<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.:
January 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 March 12, 1999, there were 5,654,118 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
January 31, 1999 and July 31, 1998......................................................... 3
Consolidated Statements of Operations for the
Three Month and Six Month Periods Ended January 31, 1999 and 1998.......................... 4
Consolidated Statements of Cash Flows for the
Six Months Ended January 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........................................................ 8
Part II - Other Information
Item 1. Legal Proceedings.......................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders........................................ 14
Item 5. Other Information.......................................................................... 14
Item 6. Exhibits and Reports on Form 8-K........................................................... 15
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
VARIFLEX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
January 31, July 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $3,798 $7,522
Marketable securities available for sale 19,551 20,147
Trade accounts receivable, less allowances of $414 and
$413 as of January 31, 1999 and July 31, 1998, respectively 11,086 8,205
Inventory (finished goods) 5,787 5,898
Inventory (raw materials and work-in-process) 578 585
Deferred income taxes 616 -
Prepaid expenses and other current assets 1,006 1,809
---------- ----------
Total current assets 42,422 44,166
Property and equipment, net 403 501
Other assets 1,037 88
---------- ----------
Total assets $43,862 $44,755
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Trade acceptances payable $545 $384
Accounts payable 466 371
Accrued warranty 912 450
Accrued salaries and related liabilities 482 234
Accrued co-op advertising 3,208 2,481
Accrued returns and allowances 342 150
Other accrued expenses 1,565 813
---------- ----------
Total current liabilities 7,520 4,883
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 shares issued
as of January 31, 1999 and July 31, 1998 9 9
Common stock warrants 702 702
Additional paid-in capital 21,023 21,023
Accumulated other comprehensive income (1,867) (392)
Retained earnings 18,769 18,530
Treasury stock, at cost, 371,279 shares as of January 31, 1999 (2,294) -
---------- ----------
Total stockholders' equity 36,342 39,872
------------ ------------
Total liabilities and stockholders' equity $43,862 $44,755
=========== ===========
</TABLE>
See accompanying notes
3
<PAGE>
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended Three months ended
January 31, January 31,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $19,502 $24,304 $10,626 $10,645
Cost of goods sold 15,109 20,386 7,887 8,888
-------- -------- -------- --------
Gross profit 4,393 3,918 2,739 1,757
-------- -------- -------- --------
Operating expenses:
Selling and marketing 2,383 2,818 1,427 1,356
General and administrative 2,637 2,942 1,545 1,843
Impairment write-off - 995 - 995
-------- -------- -------- --------
Total operating expenses 5,020 6,755 2,972 4,194
-------- -------- -------- --------
Loss from operations (627) (2,837) (233) (2,437)
-------- -------- -------- --------
Other income (expense):
Interest income and other 1,046 533 544 277
-------- -------- -------- --------
Total other income (expense) 1,046 533 544 277
-------- -------- -------- --------
Income (loss) before income taxes 419 (2,304) 311 (2,160)
Provision for income taxes 180 505 180 628
-------- -------- -------- --------
Net income (loss) $239 ($2,809) $131 ($2,788)
======== ======== ======== ========
Net income (loss) per share of common stock:
Basic $0.04 $0.47 $0.02 $0.46
======== ======== ======== ========
Diluted $0.04 $0.47 $0.02 $0.46
======== ======== ======== ========
Weighted average shares outstanding:
Basic 6,017 6,025 6,009 6,025
======== ======== ======== ========
Diluted 6,065 6,025 6,084 6,025
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
January 31,
--------- ---------
1999 1998
--------- ---------
<S> <C> <C>
Operating activities
Net income (loss) $239 ($2,809)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 223 510
Deferred income taxes (616) 784
Loss on sale of marketable securities 2 4
Impairment write-offs - 995
Common stock warrants issued - 702
Changes in operating assets and liabilities:
Trade accounts receivable (2,881) (505)
Inventory 118 3,877
Prepaid expenses and other current assets 803 (620)
Trade acceptances payable 161 (336)
Accounts payable 95 (236)
Other current liabilities 2,381 1,147
--------- ---------
Net cash provided by operating activities 525 3,513
--------- ---------
Investing activities
Purchases of property and equipment (83) (202)
Gross purchases of available-for-sale securities (883) (5,493)
Gross sales of available-for-sale securities 2 4,404
Other assets (991) 39
Purchase of treasury shares (2,294) -
--------- ---------
Net cash used in investing activities (4,249) (1,252)
--------- ---------
Financing activities - -
Net increase (decrease) in cash (3,724) 2,261
Cash and cash equivalents at beginning of period 7,522 7,823
--------- ---------
Cash and cash equivalents at end of period $3,798 $10,084
========= =========
Cash paid during the period for:
Interest - -
Income taxes $112 -
</TABLE>
Supplemental disclosure of non-cash financing activities:
In November 1997, the Company issued stock warrants and recorded therewith a
non-cash expense of $702,000 as compensation in connection with certain
consulting agreements entered into.
