<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: Commission File No.:
October 31, 1999 0-24338
VARIFLEX, INC.
(Exact name of Registrant as specified in its charter)
Delaware 95-3164466
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
5152 North Commerce Avenue
Moorpark, California 93021
(Address of principal executive offices)
Registrant's telephone number, including area code:
(805) 523-0322
_____________________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- ______
As of December 13, 1999, there were 5,000,343 shares of Common Stock, $.001 par
value, outstanding.
<PAGE>
VARIFLEX, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at
October 31, 1999 and July 31, 1999........................ 3
Consolidated Statements of Operations for the
Three Months Ended October 31, 1999 and 1998.............. 4
Consolidated Statements of Cash Flows for the
Three Months Ended October 31, 1999 and 1998.............. 5
Notes to Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 9
Part II - Other Information
Item 1. Legal Proceedings......................................... 14
Item 5. Other Information......................................... 14
Item 6. Exhibits and Reports on Form 8-K.......................... 14
</TABLE>
2
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
VARIFLEX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
October 31, July 31,
1999 1999
----------- --------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,221 $ 5,343
Marketable securities available for sale 19,661 19,892
Trade accounts receivable, less allowances of $432 and
$430 as of October 31, 1999 and July 31, 1999, respectively 7,495 6,900
Inventory (finished goods) 7,489 5,194
Inventory (raw materials and work-in-process) 700 554
Deferred income taxes 671 604
Prepaid expenses and other current assets 399 641
------- -------
Total current assets 41,636 39,128
Property and equipment, net 275 283
Other assets 1,312 1,206
------- -------
Total assets $43,223 $40,617
======= =======
Liabilities and stockholders' equity
Current liabilities:
Trade acceptances payable $ 1,728 $ 133
Accounts payable 1,707 466
Accrued warranty 982 844
Accrued salaries and related liabilities 348 410
Accrued co-op advertising 1,884 1,612
Accrued returns and allowances 547 429
Accrued product liability claims 280 267
Income taxes payable 48 272
Other accrued expenses 689 623
------- -------
Total current liabilities 8,213 5,056
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares
authorized, none issued and outstanding - -
Common stock, $.001 par value, 40,000,000 shares
authorized, 6,025,397 issued and outstanding as of
October 31, 1999 and July 31, 1999 9 9
Common stock warrants 702 702
Additional paid-in capital 21,023 21,023
Retained earnings 19,438 19,333
Accumulated other comprehensive loss (3,088) (2,432)
Treasury stock, at cost, 512,979 shares as of
October 31, 1999 and July 31, 1999 (3,074) (3,074)
------- -------
Total stockholders' equity 35,010 35,561
------- -------
Total liabilities and stockholders' equity $43,223 $40,617
======= =======
</TABLE>
See accompanying notes.
3
<PAGE>
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
October 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net sales $ 9,503 $ 8,876
Cost of goods sold 7,587 7,222
--------- ----------
Gross profit 1,916 1,654
--------- ----------
Operating expenses:
Selling and marketing 882 956
General and administrative 1,435 1,092
--------- ----------
Total operating expenses 2,317 2,048
--------- ----------
Loss from operations (401) (394)
--------- ----------
Other income (expense):
Interest income and other 506 502
--------- ----------
Total other income (expense) 506 502
--------- ----------
Income before income taxes 105 108
Provision for income taxes - -
--------- ----------
Net income $ 105 $ 108
========= ==========
Net income per share of common stock:
Basic $ 0.02 $ 0.02
========= ==========
Diluted $ 0.02 $ 0.02
========= ==========
Weighted average share outstanding:
Basic 5,512 6,025
========= ==========
Diluted 5,650 6,047
========= ==========
</TABLE>
See accompanying notes.
4
<PAGE>
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
October 31,
--------------------------
1999 1998
------- ------
<S> <C> <C>
Operating activities
Net income $ 105 $ 108
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 59 98
Deferred income taxes (67) -
Loss on sale of marketable securities 2 2
Changes in operating assets and liabilities:
Trade accounts receivable (595) (410)
Inventory (2,441) (862)
Prepaid expenses and other current assets 242 420
Trade acceptances payable 1,595 864
Accounts payable 1,241 552
Other current liabilities 321 677
------- ------
Net cash provided by operating activities 462 1,449
------- ------
Investing activities
Purchases of property and equipment (41) (75)
Proceeds from sale of assets 4
Gross purchases of available-for-sale securities (425) (412)
Gross sales of available-for-sale securities - 2
Other assets (122) 3
------- ------
Net cash used in investing activities (584) (482)
------- ------
Financing activities - -
Net increase (decrease) in cash (122) 967
Cash and cash equivalents at beginning of period 5,343 7,522
------- ------
Cash and cash equivalents at end of period $ 5,221 $8,489
======= ======
Cash paid during the period for:
Interest - -
Income taxes $ 289 -
</TABLE>
See accompanying notes.
