Quorum"); or
(ii) An Independent Counsel.
If the Reviewing Party is an Independent Counsel, such Independent Counsel
shall be selected by Indemnitee and approved by the Company (which approval
shall not be unreasonably withheld), and shall not have otherwise performed
services for the Company or Indemnitee within the previous five (5) years. An
Independent Counsel shall not include any person who, under the applicable
standards of professional conduct then prevailing, would have a conflict of
interest in representing either the Company or Indemnitee in an action to
determine Indemnitee's rights under this Agreement. An Independent Counsel,
among other things, shall render a written opinion to the Company and Indemnitee
on whether and to what extent Indemnitee should be permitted to be indemnified
under applicable law. The Company agrees to pay the reasonable fees of an
Independent Counsel and to fully indemnify an Independent Counsel against any
and all expenses, including attorneys' fees, claims, liabilities, losses and
damages arising out of or relating to this Agreement or the engagement of an
Independent Counsel under this Agreement.
SECTION 5. ESTABLISHMENT OF TRUST.
----------------------
In the event of a Change in Control or a Potential Change in Control, the
Company shall, on written request by Indemnitee, create a trust for the benefit
of Indemnitee (the "Trust") and from time to time on written request of
Indemnitee (a "Trust Request"), shall fund the Trust with an amount sufficient
to satisfy any and all Expenses reasonably anticipated to be incurred in
connection with investigating, preparing for, participating in, and/or defending
any Indemnifiable
5
<PAGE>
Event. The individual selected to be trustee shall be agreed upon by both
Indemnitee and the Company (the "Trustee"). The terms of the Trust shall provide
that upon a Change in Control:
a. The Trust shall not be revoked or the principal invaded without the
written consent of Indemnitee;
b. The Trust shall continue to be funded by the Company in accordance with
the funding obligation set forth in this Section 5;
c. The Trustee shall promptly pay to Indemnitee all amounts for which
Indemnitee shall be entitled under this Agreement or otherwise; and
d. All unexpended funds in the Trust shall revert to the Company on a
final determination by a Reviewing Party or a court of competent jurisdiction
that Indemnitee has been fully indemnified under the terms of this Agreement.`
Nothing in this Section 5 shall relieve the Company of any of its
obligations under this Agreement. The Company shall pay all costs of
establishing and maintaining the Trust and shall indemnify the Trustee against
any and all expenses, including attorneys' fees, claims, liabilities, losses and
damages arising out of or relating to this Agreement or the establishment and
maintenance of the Trust.
SECTION 6. NONEXCLUSIVITY.
--------------
The rights of Indemnitee under this Agreement shall be in addition to any
other rights Indemnitee may have under the Company's Articles of Incorporation,
Bylaws, applicable law or otherwise. To the extent that a change in applicable
law (whether by statute or judicial decision) permits greater indemnification by
agreement than would be afforded currently under the Company's Articles of
Incorporation, Bylaws, applicable law or this Agreement, it is the intent of the
parties that Indemnitee enjoy by this Agreement the greater benefits afforded by
such change.
SECTION 7. LIABILITY INSURANCE.
-------------------
To the extent the Company maintains an insurance policy or policies
providing directors' and officers' liability insurance, Indemnitee shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any Company director and/or
officer.
SECTION 8. PERIOD OF LIMITATIONS.
---------------------
No legal action shall be brought, and no cause of action shall be asserted,
by or on behalf of the Company or any affiliate of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives, after the expiration of two (2) years from the date of accrual
of such cause of action, or such longer period as may be required by state law
under the circumstances. Any claim or cause of action of the Company or its
affiliate shall be extinguished and deemed released unless asserted by the
timely filing of a legal action within such period; provided, however, that if
any shorter period of limitations is otherwise applicable to any such cause of
action, the shorter period shall govern.
SECTION 9. AMENDMENT OF THIS AGREEMENT; WAIVER.
-----------------------------------
No supplement, modification, or amendment of this Agreement shall be
binding unless executed in writing by both of the parties hereto. No waiver of
any of the provisions of this
6
<PAGE>
Agreement shall operate as a waiver of any other provisions of this Agreement
(whether or not similar), nor shall such waiver constitute a continuing waiver.
Except as specifically provided in this Agreement, no failure to exercise or
delay in exercising any right or remedy under it shall constitute a waiver of
the right or remedy.
SECTION 10. SUBROGATION.
-----------
In the event of payment under this Agreement, the Company shall be
subrogated to the extent of that payment to all of the rights of recovery of
Indemnitee, who shall execute all papers required and shall do everything that
may be necessary to secure such rights, including the execution of any documents
necessary to enable the Company effectively to bring suit to enforce such
rights.
SECTION 11. NO DUPLICATION OF PAYMENTS.
--------------------------
The Company shall not be liable under this Agreement to make any payment in
connection with any claim made against Indemnitee to the extent Indemnitee has
otherwise obtained payment (under any insurance policy, bylaw or otherwise) of
the amounts otherwise indemnifiable under this Agreement.
SECTION 12. BINDING EFFECT.
--------------
This Agreement shall be binding on and inure to the benefit of and be
enforceable by the parties to it and their respective successors (including any
direct or indirect successor by purchase, merger, consolidation, or otherwise to
all or substantially all of the Company's business or assets or both), assigns,
spouses, heirs, and personal and legal representatives. The Company shall
require and cause any successor (whether direct or indirect, by purchase,
merger, consolidation, or otherwise) to all, substantially all, or a substantial
part, of the Company's business or assets or both, by written agreement in form
and substance satisfactory to Indemnitee, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform if no such succession had taken place.
SECTION 13. SEVERABILITY.
------------
If any term or provision of this Agreement or the application thereof to
any person or circumstance shall, to any extent, be determined to be invalid,
illegal or unenforceable under present or future laws effective during the term
of this Agreement, then and, in that event: (A) the performance of the offending
term or provision (but only to the extent its application is invalid, illegal or
unenforceable) shall be excused as if it had never been incorporated into this
Agreement, and, in lieu of such excused provision, there shall be added a
provision as similar in terms to such excused provision as may be possible and
be legal, valid and enforceable, and (B) the remaining part of this Agreement
(including the application of the offending term or provision to persons or
circumstances other than those as to which it is held invalid, illegal or
unenforceable) shall not be affected thereby and shall continue in full force
and effect to the fullest extent provided by law.
SECTION 14. GOVERNING LAW.
-------------
This Agreement and the rights and remedies of each party arising out of or
relating to this Agreement (including, without limitation, equitable remedies)
shall be solely governed by, interpreted under, and construed and enforced in
accordance with the internal laws of the state of Delaware, without regard to
conflicts of laws principles as if this Agreement were made, and as if its
obligations are to be performed, wholly within the state of Delaware.
7
<PAGE>
SECTION 15. CONSENT TO JURISDICTION.
-----------------------
Any action or proceeding arising out of or relating to this Agreement shall
be filed in and heard and litigated solely before the state courts of California
located within the county of Ventura. Each party generally and unconditionally
accepts the exclusive jurisdiction of such courts and waives any defense or
right to object to venue in said courts based upon the doctrine of "forum non
conveniens". Each party irrevocably agrees to be bound by any judgement
rendered thereby in connection with this Agreement.
SECTION 16. NOTICES.
-------
All notices, demands, and other communications required or permitted under
this Agreement shall be made in writing and shall be deemed to have been duly
given if delivered by hand, against receipt, or mailed, certified or registered
mail, return receipt requested, and addressed to the Company at:
Variflex, Inc.
5152 North Commerce Avenue
Moorpark, California 93021
Attn: Mr. Raymond "Jay" H. Losi, II
and to counsel at:
Morrison & Foerster LLP
555 West Fifth Street
Los Angeles, California 90013
Attn: Michael C. Cohen
and to Indemnitee at: ________________________________________
________________________________________
________________________________________
Notice of change of address shall be effective only when given in
accordance with this Section. All notices complying with this Section shall be
deemed to have been received on the date of delivery.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the date set forth above.
COMPANY:
Variflex, Inc., a Delaware corporation
/s/ Raymond (Jay) H. Losi II
----------------------------
Raymond (Jay) H. Losi II
Chief Executive Officer and Chief
Operating Officer
Indemnitee:
/s/ Michael T. Carr
-------------------
Michael T. Carr
9
<PAGE>
INDEMNIFICATION AGREEMENT
-------------------------
THIS AGREEMENT is entered into as of September 17, 1998 between Variflex,
Inc. a Delaware corporation (the "Company"), and Steven Muellner ("Indemnitee").
RECITALS
--------
WHEREAS, it is essential to the best interests of the Company to attract
and retain highly capable persons to serve as directors and/or officers of the
Company;
WHEREAS, Indemnitee is or has been appointed or elected to be a director
and/or officer of the Company;
WHEREAS, the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers of
corporations; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability, in order to enhance Indemnitee's continued service
to the Company, and in order to induce Indemnitee to continue to provide
services to the Company as a director and/or officer, the Company wishes to
provide in this Agreement for the indemnification of and the advancement of
expenses to Indemnitee to the fullest extent permitted by law and as set forth
in this Agreement, and to the extent applicable insurance is maintained, for the
coverage of Indemnitee under the Company's policies of directors' and officers'
liability insurance.
NOW THEREFORE, IN CONSIDERATION of the foregoing, the mutual covenants and
promises contained herein and of Indemnitee's continuing to provide services to
the Company the parties agree as follows:
SECTION 1. DEFINITIONS.
-----------
a. BOARD: the board of directors of the Company.
b. CHANGE IN CONTROL: a state of affairs that shall be deemed to have
occurred if:
(i) any person's or entity's beneficial ownership of the total voting
power of the Company's then outstanding voting securities increases, either
directly or indirectly, by twenty percent (20%); or
(ii) during any period of three (3) consecutive years, individuals
who, at the beginning of such period, constituted the Board, together with any
new director whose election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds (2/3) of
the directors then in office who either were directors at the beginning of the
three (3) year period, or whose election or nomination was previously so
approved, cease for any reason to constitute a majority of the Board; or
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation that would result in the outstanding voting securities of the
Company immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least eighty percent (80%) of the total
outstanding
1
<PAGE>
voting power represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation.
c. EXPENSES:
(i) any costs, expenses, fees or losses actually and reasonable
incurred, including, but not limited to, attorneys' fees, judgements, fines,
damages, penalties and amounts paid or to be paid in settlement;
(ii) any interest, assessments, or other charges imposed on any of the
items in part (i) of this subsection (c); and
(iii) any federal, state, local or foreign taxes imposed as a result
of the actual or deemed receipt of any payments under this Agreement that are
paid or incurred in connection with investigating, defending, being a witness
in, or participating in (including on appeal) or preparing for any of the
foregoing in any Proceeding relating to an Indemnifiable Event, as defined
hereinbelow.
d. INDEMNIFIABLE EVENT: any Proceeding that takes place either before or
after the execution of this Agreement and that is related to or arises out of:
(i) the fact that Indemnitee is or was a director and/or officer of
the Company or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise; or
(ii) actions taken or not taken by Indemnitee in his capacity as a
director and/or officer (subject to Section 2b. hereof).
e. INDEPENDENT COUNSEL: the person or body described in Section 4.
f. POTENTIAL CHANGE IN CONTROL: a state of affairs that shall be deemed
to exist if:
(i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control; or
(ii) any person or entity announces an intention to take or to
consider taking actions that, if consummated, would constitute a Change in
Control; or
(iii) the Board adopts a resolution to the effect that, for purposes
of this Agreement, a Potential Change in Control has occurred.
g. PROCEEDING: any threatened, pending, or completed action, suit, or
proceeding, or any injury, hearing, or investigation, whether conducted by the
Company or any other party, that an Indemnitee in good faith believes might lead
to the institution of any such action, suit, or proceeding, whether civil,
criminal, administrative, investigative or other.
h. REVIEWING PARTY: the person or body appointed in accordance with
Section 4.
i. VOTING SECURITIES: any securities of the Company that have the right
to vote generally in the election of directors.