See accompanying notes.
5
<PAGE>
VARIFLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended
January 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, 1998.
Note 2. Reclassifications
Certain reclassifications have been made to the fiscal 1998 financial
statements to conform with fiscal 1999 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 and six month periods
ended January 31, 1999 the number of shares used in the calculation of diluted
earnings per share included 74,273 shares and 47,835 shares, respectively,
issuable under stock options and warrants using the treasury stock method. The
Company's diluted earnings per share for the three and six month periods ended
January 31, 1998 is the same as basic earnings per share since the effect of
options and warrants is antidilutive or immaterial.
Note 4. Comprehensive Income
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, which prior to adoption were reported separately
in stockholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the requirements
of Statement 130.
Total comprehensive income (loss), which consists of net income (loss) and
other comprehensive income (loss) for the period, amounted to $585,000 and
$(1,236,000), respectively, for the three and six month periods ended January
31, 1999 and amounted to $(2,747,000) and $(2,744,000), respectively, for the
three and six month periods ended January 31, 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, will be adopted by the Company for the 1999 fiscal year.
The Company does not expect the adoption of SFAS No. 131 to result in any
material changes in its disclosure and this statement will have no impact on the
Company's consolidated results of operations, financial position or cash flows.
Note 6. Treasury Stock
In January 1999, the Company purchased 371,279 shares of its common stock,
which were tendered as a result of a self-tender offer, pursuant to a modified
Dutch auction. The shares were purchased at a price of $6.00 per share.
Treasury stock is recorded at cost, including all fees and expenses applicable
to the self-tender offer.
Note 7. 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.
Thereafter, the plaintiff dismissed without prejudice the Northern District of
California action, and the claim will proceed in the Los Angeles action. 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
7
<PAGE>
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 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), snowboards and related accessories, yo-yo's, and portable
instant canopies, and plans to introduce a springless trampoline in early 1999.
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 second quarter of fiscal 1999 (the quarter
----------
ended January 31, 1999) totaled $10,626,000 compared to $10,645,000 for the
second quarter of fiscal 1998, representing a decrease of $19,000, or 0%. For
the six months ended January 31, 1999, net sales totaled $19,502,000 compared to
$24,304,000 for the corresponding period of the prior year, representing a
decrease of $4,802,000, or 20%. The decrease in net sales for the six months
primarily resulted from Kmart Corporation, which accounted for 15% of the
Company's gross sales for the first six months of fiscal 1998, no longer being a
major customer for the Company's in-line skates and skateboards. Net sales were
also adversely affected by competitive pressures on in-line skates and
skateboards, which caused sales prices to decline in these product categories.
Sales of the Company's athletic protective equipment and snowboards decreased,
offset by increases in sales of yo-yo's (a new product introduced in fiscal
1999) and the Quik Shade(R) instant canopy.
8
<PAGE>
The following table shows the Company's major product categories as a
percentage of total gross sales:
<TABLE>
<CAPTION>
Quarter Ended January 31 Six Months Ended January 31,
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---- ---- ---- ----
In-line skates 64% 57% 60% 62%
Skateboards and scooters 18% 24% 18% 20%
Canopies 4% 1% 6% 1%
Bicycle and recreational safety helmets 4% 6% 5% 4%
Snowboards and accessories 1% 8% 4% 8%
Yo-yo's 6% - 4% -
Athletic protective equipment 3% 4% 3% 5%
Other (*) (*) (*) (*)
---- ---- ---- ----
Total 100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
-----------------------------
(*) Less than one-half of one percent.
Gross Profit. Gross profit for the second quarter of fiscal 1999 totaled
-------------
$2,739,000, compared to $1,757,000 for the second quarter of fiscal 1998, an
increase of $982,000, or 56%. The Company's gross margin was 25.8% of net sales
for the quarter ended January 31, 1999, compared to 16.5% for the quarter ended
January 31, 1998. The increase in gross margin percentage was the result of
several factors, including the impact of the addition to the sales product mix
of canopies which had a higher margin, as well as lower product costs as a
result of beneficial sourcing and the decrease in sales to Kmart Corporation
during the second quarter of fiscal 1999 versus the second quarter of fiscal
1998, which had a positive impact on the Company's gross margin due to the
pricing structure for Kmart. Gross margin was 22.5% for the six months ended
January 31, 1999, compared to 16.1% for the six months ended January 31, 1998.