5
<PAGE>
VARIFLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended October 31, 1999
are not necessarily indicative of the results that may be expected for the full
fiscal year. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
fiscal year ended July 31, 1999.
Note 2. Reclassifications
Certain reclassifications have been made to the fiscal 1999 financial
statements to conform with fiscal 2000 presentation.
Note 3. Earnings per Share
Basic earnings per share excludes any dilutive effects of options, warrants
and convertible securities. Diluted earnings per share includes the dilutive
effects of stock options and warrants. For the three months ended October 31,
1999 and 1998 the number of shares used in the calculation of diluted earnings
per share included 138,096 shares and 21,820 shares, respectively, issuable
under stock options and warrants using the treasury stock method.
Note 4. Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Company's net income or stockholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities to be included in other comprehensive income
(loss).
Total comprehensive income (loss), which consists of net income (loss) and
other comprehensive income (loss) for the period, amounted to ($551,000) and
($1,821,000), respectively, for the three months ended October 31, 1999 and
1998.
6
<PAGE>
Note 5. Segment Information
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosures about Segments of an Enterprise and Related Information," was
issued in 1997 effective for fiscal years beginning subsequent to December 15,
1997, and therefore, was adopted by the Company for the 1999 fiscal year. The
Company has determined, based on its internal system of management reporting and
since it assesses performance as a single operating unit, that during the three
months ended October 31, 1999 and 1998, it operated in only one segment.
Sales of similar products for that segment are as follows:
<TABLE>
<CAPTION>
Three months ended
October 31,
---------------------------------
1999 1998
--------------- --------------
(In thousands)
<S> <C> <C>
In-line skates $ 6,248 $ 4,943
Skateboards 1,197 1,589
Canopies 907 701
Other 1,494 2,041
--------------- -------------
Total gross sales 9,846 9,274
Returns and allowances (343) (398)
--------------- -------------
Total net sales $ 9,503 $ 8,876
=============== =============
</TABLE>
Note 6. 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 (a)
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 infringes plaintiff's trade dress, and (b) 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 (a) alleges that the Company's Quik Shade(R)
product infringes two patents owned by the plaintiff and (b) 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 and restitution for unfair competition violations.
On September 8, 1999 the Court allowed plaintiffs Carter and E-Z Up to
amend their Complaint to state an additional claim against the Company for
alleged infringement of an additional patent. The Company has answered this
amended Complaint, denying its material allegations, and pleading an amended
counterclaim for similar alleged wrongs as previously pleaded in its
counterclaim.
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
7
<PAGE>
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. Service
Merchandise filed an answer to the Complaint in the Central District of
California (Los Angeles) action. Thereafter, the plaintiff dismissed without
prejudice the Northern District of California action, and the claim proceeded in
the Los Angeles action. Thereafter, Service Merchandise filed a Chapter 11
bankruptcy petition, so the case is now stayed as to that defendant only. No
party has taken action to obtain an order for relief from the automatic stay as
to defendant Service Merchandise.
The Los Angeles action has had extensive discovery taken, with a trial date
set for February 8, 2000. Recently the Denver action was ordered transferred to
the federal court in Los Angeles, with a recommendation for consolidation with
the previously pending Los Angeles action. The Los Angeles court has not yet
acted to consolidate the two actions. The transfer of the Denver action to Los
Angeles and the addition of the new patent in suit probably will result in a 90
day continuance of the existing trial date by agreement of the parties, subject
to the approval of the Court. The parties have submitted to the Court a
stipulation and proposed order to continue the trial date to May 2, 2000, with
corresponding 90 day extensions of related pretrial dates.