2
<PAGE>
SECTION 2. GENERAL AGREEMENT; PROHIBITED INDEMNIFICATION.
---------------------------------------------
a. GENERAL AGREEMENT. In the event Indemnitee was, is, or is threatened
to be made a participant in, an Indemnifiable Event, the Company shall indemnify
Indemnitee from and against any and all Expenses to the fullest extent permitted
by law, including but not limited to Section 145 of the Delaware General
Corporation Law, as the same exists or may hereafter be amended or interpreted
(but in the case of any such amendment or interpretation, only to the extent
that such amendment or interpretation permits the Company to provide broader
indemnification rights than were permitted prior to that amendment or
interpretation). The parties to this Agreement intend that this Agreement shall
provide for indemnification in excess of that expressly permitted by statute,
including, without limitation, any indemnification provided by the Company's
Articles of Incorporation, its Bylaws, a vote of its shareholders or
disinterested directors or applicable law. The indemnification provided under
this Agreement shall continue for Indemnitee even though Indemnitee may have
ceased to serve in such capacity at the time of any Proceeding. Notwithstanding
anything in this Agreement to the contrary, Indemnitee shall not be entitled to
indemnification under this Agreement in connection with any Proceeding initiated
by Indemnitee against the Company or any director or officer of the Company
unless:
(i) the Company has joined in or the Board has consented to the
initiation of the Proceeding; or
(ii) the Proceeding is one to enforce indemnification rights or any
other terms under this Agreement.
b. PROHIBITED INDEMNIFICATION. The following shall not be Indemnifiable
by the Company:
(i) A Proceeding in which judgement is rendered against Indemnitee
for an accounting or profits made from the purchase or sale by Indemnitee of
securities of the Company under the provisions of Section 16(b) of the
Securities Exchange Act, or similar provision of any federal, state or local
laws;
(ii) Any breach of the director's duty of loyalty to the Company or
its shareholders;
(iii) Acts or omissions not in good faith or which involve
intentional misconduct or a knowing and violation of law;
(iv) Unlawful payment of dividends or unlawful stock purchase or
redemption pursuant to Section 174 of the Delaware General Corporation Law; and
(v) Any transaction from which the director derived an improper
personal benefit.
SECTION 3. INDEMNIFICATION PROCESS.
------------------------
a. DEFENSE OF ACTION. Indemnitee shall notify the Company in writing
within a reasonable amount of time of becoming aware of the commencement of an
Indemnifiable Event (the "Event Notice"). The Event Notice shall also set forth
whether Indemnitee desires to be indemnified by the Company and whether
Indemnitee desires the Company to defend the Indemnifiable Event. The Company
shall defend the Indemnifiable Event with counsel reasonably satisfactory to
Indemnitee, provided, however, Indemnitee reserves the right to appoint separate
counsel in the event of a conflict of interest with the interests of Indemnitee
or
3
<PAGE>
in the event the Company fails to timely and adequately defend the Indemnifiable
Event. In the event Indemnitee elects to defend the Indemnifiable Event, such
election shall not constitute a waiver by Indemnitee of his rights against the
Company for Expenses or to later demand that the Company assume the defense of
Indemnitee. Counsel defending the Indemnifiable Event on behalf of either party
shall diligently defend the matter and shall keep the other parties fully
informed of its status including all pertinent facts and information pertaining
to the Indemnifiable Event and the strategy to be followed. The Company shall
not settle any Proceeding in any manner without Indemnitee's written consent.
b. ADVANCE OF EXPENSES. If requested by Indemnitee, the Company shall, in
accordance with this Agreement and within ten (10) business days of a written
request by Indemnitee, advance to Indemnitee the Expenses that are reasonably
anticipated to be incurred by Indemnitee and reimburse Indemnitee for the
Expenses that are actually incurred by Indemnitee in connection with any claim
asserted against or action brought by Indemnitee for:
(i) indemnification by the Company under this Agreement, or any other
agreement, or under applicable law, or the Company's Articles of Incorporation
or Bylaws now or hereafter in effect relating to indemnification for
Indemnifiable Events, and/or
(ii) recovery under directors' and officers' liability insurance
policies maintained by the Company.
c. PROHIBITED INDEMNIFICATION; REIMBURSEMENT TO THE COMPANY.
To the extent that a Reviewing Party determines that an Indemnitee is not
permitted to be indemnified under applicable law and Section 2b. hereinabove,
the Company shall be entitled to be reimbursed by Indemnitee for all Expenses
advanced and/or incurred, and Indemnitee hereby agrees to reimburse the Company
promptly for the same, provided, however, that if Indemnitee has commenced legal
proceedings in a court of competent jurisdiction to secure a determination that
Indemnitee should be indemnified under applicable law, as provided in Section
2d. hereinabove, any determination made by the Reviewing Party that Indemnitee
would not be permitted to be indemnified under applicable law shall not be
binding, and Indemnitee shall not be required to reimburse the Company for any
advance of Expenses until a final judicial determination is made with respect
thereto and all rights of appeal therefrom have been exhausted or have lapsed.
Indemnitee's obligation to reimburse the Company for Expenses advances shall be
unsecured and no interest shall be charged thereon.
d. INDEMNIFICATION ENFORCEMENT RIGHTS. If Indemnitee has not received
full indemnification within thirty (30) days after making a demand for Expenses,
Indemnitee shall have the right to enforce its indemnification rights under this
Agreement by commencing litigation in any court in the State of California
seeking an initial determination by the court or challenging any determination
by the Reviewing Party or any aspect thereof. The Company hereby consents to
service of process and to appear in any such proceeding. Any determination by
the Reviewing Party not challenged by Indemnitee shall be binding on the Company
and Indemnitee. The remedy provided for in this section 2(d) shall be in
addition to any other remedies available to Indemnitee in law or equity.
e. COMPANY DEFENSES. It shall be a defense to any action brought by
Indemnitee against the Company to enforce this Agreement (other than an action
brought to enforce a claim for Expenses incurred in defending a Proceeding in
advance of its final disposition) that it is not permissible, under this
Agreement or applicable law, for the Company to indemnify Indemnitee for the
amount claimed. In connection with any such action, the burden of proving such
a defense shall be on the Company. The failure of a Reviewing Party to have
made an Indemnification Determination (as defined below) before the commencement
of such action by
4
<PAGE>
Indemnitee that indemnification is proper under the circumstances shall not be a
defense to the action. For purposes of this Agreement, the termination of any
Indemnifiable Event by judgment, order, settlement (whether with or without
court approval), conviction or upon a plea of nolo contendere or its equivalent
(a "Termination Event"), shall not, of itself, create a presumption that
Indemnitee did not meet any particular standard of conduct or have any
particular belief or that a court had determined that indemnification is not
permitted by applicable law.
SECTION 4. INDEMNIFICATION REVIEW PROCEDURE; REVIEWING PARTY.
-------------------------------------------------
a. INDEMNIFICATION REVIEW PROCEDURE. Within five (5) days of the
occurrence of a Termination Event, Indemnitee shall provide written notice to
the Company of the Termination Event (the "Termination Event Notice"). In the
Event that Indemnitee has been successful on the merits or otherwise in defense
of the Indemnifiable Event, indemnification by the Company of Indemnitee shall
be mandatory. In the event that Indemnitee loses a judgement on the merits or
otherwise in defense of the Indemnifiable Event, or where there is no judicial
determination of the actual merits of the defense raised, whether due to
settlement, dismissal of the Complaint before trial, or upon a plea of nolo
contendere or its equivalent, the Company shall submit the Termination Event
Notice to the applicable Reviewing Party (as set forth below). The Reviewing
Party shall make a determination whether or not Indemnitee is entitled to be
indemnified pursuant to this Agreement and applicable law (the "Indemnification
Determination"). The Indemnification Determination shall be made within twenty-
five (25) days of the receipt of the Termination Event Notice. In connection
with any Indemnification Determination, the burden of proof shall be on the
Company.
b. REVIEWING PARTY. The Reviewing Party that shall make an
Indemnification Determination shall be, at Indemnitee's option, either:
(i) A majority of a quorum of the board of directors of the Company
consisting of directors who are not parties to the Indemnifiable Event (a
"Quorum"); or
(ii) An Independent Counsel.
If the Reviewing Party is an Independent Counsel, such Independent
Counsel shall be selected by Indemnitee and approved by the Company (which
approval shall not be unreasonably withheld), and shall not have otherwise
performed services for the Company or Indemnitee within the previous five (5)
years. An Independent Counsel shall not include any person who, under the
applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either the Company or Indemnitee in an
action to determine Indemnitee's rights under this Agreement. An Independent
Counsel, among other things, shall render a written opinion to the Company and
Indemnitee on whether and to what extent Indemnitee should be permitted to be
indemnified under applicable law. The Company agrees to pay the reasonable fees
of an Independent Counsel and to fully indemnify an Independent Counsel against
any and all expenses, including attorneys' fees, claims, liabilities, losses and
damages arising out of or relating to this Agreement or the engagement of an
Independent Counsel under this Agreement.
SECTION 5. ESTABLISHMENT OF TRUST.
----------------------
In the event of a Change in Control or a Potential Change in Control, the
Company shall, on written request by Indemnitee, create a trust for the benefit
of Indemnitee (the "Trust") and from time to time on written request of
Indemnitee (a "Trust Request"), shall fund the Trust with an amount sufficient
to satisfy any and all Expenses reasonably anticipated to be incurred in
connection with investigating, preparing for, participating in, and/or defending
any Indemnifiable
5
<PAGE>
Event. The individual selected to be trustee shall be agreed upon by both
Indemnitee and the Company (the "Trustee"). The terms of the Trust shall provide
that upon a Change in Control:
a. The Trust shall not be revoked or the principal invaded without the
written consent of Indemnitee;
b. The Trust shall continue to be funded by the Company in accordance with
the funding obligation set forth in this Section 5;
c. The Trustee shall promptly pay to Indemnitee all amounts for which
Indemnitee shall be entitled under this Agreement or otherwise; and
d. All unexpended funds in the Trust shall revert to the Company on a
final determination by a Reviewing Party or a court of competent jurisdiction
that Indemnitee has been fully indemnified under the terms of this Agreement.`
Nothing in this Section 5 shall relieve the Company of any of its
obligations under this Agreement. The Company shall pay all costs of
establishing and maintaining the Trust and shall indemnify the Trustee against
any and all expenses, including attorneys' fees, claims, liabilities, losses and
damages arising out of or relating to this Agreement or the establishment and
maintenance of the Trust.