The increase in gross margin was primarily due to the same factors that impacted
the second quarter, as discussed above. The Company's gross margin of 25.8% for
the second quarter of fiscal 1999 represents an increase from 18.6% for the
quarter ended October 31, 1998. 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
------------------
$1,427,000 for the second quarter of 1999, compared to $1,356,000 in the second
quarter of 1998, an increase of $71,000 or 5%. Selling and marketing expenses
for the second quarter of fiscal 1999 thus amounted to 13.4% of net sales,
compared to 12.7% during the second quarter of fiscal 1998. The increase in
selling and marketing expenses and the increase as a percentage of net sales are
primarily due to increases in promotional and co-op advertising expenses. For
the six months ended January 31, 1999, selling and marketing expenses totaled
$2,383,000 compared to $2,818,000 for the corresponding period of the prior
year, representing a decrease of $435,000 or 15%. Selling and marketing
expenses for the first six months of fiscal 1999 thus amounted to 12.2% of net
sales, compared to 11.6% during the first six months of fiscal 1998. The
percentage increase is primarily due to increases in promotional advertising
expenses as a percentage of net sales, while the decrease in dollar amount is
primarily due to decreases in various expenses that are directly related to
sales and decreased correspondingly with the lower sales level described in the
Net Sales section.
General and administrative expenses totaled $1,545,000 in the second
quarter of 1999, compared to $1,843,000 in the second quarter of 1998, a
decrease of $298,000, or 16%. For the six
9
<PAGE>
months ended January 31, 1999, general and administrative expenses decreased
$305,000, or 10%. These decreases in both the second quarter and first six
months of fiscal 1999 are primarily due to non-cash consulting expenses of
$702,000 recognized in the second quarter of fiscal 1998 with respect to the
consultation agreements entered into in connection with the stock acquisition by
REMY Capital Partners IV, L.P., a private investment partnership. Excluding such
consulting expenses, the Company's general and administrative expenses for the
second quarter of fiscal 1999 increased $404,000 or 35%, compared to the second
quarter of fiscal 1998, and for the six months of fiscal 1999 increased $397,000
or 18%, compared to the six months of fiscal 1998, due primarily to an increase
in legal expenses, related to the legal proceedings described in Note 7 in the
notes to the consolidated financial statements, partially offset by a decrease
in computer consulting expense.
During the quarter ended January 31, 1998, the Company recognized an
impairment loss of $995,000 for write-downs of fixed assets and a write-off of
the remaining unamortized balance of goodwill relating to its snowboard
operations.
Other Income (Expense). Other income totaled $544,000 in the second
----------------------
quarter of 1999, compared to $277,000 in the second quarter of 1998, an increase
of $267,000 or 96%. This increase was primarily due to an increase in interest
income as a result of a change during the third quarter of fiscal year 1998 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 the corresponding period of the prior year.
Provision for Income Taxes. The provision for income taxes is $180,000 or
---------------------------
57.9% of income before income taxes for the second quarter of fiscal 1999
compared to an income tax provision of $628,000 on a loss before income taxes of
($2,160,000) for the second quarter of fiscal 1998. The provision for income
taxes is $180,000 or 43.0% of income before income taxes for the first six
months of fiscal 1999 compared to an income tax provision of $505,000 on a loss
before income taxes of $(2,304,000) for the first six months of fiscal 1998.
The provisions for income taxes for the three and six month periods ended
January 31, 1998 resulted from a deferred tax valuation allowance recorded
during the quarter ended January 31, 1998, which was equal to the balance of the
Company's deferred tax assets. The provision for income taxes for the three and
six month periods ended January 31, 1999 reflects the net increase of
approximately $29,000 and the net reduction of approximately $18,000,
respectively, of the deferred tax valuation allowance. The provision for income
taxes before the net change of the deferred tax valuation allowance for the
three and six months ended January 31, 1999 would have been approximately
$151,000 and $198,000, respectively, representing 48.6% and 47.3%, respectively,
of income before income taxes. The effective tax rate before the reduction of
the deferred tax valuation allowance for the six months ended January 31, 1999
differs from the federal statutory rate primarily due to state income taxes and
certain expenses that are not deductible for federal income tax purposes.
At January 31, 1999 the Company has a valuation allowance of $1,519,000 for
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.
10
<PAGE>
Liquidity and Capital Resources
-------------------------------
The Company has a credit agreement with a major bank providing a $7,500,000
revolving line of credit for the issuance of commercial letters of credit. The
agreement, which expires March 31, 1999, is unsecured and contains certain
financial covenants which the Company must satisfy.
Cash and marketable securities available for sale totaled $23,349,000 as of
January 31, 1999, compared to $27,669,000 as of July 31, 1998. Net working
capital as of January 31, 1999 was $34,902,000, compared to $39,283,000 as of
July 31, 1998, and the Company's current ratio was 5.6:1 as of January 31, 1999,
compared to 9.0:1 as of July 31, 1998. The decreases in working capital and
current ratio were primarily due to decreases in cash of approximately
$2,300,000 used for the purchase of treasury stock as described in Note 6 in the
notes to the consolidated financial statements and $1,000,000 used as payment
pursuant to the trampoline license agreement entered into on December 1, 1998,
as well as increases in liabilities for trade acceptances, accounts payable and
accruals for co-op advertising, warranty, returns and allowances and other
various expenses.
