<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: Commission File No.:
April 30, 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 June 7, 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
April 30, 1999 and July 31, 1998........................... 3
Consolidated Statements of Operations for the Three Month
and Nine Month Periods Ended April 30, 1999 and 1998....... 4
Consolidated Statements of Cash Flows for the
Nine Months Ended April 30, 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 5. Other Information.......................................... 14
Item 6. Exhibits and Reports on Form 8-K........................... 14
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
VARIFLEX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,023 $ 7,522
Marketable securities available for sale 20,065 20,147
Trade accounts receivable, less allowances of $417 and
$413 as of April 30, 1999 and July 31, 1998, respectively 9,583 8,205
Inventory (finished goods) 5,263 5,898
Inventory (raw materials and work-in-process) 374 585
Deferred income taxes 215 -
Prepaid expenses and other current assets 1,078 1,809
----------- -----------
Total current assets 42,601 44,166
Property and equipment, net 341 501
Other assets 1,175 88
----------- -----------
Total assets $44,117 $44,755
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Trade acceptances payable $ 1,455 $ 384
Accounts payable 719 371
Accrued warranty 972 450
Accrued salaries and related liabilities 523 234
Accrued co-op advertising 2,482 2,481
Accrued returns and allowances 476 150
Other accrued expenses 723 813
----------- -----------
Total current liabilities 7,350 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 April 30, 1999 and July 31, 1998 9 9
Common stock warrants 702 702
Additional paid-in capital 21,023 21,023
Accumulated other comprehensive loss (1,759) (392)
Retained earnings 19,087 18,530
Treasury stock, at cost, 371,279 shares as of April 30, 1999 (2,295) -
----------- -----------
Total stockholders' equity 36,767 39,872
----------- -----------
Total liabilities and stockholders' equity $44,117 $44,755
=========== ===========
</TABLE>
See accompanying notes
3
<PAGE>
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Three months ended
April 30, April 30,
---------------------------------------------
1999 1998 1999 1998
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net sales $29,897 $34,862 $10,395 $10,558
Cost of goods sold 23,106 28,902 7,997 8,516
-------- -------- -------- --------
Gross profit 6,791 5,960 2,398 2,042
-------- -------- -------- --------
Operating expenses:
Selling and marketing 3,608 4,225 1,225 1,407
General and administrative 3,963 3,898 1,326 956
Impairment write-off - 995 - -
-------- -------- -------- --------
Total operating expenses 7,571 9,118 2,551 2,363
-------- -------- -------- --------
Loss from operations (780) (3,158) (153) (321)
-------- -------- -------- --------
Other income (expense):
Interest income and other 1,517 941 471 408
-------- -------- -------- --------
Total other income (expense) 1,517 941 471 408
-------- -------- -------- --------
Income (loss) before income taxes 737 (2,217) 318 87
Provision for income taxes 180 572 0 67
-------- -------- -------- --------
Net income (loss) $557 ($2,789) $318 $20
======== ======== ======== ========
Net income (loss) per share of common stock:
Basic $0.09 $0.46 $0.06 $0.00
======== ======== ======== ========
Diluted $0.09 $0.46 $0.06 $0.00
======== ======== ======== ========
Weighted average shares outstanding:
Basic 5,899 6,025 5,654 6,025
======== ======== ======== ========
Diluted 5,945 6,025 5,697 6,025
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
April 30,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating activities
Net income (loss) $557 ($2,789)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 307 696
Deferred income taxes (215) 784
Gain on sale of marketable securities 2 (27)
Impairment write-off - 995
Common stock warrants issued - 702
Changes in operating assets and liabilities:
Trade accounts receivable (1,378) (2,328)
Inventory 846 1,987
Prepaid expenses and other current assets 731 628
Trade acceptances payable 1,071 606
Accounts payable 348 (135)
Other current liabilities 1,048 1,414
--------- ---------
Net cash provided by operating activities 3,317 2,533
--------- ---------
Investing activities
Purchases of property and equipment (106) (249)
Gross purchases of available-for-sale securities (1,289) (25,605)
Gross sales of available-for-sale securities 2 20,348
Other assets (1,128) 51
Purchase of treasury shares (2,295) -
--------- ---------
Net cash used in investing activities (4,816) (5,455)
--------- ---------
Financing activities - -
Net decrease in cash (1,499) (2,922)
Cash and cash equivalents at beginning of period 7,522 7,823
--------- ---------
Cash and cash equivalents at end of period $6,023 $4,901
========= =========
Cash paid during the period for:
Interest - -
Income taxes $512 -
</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 nine month periods ended
April 30, 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 nine month periods
ended April 30, 1999 the number of shares used in the calculation of diluted
earnings per share included 42,945 shares and 46,205 shares, respectively,
issuable under stock options and warrants using the treasury stock method. The
Company's diluted earnings per share for the three and nine month periods ended
April 30, 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 $426,000 and
$(810,000), respectively, for the three and nine month periods ended April 30,
1999 and amounted to $40,000 and $(2,704,000), respectively, for the three and
nine month periods ended April 30, 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 infringes plaintiff's trade dress, 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. Recently Service Merchandise filed a Chapter 11
bankruptcy petition, so the case is now stayed as to that defendant only.