SECTION 6. NONEXCLUSIVITY.
--------------
The rights of Indemnitee under this Agreement shall be in addition to any
other rights Indemnitee may have under the Company's Articles of Incorporation,
Bylaws, applicable law or otherwise. To the extent that a change in applicable
law (whether by statute or judicial decision) permits greater indemnification by
agreement than would be afforded currently under the Company's Articles of
Incorporation, Bylaws, applicable law or this Agreement, it is the intent of the
parties that Indemnitee enjoy by this Agreement the greater benefits afforded by
such change.
SECTION 7. LIABILITY INSURANCE.
-------------------
To the extent the Company maintains an insurance policy or policies
providing directors' and officers' liability insurance, Indemnitee shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any Company director and/or
officer.
SECTION 8. PERIOD OF LIMITATIONS.
---------------------
No legal action shall be brought, and no cause of action shall be asserted,
by or on behalf of the Company or any affiliate of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives, after the expiration of two (2) years from the date of accrual
of such cause of action, or such longer period as may be required by state law
under the circumstances. Any claim or cause of action of the Company or its
affiliate shall be extinguished and deemed released unless asserted by the
timely filing of a legal action within such period; provided, however, that if
any shorter period of limitations is otherwise applicable to any such cause of
action, the shorter period shall govern.
SECTION 9. AMENDMENT OF THIS AGREEMENT; WAIVER.
-----------------------------------
No supplement, modification, or amendment of this Agreement shall be
binding unless executed in writing by both of the parties hereto. No waiver of
any of the provisions of this
6
<PAGE>
Agreement shall operate as a waiver of any other provisions of this Agreement
(whether or not similar), nor shall such waiver constitute a continuing waiver.
Except as specifically provided in this Agreement, no failure to exercise or
delay in exercising any right or remedy under it shall constitute a waiver of
the right or remedy.
SECTION 10. SUBROGATION.
-----------
In the event of payment under this Agreement, the Company shall be
subrogated to the extent of that payment to all of the rights of recovery of
Indemnitee, who shall execute all papers required and shall do everything that
may be necessary to secure such rights, including the execution of any documents
necessary to enable the Company effectively to bring suit to enforce such
rights.
SECTION 11. NO DUPLICATION OF PAYMENTS.
--------------------------
The Company shall not be liable under this Agreement to make any payment in
connection with any claim made against Indemnitee to the extent Indemnitee has
otherwise obtained payment (under any insurance policy, bylaw or otherwise) of
the amounts otherwise indemnifiable under this Agreement.
SECTION 12. BINDING EFFECT.
--------------
This Agreement shall be binding on and inure to the benefit of and be
enforceable by the parties to it and their respective successors (including any
direct or indirect successor by purchase, merger, consolidation, or otherwise to
all or substantially all of the Company's business or assets or both), assigns,
spouses, heirs, and personal and legal representatives. The Company shall
require and cause any successor (whether direct or indirect, by purchase,
merger, consolidation, or otherwise) to all, substantially all, or a substantial
part, of the Company's business or assets or both, by written agreement in form
and substance satisfactory to Indemnitee, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform if no such succession had taken place.
SECTION 13. SEVERABILITY.
------------
If any term or provision of this Agreement or the application thereof to
any person or circumstance shall, to any extent, be determined to be invalid,
illegal or unenforceable under present or future laws effective during the term
of this Agreement, then and, in that event: (A) the performance of the offending
term or provision (but only to the extent its application is invalid, illegal or
unenforceable) shall be excused as if it had never been incorporated into this
Agreement, and, in lieu of such excused provision, there shall be added a
provision as similar in terms to such excused provision as may be possible and
be legal, valid and enforceable, and (B) the remaining part of this Agreement
(including the application of the offending term or provision to persons or
circumstances other than those as to which it is held invalid, illegal or
unenforceable) shall not be affected thereby and shall continue in full force
and effect to the fullest extent provided by law.
SECTION 14. GOVERNING LAW.
-------------
This Agreement and the rights and remedies of each party arising out of or
relating to this Agreement (including, without limitation, equitable remedies)
shall be solely governed by, interpreted under, and construed and enforced in
accordance with the internal laws of the state of Delaware, without regard to
conflicts of laws principles as if this Agreement were made, and as if its
obligations are to be performed, wholly within the state of Delaware.
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<PAGE>
SECTION 15. CONSENT TO JURISDICTION.
-----------------------
Any action or proceeding arising out of or relating to this Agreement shall
be filed in and heard and litigated solely before the state courts of California
located within the county of Ventura. Each party generally and unconditionally
accepts the exclusive jurisdiction of such courts and waives any defense or
right to object to venue in said courts based upon the doctrine of "forum non
conveniens". Each party irrevocably agrees to be bound by any judgement
rendered thereby in connection with this Agreement.
SECTION 16. NOTICES.
-------
All notices, demands, and other communications required or permitted under
this Agreement shall be made in writing and shall be deemed to have been duly
given if delivered by hand, against receipt, or mailed, certified or registered
mail, return receipt requested, and addressed to the Company at:
Variflex, Inc.
5152 North Commerce Avenue
Moorpark, California 93021
Attn: Mr. Raymond "Jay" H. Losi, II
and to counsel at:
Morrison & Foerster LLP
555 West Fifth Street
Los Angeles, California 90013
Attn: Michael C. Cohen
and to Indemnitee at:
-------------------------------------
-------------------------------------
-------------------------------------
Notice of change of address shall be effective only when given in
accordance with this Section. All notices complying with this Section shall be
deemed to have been received on the date of delivery.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the date set forth above.
COMPANY:
Variflex, Inc., a Delaware corporation
/s/ Raymond (Jay) H. Losi II
----------------------------
Raymond (Jay) H. Losi II
Chief Executive Officer and Chief Operating
Officer
Indemnitee:
/s/ Steven Muellner
-------------------
Steven Muellner
9
<PAGE>
INDEMNIFICATION AGREEMENT
-------------------------
THIS AGREEMENT is entered into as of September 17, 1998 between Variflex,
Inc. a Delaware corporation (the "Company"), and Roger M. Wasserman
("Indemnitee").
RECITALS
--------
WHEREAS, it is essential to the best interests of the Company to attract
and retain highly capable persons to serve as directors and/or officers of the
Company;
WHEREAS, Indemnitee is or has been appointed or elected to be a director
and/or officer of the Company;
WHEREAS, the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers of
corporations; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability, in order to enhance Indemnitee's continued service
to the Company, and in order to induce Indemnitee to continue to provide
services to the Company as a director and/or officer, the Company wishes to
provide in this Agreement for the indemnification of and the advancement of
expenses to Indemnitee to the fullest extent permitted by law and as set forth
in this Agreement, and to the extent applicable insurance is maintained, for the
coverage of Indemnitee under the Company's policies of directors' and officers'
liability insurance.
NOW THEREFORE, IN CONSIDERATION of the foregoing, the mutual covenants and
promises contained herein and of Indemnitee's continuing to provide services to
the Company the parties agree as follows:
SECTION 1. DEFINITIONS.
-----------
a. BOARD: the board of directors of the Company.
b. CHANGE IN CONTROL: a state of affairs that shall be deemed to have
occurred if:
(i) any person's or entity's beneficial ownership of the total voting
power of the Company's then outstanding voting securities increases, either
directly or indirectly, by twenty percent (20%); or
(ii) during any period of three (3) consecutive years, individuals
who, at the beginning of such period, constituted the Board, together with any
new director whose election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds (2/3) of
the directors then in office who either were directors at the beginning of the
three (3) year period, or whose election or nomination was previously so
approved, cease for any reason to constitute a majority of the Board; or
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation that would result in the outstanding voting securities of the
Company immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least eighty percent (80%) of the total
outstanding
1
<PAGE>
voting power represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation.
c. EXPENSES:
(i) any costs, expenses, fees or losses actually and reasonable
incurred, including, but not limited to, attorneys' fees, judgements, fines,
damages, penalties and amounts paid or to be paid in settlement;
(ii) any interest, assessments, or other charges imposed on any of the
items in part (i) of this subsection (c); and
(iii) any federal, state, local or foreign taxes imposed as a result
of the actual or deemed receipt of any payments under this Agreement that are
paid or incurred in connection with investigating, defending, being a witness
in, or participating in (including on appeal) or preparing for any of the
foregoing in any Proceeding relating to an Indemnifiable Event, as defined
hereinbelow.
d. INDEMNIFIABLE EVENT: any Proceeding that takes place either before or
after the execution of this Agreement and that is related to or arises out of:
(i) the fact that Indemnitee is or was a director and/or officer of
the Company or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise; or
(ii) actions taken or not taken by Indemnitee in his capacity as a
director and/or officer (subject to Section 2b. hereof).
e. INDEPENDENT COUNSEL: the person or body described in Section 4.
f. POTENTIAL CHANGE IN CONTROL: a state of affairs that shall be deemed
to exist if:
(i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in Control; or
(ii) any person or entity announces an intention to take or to
consider taking actions that, if consummated, would constitute a Change in
Control; or
(iii) the Board adopts a resolution to the effect that, for purposes
of this Agreement, a Potential Change in Control has occurred.
g. PROCEEDING: any threatened, pending, or completed action, suit, or
proceeding, or any injury, hearing, or investigation, whether conducted by the
Company or any other party, that an Indemnitee in good faith believes might lead
to the institution of any such action, suit, or proceeding, whether civil,
criminal, administrative, investigative or other.
h. REVIEWING PARTY: the person or body appointed in accordance with
Section 4.
i. VOTING SECURITIES: any securities of the Company that have the right
to vote generally in the election of directors.
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<PAGE>
SECTION 2. GENERAL AGREEMENT; PROHIBITED INDEMNIFICATION.