On October 21, 1999, the Court denied a motion for summary judgement by
Variflex directed against plaintiffs' trade dress infringement claims due to the
existence of triable issues of material fact concerning such claims. This order
will allow plaintiffs' trade dress infringement claims to go to trial and be
determined by a jury.
On November 29, 1999 counterclaim defendants Carter and E-Z Up filed a
motion for summary judgement against Variflex regarding Variflex's antitrust and
related counterclaims. The hearing on this motion is set for February 7, 2000.
Variflex in turn plans to file a motion for summary judgement on plaintiffs'
patent infringement claims, which motion is expected to be filed in or around
January, 2000.
In the Carter action, SAFECO Insurance Company of America has agreed to
provide a defense with a reservation of rights. SAFECO denies coverage for the
patent claims and reserves rights as to trade dress and advertising injury
claims, asserting numerous defenses to coverage. On September 28, 1999 SAFECO
filed, and on October 11, 1999 caused to be served on the Company, a Complaint
for Declaratory Relief entitled SAFECO Insurance Company of America vs.
Variflex, Inc., et al., (Case No. BC217286) in the Superior Court of the State
of California for the County of Los Angeles ("the Coverage Action"). The
Coverage Action asserts a single cause of action for declaratory relief by which
SAFECO seeks a declaration concerning seven different theories of defense to
coverage liability in the underlying Carter action. The Company answered the
Coverage Action, denying its material allegations. SAFECO has propounded
requests for admissions and interrogatories to the Company, to which responses
are due on December 29, 1999. Before that date, the Company plans to file a
motion to stay the Coverage Action pending the outcome of the underlying action.
The Company intends vigorously to defend the Coverage Action. Further, based on
a recent judicial decision, the Company also will tender to SAFECO the defense
of the Lynch action referenced above.
The Company believes it has meritorious defenses to the claims alleged in
the Carter and Lynch 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.
8
<PAGE>
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, results of operations or cash flows.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Overview
--------
The Company is a leading distributor and wholesaler in the United States of
in-line skates, skateboards, recreational safety helmets and athletic protective
equipment (such as wrist guards, elbow pads and knee pads used by skaters and
skateboarders) to the mass market. The Company also sells Quik Shade(R), a
convenient and innovative portable instant canopy, snowboards and related
accessories, and the Airzone(TM) "springless" trampoline. 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 in foreign countries.
Results of Operations
---------------------
Net Sales. Net sales for the first quarter of fiscal 2000 (the quarter
---------
ended October 31, 1999) totaled $9,503,000 compared to $8,876,000 for the first
quarter of fiscal 1999, representing an increase of $627,000, or 7%. The
increase in net sales primarily resulted from increases in sales of the
Company's in-line skates, canopies, and athletic protective equipment, offset to
a lesser degree by decreases in sales of skateboards and snowboards. Net sales
were also adversely affected by competitive pressures on in-line skates, which
caused sales prices to decline in this product category.
The following table shows the Company's major product categories as a
percentage of total gross sales:
<TABLE>
<CAPTION>
Quarter Ended October 31,
1999 1998
---- ----
<S> <C> <C>
In-line skates 64% 54%
Skateboards and scooters 12% 19%
Canopies 9% 8%
Recreational safety helmets 6% 6%
Athletic protective equipment 5% 3%
Snowboards 1% 8%
Trampolines 1% -
Other 2% 2%
---- ----
Total 100% 100%
==== ====
</TABLE>
9
<PAGE>
Gross Profit. Gross profit for the first quarter of fiscal 2000 totaled
------------
$1,916,000, compared to $1,654,000 for the first quarter of fiscal 1999, an
increase of $262,000, or 16%. The Company's gross margin was 20.2% of net sales
for the quarter ended October 31, 1999, compared to 18.6% for the quarter ended
October 31, 1998. The increase in gross margin percentage was the result of
several factors, including the impact of the increased sales of the higher
margin canopies and lower product costs as a result of beneficial sourcing,
offset to a lesser degree by increases in ocean freight costs and decreases in
sales prices of in-line skates as discussed above. 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 for
certain product categories in order to sustain or improve present gross profit
margins.
Operating Expenses. The Company's selling and marketing expenses totaled
------------------
$882,000 for the first quarter of 2000, compared to $956,000 in the first
quarter of 1999, a decrease of $74,000 or 8%. Selling and marketing expenses
for the first quarter of fiscal 2000 amounted to 9.3% of net sales, compared to
10.8% during the first quarter of fiscal 1999. The decrease in selling and
marketing expenses and the decrease as a percentage of net sales are primarily
due to decreases in freight-out and sales commission expenses.