7
<PAGE>
The Los Angeles action has had extensive discovery taken, with a trial date
set for October 4, 1999. The Denver action is at an early stage, with a motion
to transfer it to Los Angeles set for hearing September 3, 1999.
In the Los Angeles action, SAFECO Insurance Company has agreed to provide a
defense with a reservation of rights. SAFECO denies coverage for the patent
claims but reserves rights as to trade dress and advertising injury claims,
asserting numerous defenses to coverage.
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.
Note 8. Subsequent Event
In May 1999, the Company announced that it will introduce a line of in-line
skates, accessories, snowboards, helmets and yo-yo's under a license agreement
to produce "X-Games"- identified merchandise. "X-Games" is a popular series of
"extreme" sports programming aired on ESPN television networks.
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 has introduced a springless trampoline in the fourth
quarter of 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 third quarter of fiscal 1999 (the quarter
----------
ended April 30, 1999) totaled $10,395,000 compared to $10,558,000 for the third
quarter of fiscal 1998, representing a decrease of $163,000, or 2%. For the
nine months ended April 30, 1999, net sales totaled $29,897,000 compared to
$34,862,000 for the corresponding period of the prior year, representing a
8
<PAGE>
decrease of $4,965,000, or 14%. The decrease in net sales for the nine months
resulted from several factors, including Kmart Corporation, which accounted for
7% of the Company's gross sales for the first nine 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 recreational safety helmets, 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 instant
canopy.
The following table shows the Company's major product categories as a
percentage of total gross sales:
<TABLE>
<CAPTION>
Quarter Ended April 30, Nine Months Ended April 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
In-line skates 42% 47% 53% 58%
Skateboards and scooters 13% 16% 17% 18%
Canopies 30% 19% 14% 6%
Yo-yo's 9% - 6% -
Bicycle and recreational safety helmets 5% 12% 5% 7%
Snowboards and accessories - 2% 3% 6%
Athletic protective equipment 1% 4% 2% 5%
Other (*) (*) (*) (*)
----- ----- ----- -----
Total 100% 100% 100% 100%
===== ===== ===== =====
</TABLE>
---------------------------
(*) Less than one-half of one percent.
Gross Profit. Gross profit for the third quarter of fiscal 1999 totaled
-------------
$2,398,000, compared to $2,042,000 for the third quarter of fiscal 1998, an
increase of $356,000, or 17%. The Company's gross margin was 23.1% of net sales
for the quarter ended April 30, 1999, compared to 19.3% for the quarter ended
April 30, 1998. The increase in gross margin percentage was the result of
several factors, including the impact of the increased sales of canopies which
had a higher margin, as well as lower product costs as a result of beneficial
sourcing. Gross margin was 22.7% for the nine months ended April 30, 1999,
compared to 17.1% for the nine months ended April 30, 1998. The increase in
gross margin was primarily due to the same factors that impacted the third
quarter, 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
------------------
$1,225,000 for the third quarter of 1999, compared to $1,407,000 in the third
quarter of 1998, a decrease of $182,000 or 13%. Selling and marketing expenses
for the third quarter of fiscal 1999 thus amounted to 11.8% of net sales,
compared to 13.3% during the third quarter of fiscal 1998. The decrease in
selling and marketing expenses and the decrease as a percentage of net sales are
primarily due to decreases in advertising and promotional expenses. For the
nine months ended April 30, 1999, selling and marketing expenses totaled
$3,608,000 compared to $4,225,000 for the corresponding period of the prior
year, representing a decrease of $617,000 or 15%. Selling and marketing
expenses for the first nine months of fiscal 1999 thus amounted to 12.1% of net
sales, compared to 12.1% during the first nine months of fiscal 1998. The
decrease in dollar amount is primarily due to decreases in various expenses,
such as co-op advertising and sales commissions, that are directly
9
<PAGE>
related to sales and decreased correspondingly with the lower sales level
described in the Net Sales section.