---------------------------------------------
a. GENERAL AGREEMENT. In the event Indemnitee was, is, or is threatened
to be made a participant in, an Indemnifiable Event, the Company shall indemnify
Indemnitee from and against any and all Expenses to the fullest extent permitted
by law, including but not limited to Section 145 of the Delaware General
Corporation Law, as the same exists or may hereafter be amended or interpreted
(but in the case of any such amendment or interpretation, only to the extent
that such amendment or interpretation permits the Company to provide broader
indemnification rights than were permitted prior to that amendment or
interpretation). The parties to this Agreement intend that this Agreement shall
provide for indemnification in excess of that expressly permitted by statute,
including, without limitation, any indemnification provided by the Company's
Articles of Incorporation, its Bylaws, a vote of its shareholders or
disinterested directors or applicable law. The indemnification provided under
this Agreement shall continue for Indemnitee even though Indemnitee may have
ceased to serve in such capacity at the time of any Proceeding. Notwithstanding
anything in this Agreement to the contrary, Indemnitee shall not be entitled to
indemnification under this Agreement in connection with any Proceeding initiated
by Indemnitee against the Company or any director or officer of the Company
unless:
(i) the Company has joined in or the Board has consented to the
initiation of the Proceeding; or
(ii) the Proceeding is one to enforce indemnification rights or any
other terms under this Agreement.
b. PROHIBITED INDEMNIFICATION. The following shall not be Indemnifiable
by the Company:
(i) A Proceeding in which judgement is rendered against Indemnitee for
an accounting or profits made from the purchase or sale by Indemnitee of
securities of the Company under the provisions of Section 16(b) of the
Securities Exchange Act, or similar provision of any federal, state or local
laws;
(ii) Any breach of the director's duty of loyalty to the Company or
its shareholders;
(iii) Acts or omissions not in good faith or which involve
intentional misconduct or a knowing and violation of law;
(iv) Unlawful payment of dividends or unlawful stock purchase or
redemption pursuant to Section 174 of the Delaware General Corporation Law; and
(v) Any transaction from which the director derived an improper
personal benefit.
SECTION 3. INDEMNIFICATION PROCESS.
------------------------
a. DEFENSE OF ACTION. Indemnitee shall notify the Company in writing
within a reasonable amount of time of becoming aware of the commencement of an
Indemnifiable Event (the "Event Notice"). The Event Notice shall also set forth
whether Indemnitee desires to be indemnified by the Company and whether
Indemnitee desires the Company to defend the Indemnifiable Event. The Company
shall defend the Indemnifiable Event with counsel reasonably satisfactory to
Indemnitee, provided, however, Indemnitee reserves the right to appoint separate
counsel in the event of a conflict of interest with the interests of Indemnitee
or
3
<PAGE>
in the event the Company fails to timely and adequately defend the Indemnifiable
Event. In the event Indemnitee elects to defend the Indemnifiable Event, such
election shall not constitute a waiver by Indemnitee of his rights against the
Company for Expenses or to later demand that the Company assume the defense of
Indemnitee. Counsel defending the Indemnifiable Event on behalf of either party
shall diligently defend the matter and shall keep the other parties fully
informed of its status including all pertinent facts and information pertaining
to the Indemnifiable Event and the strategy to be followed. The Company shall
not settle any Proceeding in any manner without Indemnitee's written consent.
b. ADVANCE OF EXPENSES. If requested by Indemnitee, the Company shall, in
accordance with this Agreement and within ten (10) business days of a written
request by Indemnitee, advance to Indemnitee the Expenses that are reasonably
anticipated to be incurred by Indemnitee and reimburse Indemnitee for the
Expenses that are actually incurred by Indemnitee in connection with any claim
asserted against or action brought by Indemnitee for:
(i) indemnification by the Company under this Agreement, or any other
agreement, or under applicable law, or the Company's Articles of Incorporation
or Bylaws now or hereafter in effect relating to indemnification for
Indemnifiable Events, and/or
(ii) recovery under directors' and officers' liability insurance
policies maintained by the Company.
c. PROHIBITED INDEMNIFICATION; REIMBURSEMENT TO THE COMPANY.
To the extent that a Reviewing Party determines that an Indemnitee is not
permitted to be indemnified under applicable law and Section 2b. hereinabove,
the Company shall be entitled to be reimbursed by Indemnitee for all Expenses
advanced and/or incurred, and Indemnitee hereby agrees to reimburse the Company
promptly for the same, provided, however, that if Indemnitee has commenced legal
proceedings in a court of competent jurisdiction to secure a determination that
Indemnitee should be indemnified under applicable law, as provided in Section
2d. hereinabove, any determination made by the Reviewing Party that Indemnitee
would not be permitted to be indemnified under applicable law shall not be
binding, and Indemnitee shall not be required to reimburse the Company for any
advance of Expenses until a final judicial determination is made with respect
thereto and all rights of appeal therefrom have been exhausted or have lapsed.
Indemnitee's obligation to reimburse the Company for Expenses advances shall be
unsecured and no interest shall be charged thereon.
d. INDEMNIFICATION ENFORCEMENT RIGHTS. If Indemnitee has not received
full indemnification within thirty (30) days after making a demand for Expenses,
Indemnitee shall have the right to enforce its indemnification rights under this
Agreement by commencing litigation in any court in the State of California
seeking an initial determination by the court or challenging any determination
by the Reviewing Party or any aspect thereof. The Company hereby consents to
service of process and to appear in any such proceeding. Any determination by
the Reviewing Party not challenged by Indemnitee shall be binding on the Company
and Indemnitee. The remedy provided for in this section 2(d) shall be in
addition to any other remedies available to Indemnitee in law or equity.
e. COMPANY DEFENSES. It shall be a defense to any action brought by
Indemnitee against the Company to enforce this Agreement (other than an action
brought to enforce a claim for Expenses incurred in defending a Proceeding in
advance of its final disposition) that it is not permissible, under this
Agreement or applicable law, for the Company to indemnify Indemnitee for the
amount claimed. In connection with any such action, the burden of proving such
a defense shall be on the Company. The failure of a Reviewing Party to have
made an Indemnification Determination (as defined below) before the commencement
of such action by
4
<PAGE>
Indemnitee that indemnification is proper under the circumstances shall not be a
defense to the action. For purposes of this Agreement, the termination of any
Indemnifiable Event by judgment, order, settlement (whether with or without
court approval), conviction or upon a plea of nolo contendere or its equivalent
(a "Termination Event"), shall not, of itself, create a presumption that
Indemnitee did not meet any particular standard of conduct or have any
particular belief or that a court had determined that indemnification is not
permitted by applicable law.
SECTION 4. INDEMNIFICATION REVIEW PROCEDURE; REVIEWING PARTY.
-------------------------------------------------
a. INDEMNIFICATION REVIEW PROCEDURE. Within five (5) days of the
occurrence of a Termination Event, Indemnitee shall provide written notice to
the Company of the Termination Event (the "Termination Event Notice"). In the
Event that Indemnitee has been successful on the merits or otherwise in defense
of the Indemnifiable Event, indemnification by the Company of Indemnitee shall
be mandatory. In the event that Indemnitee loses a judgement on the merits or
otherwise in defense of the Indemnifiable Event, or where there is no judicial
determination of the actual merits of the defense raised, whether due to
settlement, dismissal of the Complaint before trial, or upon a plea of nolo
contendere or its equivalent, the Company shall submit the Termination Event
Notice to the applicable Reviewing Party (as set forth below). The Reviewing
Party shall make a determination whether or not Indemnitee is entitled to be
indemnified pursuant to this Agreement and applicable law (the "Indemnification
Determination"). The Indemnification Determination shall be made within twenty-
five (25) days of the receipt of the Termination Event Notice. In connection
with any Indemnification Determination, the burden of proof shall be on the
Company.
b. REVIEWING PARTY. The Reviewing Party that shall make an
Indemnification Determination shall be, at Indemnitee's option, either:
(i) A majority of a quorum of the board of directors of the Company
consisting of directors who are not parties to the Indemnifiable Event (a
"Quorum"); or
(ii) An Independent Counsel.
If the Reviewing Party is an Independent Counsel, such Independent Counsel
shall be selected by Indemnitee and approved by the Company (which approval
shall not be unreasonably withheld), and shall not have otherwise performed
services for the Company or Indemnitee within the previous five (5) years. An
Independent Counsel shall not include any person who, under the applicable
standards of professional conduct then prevailing, would have a conflict of
interest in representing either the Company or Indemnitee in an action to
determine Indemnitee's rights under this Agreement. An Independent Counsel,
among other things, shall render a written opinion to the Company and Indemnitee
on whether and to what extent Indemnitee should be permitted to be indemnified
under applicable law. The Company agrees to pay the reasonable fees of an
Independent Counsel and to fully indemnify an Independent Counsel against any
and all expenses, including attorneys' fees, claims, liabilities, losses and
damages arising out of or relating to this Agreement or the engagement of an
Independent Counsel under this Agreement.
SECTION 5. ESTABLISHMENT OF TRUST.
----------------------
In the event of a Change in Control or a Potential Change in Control, the
Company shall, on written request by Indemnitee, create a trust for the benefit
of Indemnitee (the "Trust") and from time to time on written request of
Indemnitee (a "Trust Request"), shall fund the Trust with an amount sufficient
to satisfy any and all Expenses reasonably anticipated to be incurred in
connection with investigating, preparing for, participating in, and/or defending
any Indemnifiable
5
<PAGE>
Event. The individual selected to be trustee shall be agreed upon by both
Indemnitee and the Company (the "Trustee"). The terms of the Trust shall provide
that upon a Change in Control:
a. The Trust shall not be revoked or the principal invaded without the
written consent of Indemnitee;
b. The Trust shall continue to be funded by the Company in accordance with
the funding obligation set forth in this Section 5;
c. The Trustee shall promptly pay to Indemnitee all amounts for which
Indemnitee shall be entitled under this Agreement or otherwise; and
d. All unexpended funds in the Trust shall revert to the Company on a
final determination by a Reviewing Party or a court of competent jurisdiction
that Indemnitee has been fully indemnified under the terms of this Agreement.`
Nothing in this Section 5 shall relieve the Company of any of its
obligations under this Agreement. The Company shall pay all costs of
establishing and maintaining the Trust and shall indemnify the Trustee against
any and all expenses, including attorneys' fees, claims, liabilities, losses and
damages arising out of or relating to this Agreement or the establishment and
maintenance of the Trust.
SECTION 6. NONEXCLUSIVITY.
--------------
The rights of Indemnitee under this Agreement shall be in addition to any
other rights Indemnitee may have under the Company's Articles of Incorporation,
Bylaws, applicable law or otherwise. To the extent that a change in applicable
law (whether by statute or judicial decision) permits greater indemnification by
agreement than would be afforded currently under the Company's Articles of
Incorporation, Bylaws, applicable law or this Agreement, it is the intent of the
parties that Indemnitee enjoy by this Agreement the greater benefits afforded by
such change.
SECTION 7. LIABILITY INSURANCE.
-------------------
To the extent the Company maintains an insurance policy or policies
providing directors' and officers' liability insurance, Indemnitee shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any Company director and/or
officer.
SECTION 8. PERIOD OF LIMITATIONS.