The Company had no long-term debt as of January 31, 1999 and July 31, 1998.
The Company had net stockholders' equity of $36,342,000 as of January 31, 1999,
compared to $39,872,000 as of July 31, 1998, with the difference due to
operating results for the six months ended January 31, 1999, the purchase of
treasury stock as described in Note 6 in the notes to the consolidated financial
statements, and a decrease in accumulated other comprehensive income due to
unrealized losses on investments in marketable securities.
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
11
<PAGE>
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.
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 and major 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. Follow-up communication with those third parties who have not
responded should be completed by the end of the third quarter of fiscal 1999.
Over 80% 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 no contingency plans for certain
------------------
critical applications and other systems other than manual workarounds. The
Company currently has no contingency plans in place if significant third party
suppliers are not Year 2000 compliant on time. The Company plans to evaluate
the status of their readiness by July 31, 1999 and determine whether such a plan
is necessary.
12
<PAGE>
Risks Associated With Forward Looking Statements
------------------------------------------------
From time to time, the Company may make certain statements that contain
"forward-looking" information or statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Words such as "anticipate", "believe",
"expect", "estimate", "project", and similar expressions are intended to
identify such forward-looking statements. Forward-looking statements may be
made by management orally or in writing, including, but not limited to, in press
releases, as part of the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in this Report, and in the
Company's other filings with the Securities Exchange Commission. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Such forward-looking statements are subject to
certain risks, uncertainties and assumptions, including, without limitation
those identified below. Should one or more of these risks or uncertainties
materialize, or should any of the underlying assumptions prove incorrect, actual
results of current or future operations may vary materially from those
anticipated, estimated, or projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates.
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 7 to Notes to Consolidated Financial Statements included in
Part I of this Form 10-Q, which is incorporated herein by this
reference.
Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------
At the Annual Meeting of Stockholders on December 8, 1998, the
following matters were voted on and approved:
1. Six Directors were elected to the Board of Directors to hold office
for a one-year term or until their successors are elected and
qualified. The following persons were elected: Kenneth N. Berns,
Michael T. Carr, Loren Hildebrand, Raymond (Ray) H. Losi, Raymond
(Jay) H. Losi II and Mark S. Siegel. A total of 5,931,927 shares
voted, representing 98.4% of the Company's total shares
outstanding. None of the shares voting abstained. Following is a
summary of the votes for and against each Director:
<TABLE>
<CAPTION>
Votes Votes
For Against
<S> <C> <C>
Kenneth N. Berns 5,916,486 15,441
Michael T. Carr 5,916,486 15,441
Loren Hildebrand 5,916,486 15,441
Raymond H. Losi 5,916,086 15,841
Raymond H. Losi II 5,916,086 15,841
Mark S. Siegel 5,916,486 15,441
</TABLE>
2. The Board's selection of Ernst & Young LLP as the Company's
independent public accountants for the fiscal year ended July 31,
1999 was ratified. 5,915,777 shares of common stock voted in favor
of the proposal, 8,500 shares voted against and 7,650 shares
abstained.
Item 5. Other Information
-----------------
In January 1999, the Company purchased 371,279 shares of its common
stock, which were tendered as a result of a self-tender offer,
pursuant to a modified Dutch auction. The shares were purchased at a
price of $6.00 per share. Treasury stock is recorded at cost,
including all fees and expenses applicable to the self-tender offer.
14
<PAGE>
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.
15
<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.
March 12, 1999 /s/ Raymond H. Losi II
---------------------------------------------
Raymond H. Losi II
Chief Executive Officer (Principal Executive Officer)
March 12, 1999 /s/ Roger M. Wasserman
-----------------------------------
Roger M. Wasserman
Chief Financial Officer (Principal Financial and
Accounting Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 3,798
<SECURITIES> 19,551
<RECEIVABLES> 11,500
<ALLOWANCES> 414
<INVENTORY> 6,365
<CURRENT-ASSETS> 42,422
<PP&E> 5,023
<DEPRECIATION> 4,620
<TOTAL-ASSETS> 43,862
<CURRENT-LIABILITIES> 7,520
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 36,333
<TOTAL-LIABILITY-AND-EQUITY> 43,862
<SALES> 19,502
<TOTAL-REVENUES> 19,502
<CGS> 15,109
<TOTAL-COSTS> 15,109
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 419
<INCOME-TAX> 180
<INCOME-CONTINUING> 239
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 239
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