General and administrative expenses totaled $1,435,000 in the first quarter
of 2000, compared to $1,092,000 in the first quarter of 1999, an increase of
$343,000, or 31%. General and administrative expenses for the first quarter of
fiscal 2000 amounted to 15.1% of net sales, compared to 12.3% during the first
quarter of fiscal 1999. The increase in general and administrative expenses is
primarily due to an increase in legal expenses, related to the legal proceedings
described in Note 6 in the notes to the consolidated financial statements, and
to a lesser extent to an increase in product development expenses.
Other Income (Expense). Other income totaled $506,000 in the first quarter
----------------------
of 2000, compared to $502,000 in the first quarter of 1999, an increase of
$4,000 or 1%.
Provision for Income Taxes. There is no provision for income taxes for the
---------------------------
first quarter of fiscal 2000 and 1999 due to changes in the valuation allowance.
At October 31, 1999 the Company has a valuation allowance of approximately $2.5
million against its net deferred tax assets. To the extent that the Company
generates sufficient income in the future, the valuation allowance may be
reversed as a reduction of income tax expense and thereby reduce the effective
tax rate.
Liquidity and Capital Resources
-------------------------------
The Company has a credit agreement with a major bank providing a $8,000,000
revolving line of credit for the issuance of commercial letters of credit. The
agreement, which expires December 31, 1999, is unsecured and contains certain
financial covenants, which the Company must satisfy.
Cash and marketable securities available for sale totaled $24,882,000 as of
October 31, 1999, compared to $25,235,000 as of July 31, 1999. Net working
capital as of October 31, 1999 was $33,423,000, compared to $34,072,000 as of
July 31, 1999, and the Company's current ratio was 5.1:1 as of October 31, 1999,
compared to 7.7:1 as of July 31, 1999. The decreases in working capital and
current ratio were primarily due to cash used in and generated from operations,
10
<PAGE>
particularly via increases in inventory and accounts receivable, as well as
increases in liabilities for trade acceptances, accounts payable and accruals
for various expenses.
The Company had no long-term debt as of October 31, 1999 and July 31, 1999.
The Company had net stockholders' equity of $35,010,000 as of October 31, 1999,
compared to $35,561,000 as of July 31, 1999, with the difference due to
operating results for the three months ended October 31, 1999, and a decrease in
accumulated other comprehensive income due to unrealized losses on investments
in marketable securities.
In December 1999, the Company repurchased 512,075 shares of its common
stock for an aggregate purchase price of approximately $3,400,000. The funds
required for the repurchase were obtained from the sale of marketable
securities, with the Company realizing a loss of approximately $120,000. The
Company expects that it will sell additional marketable securities, for working
capital purposes, during the second quarter which are anticipated to result in
realized losses.
Sensitivity
-----------
The Company does not believe that the fluctuation in the value of the
dollar in relation to the currency of its suppliers has 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.
The Company's exposure to market rate risk for changes in interest rates
relates primarily to the Company's investment portfolio of bond funds, of which
60% is invested in high-yield bond funds. The Company does not have any
interest rate sensitivity related to borrowings.
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.
State of Readiness. The Company has been 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 assured by its
outside information systems consultant that the Company's primary information
management hardware and software systems--the mainframe systems from which the
Company generates its significant third party and business information
processing as a distributor and wholesaler--have been tested and confirmed to be
Year 2000 compliant. The Company's secondary personal computer based
information systems--hardware and software utilized for financial and
operational spreadsheets and word processing--have been tested and confirmed to
be Year 2000 compliant. The Company believes that it does not have any
significant non-information technology embedded systems that require Year 2000
remediation.
11
<PAGE>
The Company's operations are also dependent on the Year 2000 readiness of
third parties who do business with the Company. As a distributor and
wholesaler, the Company is dependent upon independent contractors for supply of
its products and upon major retailers, such as mass merchandisers, catalog
houses, home improvement chains and sporting goods chains, for the sale of its
products. The Company has sent questionnaires to its primary vendors,
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 that
they expect to be Year 2000 compliant. Over 90% of the third parties with whom
the Company has a material relationship have provided written assurances that
they will be Year 2000 compliant.