---------------------
No legal action shall be brought, and no cause of action shall be asserted,
by or on behalf of the Company or any affiliate of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives, after the expiration of two (2) years from the date of accrual
of such cause of action, or such longer period as may be required by state law
under the circumstances. Any claim or cause of action of the Company or its
affiliate shall be extinguished and deemed released unless asserted by the
timely filing of a legal action within such period; provided, however, that if
any shorter period of limitations is otherwise applicable to any such cause of
action, the shorter period shall govern.
SECTION 9. AMENDMENT OF THIS AGREEMENT; WAIVER.
-----------------------------------
No supplement, modification, or amendment of this Agreement shall be
binding unless executed in writing by both of the parties hereto. No waiver of
any of the provisions of this
6
<PAGE>
Agreement shall operate as a waiver of any other provisions of this Agreement
(whether or not similar), nor shall such waiver constitute a continuing waiver.
Except as specifically provided in this Agreement, no failure to exercise or
delay in exercising any right or remedy under it shall constitute a waiver of
the right or remedy.
SECTION 10. SUBROGATION.
-----------
In the event of payment under this Agreement, the Company shall be
subrogated to the extent of that payment to all of the rights of recovery of
Indemnitee, who shall execute all papers required and shall do everything that
may be necessary to secure such rights, including the execution of any documents
necessary to enable the Company effectively to bring suit to enforce such
rights.
SECTION 11. NO DUPLICATION OF PAYMENTS.
--------------------------
The Company shall not be liable under this Agreement to make any payment in
connection with any claim made against Indemnitee to the extent Indemnitee has
otherwise obtained payment (under any insurance policy, bylaw or otherwise) of
the amounts otherwise indemnifiable under this Agreement.
SECTION 12. BINDING EFFECT.
--------------
This Agreement shall be binding on and inure to the benefit of and be
enforceable by the parties to it and their respective successors (including any
direct or indirect successor by purchase, merger, consolidation, or otherwise to
all or substantially all of the Company's business or assets or both), assigns,
spouses, heirs, and personal and legal representatives. The Company shall
require and cause any successor (whether direct or indirect, by purchase,
merger, consolidation, or otherwise) to all, substantially all, or a substantial
part, of the Company's business or assets or both, by written agreement in form
and substance satisfactory to Indemnitee, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform if no such succession had taken place.
SECTION 13. SEVERABILITY.
------------
If any term or provision of this Agreement or the application thereof to
any person or circumstance shall, to any extent, be determined to be invalid,
illegal or unenforceable under present or future laws effective during the term
of this Agreement, then and, in that event: (A) the performance of the offending
term or provision (but only to the extent its application is invalid, illegal or
unenforceable) shall be excused as if it had never been incorporated into this
Agreement, and, in lieu of such excused provision, there shall be added a
provision as similar in terms to such excused provision as may be possible and
be legal, valid and enforceable, and (B) the remaining part of this Agreement
(including the application of the offending term or provision to persons or
circumstances other than those as to which it is held invalid, illegal or
unenforceable) shall not be affected thereby and shall continue in full force
and effect to the fullest extent provided by law.
SECTION 14. GOVERNING LAW.
-------------
This Agreement and the rights and remedies of each party arising out of or
relating to this Agreement (including, without limitation, equitable remedies)
shall be solely governed by, interpreted under, and construed and enforced in
accordance with the internal laws of the state of Delaware, without regard to
conflicts of laws principles as if this Agreement were made, and as if its
obligations are to be performed, wholly within the state of Delaware.
7
<PAGE>
SECTION 15. CONSENT TO JURISDICTION.
-----------------------
Any action or proceeding arising out of or relating to this Agreement shall
be filed in and heard and litigated solely before the state courts of California
located within the county of Ventura. Each party generally and unconditionally
accepts the exclusive jurisdiction of such courts and waives any defense or
right to object to venue in said courts based upon the doctrine of "forum non
conveniens". Each party irrevocably agrees to be bound by any judgement
rendered thereby in connection with this Agreement.
SECTION 16. NOTICES.
-------
All notices, demands, and other communications required or permitted under
this Agreement shall be made in writing and shall be deemed to have been duly
given if delivered by hand, against receipt, or mailed, certified or registered
mail, return receipt requested, and addressed to the Company at:
Variflex, Inc.
5152 North Commerce Avenue
Moorpark, California 93021
Attn: Mr. Raymond "Jay" H. Losi, II
and to counsel at:
Morrison & Foerster LLP
555 West Fifth Street
Los Angeles, California 90013
Attn: Michael C. Cohen
and to Indemnitee at:
------------------------------------
------------------------------------
------------------------------------
Notice of change of address shall be effective only when given in
accordance with this Section. All notices complying with this Section shall be
deemed to have been received on the date of delivery.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the date set forth above.
COMPANY:
Variflex, Inc., a Delaware corporation
/s/ Raymond (Jay) H. Losi II
----------------------------
Raymond (Jay) H. Losi II
Chief Executive Officer and Chief Operating
Officer
Indemnitee:
/s/ Roger M. Wasserman
----------------------
Roger M. Wasserman
9
<PAGE>
BANK OF AMERICA BUSINESS LOAN AGREEMENT
National Trust and Savings Association
________________________________________________________________________________
This Agreement dated as of _______________________, 19___, is between BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank") and Variflex, Inc.
(the "Borrower").
1. LINE OF CREDIT AMOUNT AND TERMS
1.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrower. The amount of the line of credit (the
"Commitment") is Seven Million Five Hundred Thousand Dollars ($7,500,000).
(b) This is a revolving line of credit providing for letters of credit and
shipside bonds.
(c) The Borrower agrees not to permit the outstanding amounts of any letters
of credit, including amounts drawn on letters of credit and not yet
reimbursed, and shipside bonds, to exceed the Commitment.
1.2 AVAILABILITY PERIOD. The line of credit is available between the date of
this Agreement and December 31, 1998 (the "Expiration Date") unless the Borrower
is in default.
1.3 LETTERS OF CREDIT. This line of credit may be used for financing
commercial letters of credit with a maximum maturity of 180 days but not to
extend more than 90 days beyond the Expiration Date. Each commercial letter of
credit will require drafts payable at sight. The following letters of credit are
outstanding from the Bank for the account of the Borrower:
<TABLE>
<CAPTION>
LETTER OF CREDIT NUMBER AMOUNT
----------------------- ------
<S> <C>
1025513 $ 65,000.00
1025787 163,392.00
1025844 523,000.00
1026010 200.07
1026598 3,900.00
1026599 33,795.06
1026600 161,833.90
1026950 351,948.97
1030070 435,680.37
1030177 23,230.00
1031764 445,625.00
</TABLE>
As of the date of this Agreement, these letters of credit shall be deemed to be
outstanding under this Agreement, and shall be subject to all the terms and
conditions stated in this Agreement.
The Borrower agrees:
(a) any sum drawn under a letter of credit may, at the option of the Bank, be
added to the principal amount outstanding under this Agreement. The amount
will bear interest and be due as described elsewhere in this Agreement.
(b) if there is a default under this Agreement, to immediately prepay and make
the Bank whole for any outstanding letters of credit.
1
<PAGE>
(c) the issuance of any letter of credit and any amendment to a letter of
credit is subject to the Bank's reasonable written approval and must be in
form and content reasonably satisfactory to the Bank and in favor of a
beneficiary acceptable to the Bank.
(d) to sign the Bank's form Application and Agreement for Commercial Letter of
Credit.
(e) to pay the following issuance and other fees for issuing and processing
letters of credit:
<TABLE>
<CAPTION>
<S> <C>
Issuance Fee 1 /10%, minimum $90
Amendment Fee (increases) 1 /10%, minimum $70
Amendment Fee (Other) $70
Negotiation Fee $80
</TABLE>
(f) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
1.4 SHIPSIDE BONDS. This line of credit up to a maximum face value outstanding
of Five Hundred Thousand Dollars ($500,000) may be used for financing shipside
bonds. The Borrower agrees:
(a) any sum owed to the Bank, as a result of a payment by the Bank, under a
shipside bond may, at the option of the Bank, be added to the principal
amount outstanding under this Agreement. The amount will bear interest and
be due as described elsewhere in this Agreement.
(b) if there is a default under this Agreement, to immediately prepay and make
the Bank whole for any outstanding shipside bonds.
(c) the issuance of any shipside bond is subject to the Bank's reasonable
express approval and must be in form and content satisfactory to the Bank.
(d) to sign the Bank's application, security agreement and other standard forms
for shipside bonds, and to pay any issuance and/or other fees that the Bank
notifies the Borrower will be charged for issuing and processing shipside
bonds for the Borrower.
(e) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
2. EXPENSES
2.1 REIMBURSEMENT COSTS. The Borrower agrees to reimburse the Bank for any
expenses it incurs in the preparation of this Agreement and any agreement
or instrument required by this Agreement up to a maximum of One Thousand
Dollars ($1,000). Expenses include, but are not limited to, reasonable
attorneys' fees, including any allocated costs of the Bank's in-house
counsel.
3. DISBURSEMENTS, PAYMENTS AND COSTS
3.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be made
in writing in a manner acceptable to the Bank, or by another means acceptable to
the Bank.
3.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each payment
by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
(b) made for the account of the Bank's branch selected by the Bank from time to
time;
(c) made in immediately available funds:
2
<PAGE>
(d) evidenced by records kept by the Bank. In addition, the Bank may, at its
discretion, require the Borrower to sign one or more promissory notes.
3.3 TELEPHONE and TELEFAX AUTHORIZATION.
(a) The Bank may honor telephone or telefax instructions for advances or
repayments and telefax requests for the issuance of letters of credit given
by any one of the individuals authorized to sign loan agreements on behalf
of the Borrower, or any other individual designated by any one of such
authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from the
Borrower's account number 17699-00587, or such other of the Borrower's
accounts with the Bank as designated in writing by the Borrower.
(c) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in connection
with any act resulting from telephone or telefax instructions it reasonably
believes are made by any individual authorized by the Borrower to give such
instructions. This indemnity and excuse will survive this Agreement's
termination.
3.4 DIRECT DEBIT (PRE-BILLING).
(a) The Borrower agrees that the Bank will debit the Borrower's deposit account
number 17699-00587, or such other of the Borrower's accounts with the Bank
as designated in writing by the Borrower (the "Designated Account") on the
date each payment of interest and any fees from the Borrower becomes due
(the "Due Date"). If the Due Date is not a banking day, the Designated
Account will be debited on the next banking day.
(b) Approximately 10 days prior to each Due Date, the Bank will mail to the
Borrower a statement of the amounts that will be due on that Due Date (the
'Billed Amount"). The calculation will be made on the assumption that no
new extensions of credit or payments will be made between the date of the
billing statement and the Due Date, and that there will be no changes in
the applicable interest rate.
(c) The Bank will debit the Designated Account for the Billed Amount,
regardless of the actual amount due on that date (the "Accrued Amount"). If
the Billed Amount debited to the Designated Account differs from the
Accrued Amount, the discrepancy will be treated as follows:
(i) If the Billed Amount is less than the Accrued Amount. the Billed
Amount for the following Due Date will be increased by the amount of
the discrepancy. The Borrower will not be in default by reason of any
such discrepancy.