General and administrative expenses totaled $1,326,000 in the third quarter
of 1999, compared to $956,000 in the third quarter of 1998, an increase of
$370,000, or 39%. For the nine months ended April 30, 1999, general and
administrative expenses increased $65,000, or 2%. Non-cash consulting expenses
of $702,000 were recognized during the nine months ended April 30, 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 nine months of fiscal 1999 increased $767,000 or 24%, compared
to the nine months of fiscal 1998. The increases in general and administrative
expenses for both the third quarter and nine months of fiscal 1999 were
primarily due 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 second quarter of 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 its snowboard
operations.
Other Income (Expense). Other income totaled $471,000 in the third quarter
----------------------
of 1999, compared to $408,000 in the third quarter of 1998, an increase of
$63,000 or 15%. For the nine months ended April 30, 1999, other income totaled
$1,517,000 compared to $941,000 for the corresponding period of the prior year,
an increase of $576,000 or 61%. The increases in other income for both the third
quarter and nine months of fiscal 1999 were 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.
Provision for Income Taxes. There is no provision for income taxes for the
---------------------------
third quarter of fiscal 1999 due to changes in the valuation allowance. The
income tax provision for the third quarter of fiscal 1998 was $67,000 or 77.0%
of income before income taxes. The provision for income taxes is $180,000 or
24% of income before income taxes for the first nine months of fiscal 1999
compared to an income tax provision of $572,000 on a loss before income taxes of
$(2,217,000) for the first nine months of fiscal 1998. The effective tax rate
for the nine months ended April 30, 1998 is less than the federal statutory rate
due to changes in the valuation allowance. The provision for income taxes for
the three and nine month periods ended April 30, 1998 resulted from deferred tax
valuation allowances recorded during the quarters ended January 31, 1998 and
April 30, 1998.
At April 30, 1999 the Company has a valuation allowance of approximately
$1.5 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.
10
<PAGE>
Liquidity and Capital Resources
-------------------------------
The Company has a credit agreement with a major bank providing a $6,500,000
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 $26,088,000 as of
April 30, 1999, compared to $27,669,000 as of July 31, 1998. Net working
capital as of April 30, 1999 was $35,251,000, compared to $39,283,000 as of July
31, 1998, and the Company's current ratio was 5.8:1 as of April 30, 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 an increase in cash due to normal operations and increases in
liabilities for trade acceptances, accounts payable and accruals for warranty,
returns and allowances and other various expenses.
The Company had no long-term debt as of April 30, 1999 and July 31, 1998.
The Company had net stockholders' equity of $36,767,000 as of April 30, 1999,
compared to $39,872,000 as of July 31, 1998, with the difference due to
operating results for the nine months ended April 30, 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.
11
<PAGE>
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.
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 fourth quarter of fiscal 1999.
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 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 5. Other Information
-----------------
In June 1999 the Company, in a private sale transaction, purchased an
aggregate of 141,700 shares of its common stock for an aggregate of
$779,350 pursuant to an unsolicited offer to sell received by
the Company.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits.
---------
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K were filed by the Registrant during the
quarter to which this Form 10-Q relates.
14
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VARIFLEX, INC.
June 11, 1999 /s/ Raymond H. Losi II
------------------------------
Raymond H. Losi II
Chief Executive Officer (Principal Executive Officer)
June 11, 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 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> 9-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> APR-30-1999
<CASH> 6,023
<SECURITIES> 20,065
<RECEIVABLES> 10,000
<ALLOWANCES> 417
<INVENTORY> 5,637
<CURRENT-ASSETS> 42,601
<PP&E> 4,993
<DEPRECIATION> 4,652
<TOTAL-ASSETS> 44,117
<CURRENT-LIABILITIES> 7,350
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 36,758
<TOTAL-LIABILITY-AND-EQUITY> 44,117
<SALES> 29,897
<TOTAL-REVENUES> 29,897
<CGS> 23,106
<TOTAL-COSTS> 23,106
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 737
<INCOME-TAX> 180
<INCOME-CONTINUING> 557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 557
<EPS-BASIC> 0.09
<EPS-DILUTED> 0.09
</TABLE>