Costs. The Company has utilized both internal and external resources to
-----
reprogram or replace, test, and implement the software and operating equipment
for Year 2000 modifications. The total cost of the project was approximately
$50,000 and was funded by the Company's cash flow.
Risks. The Company believes it has an effective program in place to
-----
resolve the Year 2000 issue in a timely manner. As noted above, the Company is
dependent upon third party independent contractors for supply of its products
and upon major retailers for the sale of its products. In the event that a
major supplier is not able to make its systems Year 2000 compliant, it could
adversely limit the Company's ability to receive new products to be shipped. In
the event that a major retailer is not able to make its systems Year 2000
compliant, it could adversely limit the Company's ability to ship its products
and receive collection of receivables. If third parties are not able to make
their systems Year 2000 compliant in a timely manner, it could have a material
and adverse effect on the Company's business, results of operations and
financial condition. In addition, disruptions in the economy generally
resulting from Year 2000 issues could also materially and adversely affect the
Company.
Contingency Plans. The Company has manual workaround contingency plans for
-----------------
certain critical applications and other systems. The Company currently has
contingency plans in place to have on hand sufficient additional inventory if
significant third party suppliers are not Year 2000 compliant on time.
Risks Associated With Forward Looking Statements
------------------------------------------------
From time to time, the Company may make certain statements that contain
"forward-looking" information or statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Words such as "anticipate", "believe",
"expect", "estimate", "project", and similar expressions are intended to
identify such forward-looking statements. Forward-looking statements may be
made by management orally or in writing, including, but not limited to, in press
releases, as part of the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in this Report, and in the
Company's other filings with the Securities Exchange Commission. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Such forward-looking statements are subject to
certain risks, uncertainties and assumptions, including, without limitation
those identified below. Should one or more of these risks or uncertainties
materialize, or should any of the underlying assumptions prove incorrect, actual
results of current or future operations may vary materially from those
anticipated, estimated,
12
<PAGE>
or projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates.
General. There are several risks and uncertainties that may affect the
-------
future operating results, business and financial condition of the Company,
including, without limitation: (1) the risk of reduction in consumer demand for
the product categories in which the Company does business or the Company's
products in particular; (2) the risk of loss of one or more of the Company's
major customers; (3) the risks inherent in the design and development of new
products and product enhancements, including those associated with patent issues
and marketability; (4) the risk that the Company may not be able to continue to
provide its products at prices which are competitive or that it can continue to
design and market products that appeal to consumers even if price-competitive;
(5) the risk that the Company may not be able to obtain its products and
supplies on substantially similar terms, including cost, in order to sustain its
operating margins; and (6) the risks inherent in legal proceedings. Readers are
also encouraged to refer to the Company's most recent annual report on Form 10-K
for a further discussion of the Company's business and the risks and
opportunities attendant thereto.
13
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Note 6 to Notes to Consolidated Financial Statements included in
Part I of this Form 10-Q, which is incorporated herein by this
reference.
Item 5. Other Information
-----------------
In December 1999, the Company purchased 512,075 shares of its common
stock, which were tendered as a result of a self-tender offer, at a
price of $6.50 per share.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits.
---------
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K were filed by the Registrant during
the quarter to which this Form 10-Q relates.
14
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VARIFLEX, INC.
December 13, 1999 /s/ Raymond H. Losi II
------------------------------------------------
Raymond H. Losi II
Chief Executive Officer (Principal Executive
Officer)
December 13, 1999 /s/ Roger M. Wasserman
-------------------------------------------------
Roger M. Wasserman
Chief Financial Officer (Principal Financial
and Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY UNAUDITED 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> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 5,221
<SECURITIES> 19,661
<RECEIVABLES> 7,927
<ALLOWANCES> 432
<INVENTORY> 8,189
<CURRENT-ASSETS> 41,636
<PP&E> 4,960
<DEPRECIATION> 4,685
<TOTAL-ASSETS> 43,223
<CURRENT-LIABILITIES> 8,213
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 35,001
<TOTAL-LIABILITY-AND-EQUITY> 43,223
<SALES> 9,503
<TOTAL-REVENUES> 9,503
<CGS> 7,587
<TOTAL-COSTS> 7,587
<OTHER-EXPENSES> 2,317
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 105
<INCOME-TAX> 0
<INCOME-CONTINUING> 105
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