(ii) If the Billed Amount is more than the Accrued Amount, the Billed
Amount for the following Due Date will be decreased by the amount of
the discrepancy.
Regardless of any such discrepancy, interest will continue to accrue based
on the actual amount of principal outstanding without compounding. The Bank
will not pay the Borrower interest on any overpayment.
(d) The Borrower will maintain sufficient funds in the Designated Account to
cover each debit. If there are insufficient funds in the Designated Account
or. the date the Bank enters any debit authorized by this Agreement, the
debit will be reversed.
3.6 BANKING DAYS. Unless otherwise provided in this Agreement, a banking day
is a day other than a Saturday or a Sunday on which the Bank is open for
business in California. All payments and disbursements which would be due on a
day which is not a banking day will be due on the next banking day. All payments
received on a day which is not a banking day will be applied to the credit on
the next banking day.
3
<PAGE>
3.7 TAXES. If any payments to the Bank under this Agreement are made from
outside the United States, the Borrower will not deduct any foreign taxes from
any payments it makes to the Bank. If any such taxes are imposed on any payments
made by the Borrower (including payments under this paragraph), the Borrower
will pay the taxes and will also pay to the Bank, at the time interest is paid,
any additional amount which the Bank specifies as necessary to preserve the
after-tax yield the Bank would have received if such taxes had not been imposed.
The Borrower will confirm that it has paid the taxes by giving the Bank official
tax receipts (or notarized copies) within 30 days after the due date.
3.8 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand, for the
Bank's costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitments for
credit.
3.9 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher fee
than if a 365-day year is used. Installments of principal which are not paid
when due under this Agreement shall continue to bear interest until paid.
3.10 DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, all amounts outstanding under this Agreement will
at the option of the Bank bear interest at the Bank's Reference Rate plus two
(2.00) percentage points. This will not constitute a waiver of any default.
The Reference Rate is the rate of interest publicly announced from time to time
by the Bank in San Francisco, California, as its Reference Rate. The Reference
Rate is set by the Bank based on various factors, including the Bank's costs and
desired return, general economic conditions and other factors, and is used as a
reference point for pricing some loans. The Bank may price loans to its
customers at, above, or below the Reference Rate. Any change in the Reference
Rate will take effect at the opening of business on the day specified in the
public announcement of a change in the Bank's Reference Rate.
4. CONDITIONS
The Bank must receive the following items, in form and content acceptable to the
Bank, before it is required to extend any credit to the Borrower under this
Agreement:
4.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance by
the Borrower (and any guarantor) of this Agreement and any instrument or
agreement required under this Agreement have been duly authorized.
4.2 GOVERNING DOCUMENTS. A copy of the Borrower's articles of incorporation.
4.3 OTHER ITEMS. Any other items that the Bank reasonably requires.
5. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation.
5.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
4
<PAGE>
5.2 AUTHORIZATION. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
5.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
5.4 GOOD STANDING. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
5.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement, or
obligation by which the Borrower is bound.
5.6 FINANCIAL INFORMATION. All financial and other information that has been
or will be supplied to the Bank is:
(a) sufficiently complete to give the Bank accurate knowledge of the Borrower's
(and any guarantor's) financial condition, including all material
contingent liabilities.
(b) in compliance with all government regulations that apply.
5.7 YEAR 2000 COMPLIANCE. The Borrower has conducted a comprehensive review
and assessment of the Borrower's computer applications and made inquiry of the
Borrower's key suppliers, vendors and customers with respect to the 'year 2000
problem" (that is, the risk that computer applications may not be able to
properly perform date-sensitive functions after December 31, 1999) and, based on
that review and inquiry, the Borrower does not believe the year 2000 problem
will result in a material adverse change in the Borrower's business condition
(financial or otherwise), operations, properties or prospects, or ability to
repay the credit.
5.8 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower, which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, in each case in any material
respect, except as have been disclosed in writing to the Bank.
5.9 OTHER OBLIGATIONS. The Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
5.10 INCOME TAX MATTERS. The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year.
5.11 NO TAX AVOIDANCE PLAN. The Borrower's obtaining of credit from the Bank
under this Agreement does not have as a principal purpose the avoidance of U.S.
withholding taxes.
5.12 NO EVENT OF DEFAULT. There is no event which is, or with notice or lapse of
time or both would be, a default under this Agreement.
5.13 LOCATION OF BORROWER. The Borrower's place of business (or, if the Borrower
has more than one place of business, its chief executive office) is located at
the address listed under the Borrower's signature on this Agreement.
6. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
6.1 USE OF PROCEEDS. To use the proceeds of the credit only to finance the
importation of inventory.
5
<PAGE>
6.2 USE OF PROCEEDS - INELIGIBLE Securities. Not to use, directly or
indirectly, any portion of the proceeds of the credit (including any letters of
credit) for any of the following purposes:
(a) knowingly to purchase Ineligible Securities from BancAmerica Robertson
Stephens (the "Arranger") during any period in which the Arranger makes a
market in such Ineligible Securities; or
(b) knowingly to purchase during the underwriting or placement period
Ineligible Securities being underwritten or privately placed by the
Arranger.
"Ineligible Securities" means securities which may not be underwritten or dealt
in by member banks of the Federal Reserve System under Section 16 of the Banking
Act of 1933 (12 U.S.C. (S) 24, Seventh), as amended. The Arranger is a wholly-
owned subsidiary of BankAmerica Corporation, and is a registered broker-dealer
which is permitted to underwrite and deal in certain Ineligible Securities.
6.3 FINANCIAL INFORMATION. To provide the following financial information and
statements in form and content acceptable to the Bank, and such additional
information as requested by the Bank from time to time:
(a) Within 90 days of the Borrower's fiscal year end, the Borrower's annual
financial statements. These financial statements must be audited (with an
unqualified opinion) by a Certified Public Accountant ("CPA") acceptable to
the Bank.
(b) Copies of the Borrower's Form 10-K Annual Report and Form 10-Q Quarterly
Report within 15 days after the date of filing with the Securities and
Exchange Commission.
(c) Copies of the Borrower's annual forecasts consisting of monthly balance
sheets, income statements and cash flows not later than 60 days prior to
the Expiration Date.
(d) Within 15 days of each quarter end, the Borrower shall provide to the Bank
copies of statements from depository institutions or brokerage firms, or
other evidence acceptable to the Bank of the Borrower's liquid assets.
6.4 TANGIBLE NET WORTH. To maintain tangible net worth equal to at least Forty
Million Dollars (S40,000,000). Tangible net worth" means the gross book value
of the Borrower's assets (excluding up to Six Million Dollars (S6,000,000) in
goodwill generated by an acquisition, and excluding patents, trademarks, trade
names, organization expense, treasury stock, unamortized debt discount and
expense, capitalized or deferred research and development costs, deferred
marketing expenses, deferred receivables, and other like intangibles, and) less
total liabilities, including but not limited to accrued and deferred income
taxes, and any reserves against assets.
6.5 TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO. To maintain a ratio of
total liabilities to tangible net worth not exceeding .50:1. "Total liabilities"
means the sum of current liabilities plus long term liabilities. For the
purposes of this paragraph, total liabilities shall include undrawn amounts of
outstanding letters of credit.
6.6 LIQUIDITY. To maintain unencumbered liquid assets equal to at least Ten
Million Dollars (S10,000,000). "Liquid assets" means the following assets of
the Borrower:
(a) cash and certificates of deposit:
(b) U. S. treasury bills and other obligations of the federal government;
(c) readily marketable securities (including commercial paper, but excluding
restricted stock and stock subject to the provisions of Rule 144 of the
Securities and Exchange Commission);
(d) bankers' acceptances issued by financial institutions;
(e) repurchase agreements covering U. S. government securities;
6
<PAGE>
(f) readily marketable obligations of states and municipalities.
If more than 25% of the value of the Borrower's liquid assets is represented by
margin stock, the Borrower will provide the Bank a Form U-1 Purpose Statement,
and the Bank and the Borrower will comply with the restrictions imposed by
Regulation U of the Federal Reserve, which may require a reduction in the amount
of credit provided to the Borrower.
6.7 OTHER DEBTS. Not to have outstanding or incur any direct or contingent
liabilities (other than those to the Bank), or become liable for the liabilities
of others without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of business.
(c) Obtaining surety bonds in the usual course of business.
(d) Indebtedness assumed in connection with transactions permitted in Paragraph
6.17(g) below.
6.8 OTHER LIENS. Not to create, assume, or allow any security interest or lien
(including judicial liens) on property the Borrower now or later owns, except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing to the
Bank.
6.9 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any lawsuit over Five Hundred Thousand Dollars (S500,000) against the
Borrower (or any guarantor).
(b) any substantial dispute between the Borrower (or any guarantor) and any
government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's (or any guarantor's) business
condition (financial or otherwise), operations, properties or prospects, or
ability to repay the credit.
(e) any change in the Borrower's name, legal structure, place of business, or
chief executive office if the Borrower has more than one place of business.
6.10 BOOKS AND RECORDS. To maintain adequate books and records.
6.11 AUDITS. To allow the Bank and its agents to inspect the Borrower's
properties and examine, audit and make copies of books and records at any
reasonable time. If any of the Borrower's properties, books or records are in
the possession of a third party. the Borrower authorizes that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.
6.12 COMPLIANCE WITH Laws. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.
6.13 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges,
and franchises the Borrower now has.
7
<PAGE>
6.14 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or replacements
to keep the Borrower's properties in good working condition.
6.15 COOPERATION. To take any action reasonably requested by the Bank to carry
out the intent of this Agreement.
6.16 GENERAL BUSINESS INSURANCE. To maintain insurance as is usual for the
business it is in.
6.17 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, or other combination, or become a
partner in a partnership, a member of a joint venture , or a member of a
limited liability company.
(d) sell, assign, lease, transfer or otherwise dispose of any assets for less
than fair market value, or enter into any agreement to do so.
(e) sell, assign, lease, transfer or otherwise dispose of all or a substantial
part of the Borrower's business or the Borrower's assets.
(f) enter into any sale and leaseback agreement covering any of its fixed or
capital assets.
(g) acquire or purchase a business or its assets or enter into a joint venture,
unless the total consideration for such acquisition or purchase (including
assumption of debt or capital contributions) would not exceed Five Million
Dollars (S5,000,000).
(h) voluntarily suspend its business for more than 7 consecutive days in any 30
day period.
7. DEFAULT
If any of the following events occurs, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to the Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.
8.1 FAILURE TO PAY. The Borrower fails to make a payment under this Agreement
when due.
8.2 FALSE INFORMATION. The Borrower has given the Bank materially false or
misleading information or representations.
8.3 BANKRUPTCY. The Borrower (or any guarantor) files a bankruptcy petition, a
bankruptcy petition is filed against the Borrower (or any guarantor) or the
Borrower (or any guarantor) makes a general assignment for the benefit of
creditors.
8.4 RECEIVERS. A receiver or similar official is appointed for the Borrower's
(or any guarantor's) business, or the business is terminated.
8.5 LAWSUITS. Any lawsuit or lawsuits are filed on behalf of one or more trade
creditors against the Borrower in an aggregate amount of One Hundred Thousand
Dollars (S100,000) or more in excess of any insurance coverage.
8
<PAGE>
8.6 JUDGMENTS. Any judgments or arbitration awards are entered against the
Borrower (or any guarantor), or the Borrower (or any guarantor) enters into any
settlement agreements with respect to any litigation or arbitration, in an
aggregate amount of One Hundred Thousand Dollars ($100,000) or more in excess of
any insurance coverage.
8.7 GOVERNMENT ACTION. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's (or any guarantor's)
financial condition or ability to repay.
8.8 MATERIAL ADVERSE CHANGE. A material adverse change occurs, or is
reasonably likely to occur, in the Borrower's (or any guarantor's) business
condition (financial or otherwise), operations, properties or prospects, or
ability to repay the credit.
8.9 CROSS-DEFAULT. Any default occurs under any agreement in connection with
any credit the Borrower (or any guarantor) has obtained from anyone else or
which the Borrower (or any guarantor) has guaranteed in the amount of Five
Hundred Thousand Dollars (S500,000) or more in the aggregate
8.10 OTHER BANK AGREEMENTS. The Borrower (or any guarantor) fails to meet the
conditions of, or fails to perform any obligation under any other agreement the
Borrower (or any guarantor) has with the Bank or any affiliate of the Bank. If,
in the Bank's opinion, the breach is capable of being remedied. the breach will
not be considered an event of default under this Agreement for a period of 30
days after the date on which the Bank gives written notice of the breach to the
Borrower-, provided, however, that the Bank will not be obligated to extend any
additional credit to the Borrower during that period.
8.11 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the conditions
of, or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article. This includes any failure or
anticipated failure by the Borrower to comply with any financial covenants set
forth in this Agreement, whether such failure is evidenced by financial
statements delivered to the Bank or is otherwise known to the Borrower or the
Bank. If, in the Bank's opinion, the breach is capable of being remedied, the
breach will not be considered an event of default under this Agreement for a
period of 30 days after the date on which the Bank gives written notice of the
breach to the Borrower; provided, however, that the Bank will not be obligated
to extend any additional credit to the Borrower during that period.
9. ENFORCING THIS AGREEMENT; MISCELLANEOUS
9.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
9.2 CALIFORNIA LAW. This Agreement is governed by California law.
9.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and
the Bank's successors and assignees. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the right
of set-off against the Borrower.
9.4 ARBITRATION.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those that
arise from:
(i) This Agreement (including any renewals, extensions or modifications of
this Agreement);
(ii) Any document. agreement or procedure related to or delivered in
connection with this Agreement;
9
<PAGE>
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted between
the Borrower and the Bank, including claims for injury to persons,
property or business interests (torts).
(b) At the request of the Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United States
Arbitration Act. The United States Arbitration Act will apply for this
purposes even though this Agreement provides that it is governed by
California law.
(c) Arbitration proceedings will be administered by the American Arbitration
Association and will be subject to its commercial rules of arbitration.
(d) For purposes of the application of the statute of limitations, the filing
of an arbitration pursuant to this paragraph is the equivalent of the
filing of a lawsuit, and any claim or controversy which may be arbitrated
under this paragraph is subject to any applicable statute of limitations.
The arbitrators will have the authority to decide whether any such claim or
controversy is barred by the statute of limitations and, if so, to dismiss
the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the arbitrators
will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be submitted
to any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy or claim,
at the time of the proposed submission to arbitration, arises from or
relates to an obligation to the Bank secured by real property located in
California. In this case, both the Borrower and the Bank must consent to
submission of the claim or controversy to arbitration. If both parties do
not consent to arbitration, the controversy or claim will be settled as
follows:
(i) The Borrower and the Bank will designate a referee (or a panel of
referees) selected under the auspices of the American Arbitration
Association in the same manner as arbitrators are selected in
Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be appointed
by a court as provided in California Code of Civil Procedure Section
638 and the following related sections;
(iii) The referee (or the presiding referee of the panel) will be an active
attorney or a retired judge; and
(iv) The award that results from the decision of the referee (or the
panel) will be entered as a judgment in the court that appointed the
referee, in accordance with the provisions of California Code of
Civil Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrower or the Bank to:
(i) exercise self-help remedies such as setoff'.
(ii) foreclose against or sell any real or personal property collateral;
or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(a) an interim remedy: and/or
(b) additional or supplementary remedies.
10
<PAGE>
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower or the Bank, including the
suing party, to submit the controversy or claim to arbitration if the other
party contests the lawsuit. However, if the controversy or claim arises
from or relates to an obligation to the Bank which is secured by real
property located in California at the time of the proposed submission to
arbitration, this right is limited according to the provision above
requiring the consent of both the Borrower and the Bank to seek resolution
through arbitration.
(j) If the Bank forecloses against any real property securing this Agreement,
the Bank has the option to exercise the power of sale under the deed of
trust or mortgage, or to proceed by judicial foreclosure.
9.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Bank retains all rights, even if
ft makes a loan after default. If the Bank waives a default, it may enforce a
later default. Any consent or waiver under this Agreement must be in writing.
9.6 ADMINISTRATION COSTS. The Borrower shall pay the Bank for all reasonable
out-of-pocket costs incurred by the Bank in connection with administering this
Agreement.
9.7 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any reasonable
costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and including
any amendment, waiver, "workout" or restructuring under this Agreement arising
prior to commencement of a lawsuit or arbitration proceeding. The prevailing
party is entitled to recover costs and reasonable attorneys' fees incurred in
connection with the lawsuit or arbitration proceeding, as determined by the
court or arbitrator. In the event that any case is commenced by or against the
Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar
or successor statute, the Bank is entitled to recover costs and reasonable
attorneys' fees incurred by the Bank related to the preservation, protection, or
enforcement of any rights of the Bank in such a case. As used in this paragraph,
"attorneys' fees" includes the allocated costs of in-house counsel
9.8 ONE AGREEMENT. This Agreement and any related security or other agreements
required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank and
the Borrower concerning this credit; and
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
9.9 INDEMNIFICATION. The Borrower will indemnify and hold the Bank harmless
from any loss, liability, damages, judgments, and costs of any kind relating to
or arising directly or indirectly out of (a) this Agreement or any document
required hereunder, (b) any credit extended or committed by the Bank to the
Borrower hereunder, and (c) any litigation or proceeding related to or arising
out of this Agreement, any such document, or any such credit. This indemnity
includes but is not limited to attorneys' fees (including the allocated cost of
in-house counsel). This indemnity extends to the Bank, its parent, subsidiaries
and all of their directors, officers, employees, agents, successors, attorneys,
and assigns. This indemnity will survive repayment of the Borrower's obligations
to the Bank. All sums due to the Bank hereunder shall be obligations of the
Borrower, due and payable immediately without demand.
11
<PAGE>
9.10 NOTICES. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrower may specify from time to time in writing.
9.11 HEADINGS. Article and paragraph headings are for reference only and shall
not affect the interpretation or meaning of any provisions of this Agreement.
9.12 COUNTERPARTS. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate counterparts
each of which, when so executed, shall be deemed an original but all such
counterparts shall constitute but one and the same agreement.
9.13 PRIOR AGREEMENT SUPERSEDED. This Agreement supersedes the Business Loan
Agreement entered into as of February 3, 1997, between the Bank and the
Borrower, and any credit outstanding thereunder shall be deemed to be
outstanding under this Agreement.
This Agreement is executed as of the date stated at the top of the first page.
<TABLE>
<CAPTION>
<S> <C>
BANK OF AMERICA VARIFLEX, INC.
NATIONAL TRUST AND SAVINGS ASSOCIATION
X /s/ Timothy J. Egan X /s/ William B. Ogden
------------------------------------------------- -------------------------------------------------
By: Timothy J. Egan By: William B. Ogden
---------------------------------------------- ----------------------------------------------
Title: Vice President Title Chief Financial Officer
ADDRESS WHERE NOTICES TO THE BANK ARE TO BE ADDRESS WHERE NOTICES TO THE BORROWER ARE TO BE
SENT: SENT:
International Trade Bank Office - Southwest #1769 5152 North Commerce Avenue
333 South Beaudry Avenue, 20th Floor Moorpark, CA 93021
Los Angeles, CA 90017
</TABLE>
12
<PAGE>
SECOND AMENDMENT TO 1994 VARIFLEX STOCK PLAN
This SECOND AMENDMENT TO 1994 VARIFLEX STOCK PLAN (the "Amendment") was
adopted by all of the members of the Plan Committee (the "Committee") of
Variflex, Inc., a Delaware corporation (the "Company"), effective as of August
1, 1998.
RECITALS
A. Plan. In March of 1994, the Board of Directors of the Company (the
----
"Board") and the Stockholders of the Company adopted that certain 1994 Variflex
Stock Plan (the "Plan"). The Plan sets forth the rules and regulations for
granting shares of the Company's stock to its directors, officers and employees.
B. Amendment to Plan. The Committee desires to amend the Plan as set
-----------------
forth in this Amendment.
NOW, THEREFORE, the Committee hereby adopts the following amendments to the
Plan:
1. Section 4(a) Authorized Shares. The fourth line of Section 4(a) is
-------------------------------
hereby amended by deleting the words "two hundred thousand (200,000)" and
replacing them with the words "six hundred thousand (600,000)".
2. Effect of this Amendment. Except where conflicting or inconsistent
------------------------
with the express provisions or manifest intent of this amendment, all provisions
of the Plan as in effect prior to this Amendment are and shall remain in full
force and effect. Wherever there is a conflict or inconsistency between any of
the provisions in this amendment and the Plan, the provisions of this amendment
shall govern and control.
3. Governing Law. The validity of this Amendment, its construction,
-------------
interpretation and enforcement, shall be determined under, governed by and
construed in accordance with, with laws of the State of California (without
regard to its choice or conflicts of laws principles), except to the extent that
the federal laws preempt the laws of the State of California.
/s/ Loren Hildebrand
--------------------
Loren Hildebrand
/s/ Michael T. Carr
-------------------
Michael T. Carr
1
<PAGE>
VARIFLEX, INC.
1998 STOCK OPTION PLAN AND COMPENSATION PLAN FOR NON-EMPLOYEE
DIRECTORS
1. PURPOSE. The purpose of the Variflex, Inc. Stock Option Plan and
Compensation Plan for Non-Employee Directors (the "PLAN") is to promote the
interests of Variflex, Inc. (the "COMPANY") and its stockholders by
strengthening the Company's ability to attract and retain the services of
experienced and knowledgeable non-employee directors and by encouraging such
directors to acquire an increased proprietary interest in the Company.
2. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided in
Article 6.11, the total number of shares of common stock (the "COMMON STOCK") of
the Company for which options may be granted under the Plan shall be 250,000
shares of Common Stock (the "SHARES"). The Shares shall be shares currently
authorized but unissued or currently held or subsequently acquired by the
Company as treasury shares, including shares purchased in the open market or in
private transactions. If any option granted under the Plan expires or
terminates for any reason without having been exercised in full, the Shares
subject to, but not delivered under, such options may become available for that
grant of other options under the Plan. No shares delivered to the Company in
full or partial payment of an option exercise price payable pursuant to Section
6.3 shall become available for the grant of other options under the Plan.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Compensation Committee of the Company's Board of Directors (the "COMMITTEE").
Subject to the terms of the Plan, the Committee shall have the power to construe
the provisions of the Plan, to determine all questions arising thereunder, and
to adopt and amend such rules and regulations for administering the Plan as the
Committee deems desirable.
4. PARTICIPATION IN THE PLAN. Each member of the Company's Board of
Directors (a "DIRECTOR") who is not otherwise an employee of the Company or any
subsidiary of the Company and who is not otherwise engaged as a consultant to
the Company or any subsidiary of the Company (an "ELIGIBLE DIRECTOR") shall be
eligible to participate in the Plan.
5. NONSTATUTORY STOCK OPTIONS. All options granted under the Plan shall
be nonstatutory options not intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended.
6. OPTION TERMS. Each option granted to an Eligible Director under the
Plan and the issuance of Shares thereunder shall be subject to the following
terms:
6.1 Option Agreements. Each option granted under the Plan shall be
-----------------
evidenced by an option agreement (an "AGREEMENT") duly executed on behalf of the
Company and by the Eligible Director to whom such option is granted and dated as
of the applicable date
<PAGE>
of grant. Each Agreement shall be signed on behalf of the Company by an officer
or officers delegated with such authority by the Committee using either manual
or facsimile signature. Each Agreement shall comply with and be subject to the
terms and conditions of the Plan. Any Agreement may contain such other terms,
provisions and conditions not inconsistent with the Plan as may be determined by
the Committee.
6.2 Option Grant Size and Grant Dates.
---------------------------------
6.2.1 Initial Grants. An option to purchase 4,000 Shares as
--------------
adjusted pursuant to Article 6.11 (an "INITIAL GRANT") shall be granted to
a. each Director who is an Eligible Director on the Effective
Date (as hereinafter defined), and
b. each other Eligible Director immediately following the date
on which such Director is first elected or appointed as a Director of
the Company, whichever first occurs; provided, that if an Eligible
Director who previously received an Initial Grant terminates service
as a Director and is subsequently elected or appointed to the Board,
such Director shall not be eligible to receive a second Initial Grant,
but shall be eligible to receive only Annual Grants as provided in
Section 6.2.2.
6.2.2 Annual Grants. An option to purchase 2,000 Shares as
-------------
adjusted pursuant to Article 6.11 (an "ANNUAL GRANT"), shall be granted
automatically each year to each Eligible Director who is re-elected or re-
appointed as a Director of the Company and has already received an Initial
Grant, such grant to be made immediately following the date on which such re-
election or re-appointment occurs.
6.3 Option Exercise Price. Each Agreement shall state the exercise
---------------------
price per share of the shares of Common Stock to which it relates. The exercise
price per share of Common Stock subject to an option shall not be less than 100%
of the fair market value ("FAIR MARKET VALUE") per share of such Common Stock at
the close of business on the day of the grant of the option. For purposes of
this Plan, Fair Market Value on any date shall be the closing price per share of
Common Stock on such date as reported on the Nasdaq National Market.
6.4 Exercisability. Subject to Section 6.7, an option shall become
--------------
exercisable on the first business day prior to the first anniversary of the day
on which such option was granted, if the optionee has continued to serve as an
Eligible Director until that day.
6.5 Time and Manner of Option Exercise. Any vested and exercisable
----------------------------------
option is exercisable in whole or in part at any time or from time to time
during the term of the option by giving written notice, signed by the person
exercising the option, to the Company stating the number of Shares with respect
to which the option is being exercised, accompanied by payment in full of the
option exercise price for the number of Shares to be purchased and by the
payment or making provision satisfactory to the Company for the payment of any
taxes which the
2
<PAGE>
Company is obligated to collect with respect to the issue or transfer of the
Shares upon such exercise. The date both such notice and payment are received by
the office of the Secretary of the Company shall be the date of exercise for the
stock option as to such number of Shares. No option may at any time be exercised
with respect to a fractional Share.
6.6 Payment of Exercise Price. Payment of the option exercise price
-------------------------
may be in cash or payment may be in whole or part by:
a. transfer to the Company of shares of Common Stock having a
Fair Market Value equal to the option exercise price at the time of
such exercise, or
b. delivery of instructions to the Company to withhold Shares,
that would otherwise be issued on such exercise of the option, having
a Fair Market Value at the time of such exercise equal to the total
option exercise price of the options being exercised.
If the Fair Market Value of the number of whole shares transferred or the
number of whole option Shares surrendered is less than the total exercise price
of the option being exercised, the shortfall must be made up in cash.
6.7 Terms of Options. Each option shall expire ten years from its
----------------
date of grant, but shall be subject to earlier termination as follows:
a. In the event of the termination of an optionee's services as
an Eligible Director by reason of voluntary mid-term retirement,
declining to stand for re-election, becoming a full time employee of
the Company or a subsidiary of the Company or becoming disabled, all
options granted pursuant to this Plan but unexercisable pursuant to
Section 6.4 shall automatically expire and shall not be exercisable
and all options exercisable pursuant to Section 6.4 but unexercised
shall continue to be exercisable until the stated expiration date of
such options.
b. In the event of the death of an optionee while the optionee
is an Eligible Director, the then outstanding options of such optionee
that have vested pursuant to Section 6.4 shall be exercisable for one
year from the date of the death of the optionee or until the stated
grant expiration date, whichever is earlier, by his/her successors in
interest, in accordance with the paragraph below. However, all
options which have been granted, but have not become exercisable
pursuant to Section 6.4, shall automatically expire.
c. In the event of the termination of an optionee's service as a
Director by the Board of Directors for cause or the failure of such
Director to be re-elected (other than for the reasons set forth in
Section 6.7(a) or (b)), the Committee in its sole discretion can
cancel the then-outstanding options of such optionee, including those
options which are exercisable and such options shall automatically
expire and become non-exercisable on the effective date of such
termination.
3
<PAGE>
Exercise of a deceased optionee's options that are still exercisable shall
be by the estate of such optionee or by a person or persons whom the optionee
has designated in writing filed with the Company, or, if no such designation has
been made, by the person or persons to whom the optionee's rights have passed by
will or the laws of descent and distribution.
6.8 Transferability. The right of any optionee to exercise an option
---------------
granted under the Plan shall, during the lifetime of such optionee, be
exercisable only by the optionee and shall not be assignable or transferable by
such optionee other than by will or the laws of descent and distribution.
6.9 Limitation of Rights.
--------------------
6.9.1 Limitation as to Shares. Neither the recipient of an
-----------------------
option under the Plan nor an optionee's successor or successors in interest
shall have any rights as a stockholder of the Company with respect to any Shares
subject to an option granted to such person until the date of issuance of a
stock certificate for such Shares.
6.9.2 Limitation as to Directorship. Neither the Plan, nor
-----------------------------
the granting of an option, nor any other action taken pursuant to the Plan shall
constitute or be evidence of any agreement or understanding, express or implied,
that an Eligible Director has a right to continue as a Director for any period
of time or at any particular rate of compensation.
6.10 Regulatory Approval and Compliance. The Company shall not be
----------------------------------
required to issue any certificate or certificates for Shares upon the exercise
of an option granted under the Plan or to record as a holder of record of Shares
the name of the individual exercising an option under the Plan, without
obtaining to the complete satisfaction of the Committee the approval of all
regulatory bodies deemed necessary by the Committee and without complying, to
the Committee's complete satisfaction, with all rules and regulations under
federal, state, or local law deemed applicable by the Committee.
6.11 Capital Adjustments. The aggregate number and class of Shares
-------------------
subject to and authorized by the Plan, the number of class of Shares with
respect to which an option may be granted to an Eligible Director under the Plan
as provided in Article 6, the number and class of Shares subject to each
outstanding option, and the exercise price per share specified in each such
option shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a split-up or
consolidation of shares or any like capital adjustment or the payment of any
stock dividend, or other increase or decrease in the number of such Shares
effected without receipt of consideration by the Company.
7. COMPENSATION OF ELIGIBLE DIRECTORS. In addition to the Initial and
Annual Grants provided for in Article 6 above, each Eligible Director shall
receive the following amounts:
7.1 Personal Attendance at Board Meetings. One Thousand Dollars
-------------------------------------
($1,000) for each meeting of the Board of Directors of the Company which such
Eligible Director attends in person.
4
<PAGE>
7.2 Personal Attendance at Committee Meetings. Five Hundred Dollars
-----------------------------------------
($500) for each committee meeting of the Board of Directors of the Company which
such Eligible Director attends in person. No Eligible Director shall receive
compensation as set forth in this Section 7.2 for any Committee meetings
attended in connection with the Plan or for any meetings attended as a member of
the "Plan Committee" under the 1994 Variflex Stock Plan.
7.3 Participation Other Than in Person. Two Hundred Fifty Dollars
----------------------------------
($250) for each meeting of the Board of Directors or any committee thereof of
the Company which such Eligible Director does not personally attend but in which
he or she participates by telephone.
8. EFFECTIVE DATE AND TERM OF THE PLAN. The Plan shall be effective as of
March 16, 1998 (the "EFFECTIVE DATE"). The Plan shall continue in effect until
it is terminated by action of the Board of Directors of the Company or by the
Company's stockholders, but such termination shall not affect the terms of
outstanding options.
This Plan has been adopted by the entire Board of Directors, including the
non-employee directors, and ratified and approved by the written consent of the
holders of a majority of outstanding capital stock.
/s/ Randall L. Bishop
----------------------------
Randall L. Bishop, Secretary
5
<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>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 7,522
<SECURITIES> 20,147
<RECEIVABLES> 8,618
<ALLOWANCES> 413
<INVENTORY> 6,483
<CURRENT-ASSETS> 44,166
<PP&E> 4,913
<DEPRECIATION> 4,412
<TOTAL-ASSETS> 44,755
<CURRENT-LIABILITIES> 4,883
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 39,863
<TOTAL-LIABILITY-AND-EQUITY> 44,755
<SALES> 43,148
<TOTAL-REVENUES> 43,148
<CGS> 36,531
<TOTAL-COSTS> 36,531
<OTHER-EXPENSES> 10,780
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,704)
<INCOME-TAX> 784
<INCOME-CONTINUING> (3,488)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,488)
<EPS-PRIMARY> (.58)
<EPS-DILUTED> (.58)
</TABLE>
