<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, 2000 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 15, 2000, there were 4,584,432 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, 2000 and July 31, 2000....................... 3
Consolidated Statements of Operations for the
Three Months Ended October 31, 2000 and 1999............. 4
Consolidated Statements of Cash Flows for the
Three Months Ended October 31, 2000 and 1999............. 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........................................ 12
Item 6. Exhibits and Reports on Form 8-K......................... 12
</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,
2000 2000
----------- --------
<S> <C> <C>
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 9,932 $14,066
Trade accounts receivable, less allowances of $420 and
$421 as of October 31, 2000 and July 31, 2000, respectively 18,303 13,412
Inventory (finished goods) 12,015 7,899
Inventory (raw materials and work-in-process) 984 1,027
Deferred income taxes 1,924 1,192
Prepaid expenses and other current assets 371 1,502
------- -------
Total current assets 43,529 39,098
Property and equipment, net 255 261
Intangible assets 3,206 3,326
Other assets 515 532
------- -------
Total assets $47,505 $43,217
======= =======
Liabilities and stockholders' equity
Current liabilities:
Trade acceptances payable $ 2,826 $ 957
Accounts payable 2,192 1,869
Accrued warranty 1,074 1,101
Accrued salaries and related liabilities 569 1,204
Accrued co-op advertising 2,810 2,064
Accrued returns and allowances 1,738 1,367
Accrued product liability claims 428 414
Accrued product recall expenses 1,694 1,750
Income taxes payable 1,096 221
Other accrued expenses 737 759
Current maturities of note payable 200 200
------- -------
Total current liabilities 15,364 11,906
Note payable, less current maturities 768 942
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, 2000 and July 31, 2000 9 9
Common stock warrants 702 702
Additional paid-in capital 21,023 21,023
Retained earnings 18,354 17,350
Treasury stock, at cost, 1,440,965 shares
as of October 31, 2000 and July 31, 2000 (8,715) (8,715)
------- -------
Total stockholders' equity 31,373 30,369
------- -------
Total liabilities and stockholders' equity $47,505 $43,217
======= =======
</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,
-----------------------------------------------------
2000 1999
----------------------- ----------------------
<S> <C> <C>
Net sales $19,958 $9,503
Cost of goods sold 15,764 7,587
------- ------
Gross profit 4,194 1,916
------- ------
Operating expenses:
Selling and marketing 1,641 882
General and administrative 1,282 1,435
------- ------
Total operating expenses 2,923 2,317
------- ------
Income (loss) from operations 1,271 (401)
------- ------
Other income (expense):
Interest expense (26) --
Interest income and other 218 506
------- ------
Total other income (expense) 192 506
------- ------
Income before income taxes 1,463 105
Provision for income taxes 459 --
------- ------
Net income $ 1,004 $ 105
======= ======
Net income per share of common stock:
Basic $ 0.22 $ 0.02
======= ======
Diluted $ 0.21 $ 0.02
======= ======
Weighted average shares outstanding:
Basic 4,584 5,512
======= ======
Diluted 4,677 5,650
======= ======
</TABLE>
See accompanying notes.
4
<PAGE>
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
October 31,
------------------------------
2000 1999
-------- --------
<S> <C> <C>
Operating activities
Net income $ 1,004 $ 105
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 36 43
Amortization of intangibles 120 16
Non-cash interest charge 26 --
Deferred income taxes (732) (67)
Loss on sale of marketable securities -- 2
Changes in operating assets and liabilities:
Trade accounts receivable (4,891) (595)
Inventory (4,073) (2,441)
Prepaid expenses and other current assets 1,131 242
Trade acceptances payable 1,869 1,595
Accounts payable 323 1,241
Accrued product recall expenses (56) --
Other current liabilities 1,322 321
------- -------
Net cash provided by (used in) operating activities (3,921) 462
------- -------
Investing activities
Purchases of property and equipment (30) (41)
Proceeds from sale of assets -- 4
Gross purchases of available-for-sale securities -- (425)
Other assets 17 (122)
------- -------
Net cash used in investing activities (13) (584)
------- -------
Financing activities
Principal payment on note payable (200) --
------- -------
Net cash used in financing activities (200) --
------- -------
Net decrease in cash (4,134) (122)
Cash and cash equivalents at beginning of period 14,066 5,343
------- -------
Cash and cash equivalents at end of period $ 9,932 $ 5,221
======= =======
Cash paid during the period for:
Interest $ -- $ --
Income taxes $ 315 $ 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, 2000
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, 2000.
Note 2. Reclassifications
Certain reclassifications have been made to the fiscal 2000 financial
statements to conform with fiscal 2001 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,
2000 and 1999 the number of shares used in the calculation of diluted earnings
per share included 93,252 shares and 138,096 shares, respectively, issuable
under stock options and warrants using the treasury stock method.
Note 4. Comprehensive Income (Loss)
In accordance with Statement 130, "Reporting Comprehensive Income,"
unrealized gains or losses on the Company's available-for-sale securities are
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 $1,004,000 and ($551,000), respectively, for
the three months ended October 31, 2000 and 1999.
6
<PAGE>
Note 5. Segment Information
Pursuant to Statement of Financial Accounting Standards No. 131 ("SFAS No.
131"), "Disclosures about Segments of an Enterprise and Related Information,"
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, 2000 and 1999, it operated in only one segment.
The Company classifies its products into similar product groupings. The action
sport products include in-line skates, skateboards, and scooters. The outdoor
products include portable instant canopies and springless trampolines. The
protective products include recreational protective equipment, such as wrist
guards, elbow pads and knee pads, and helmets.
Sales of similar products for that segment are as follows:
<TABLE>
<CAPTION>
Three months ended
October 31,
---------------------------------------------
2000 1999
------------------- ------------------
(In thousands)
<S> <C> <C>
Action sport products $14,610 $7,445
Outdoor products 3,082 960
Protective products 2,816 1,088
Other products 229 353
------- ------
Total gross sales 20,737 9,846
Returns and allowances (779) (343)
------- ------
Total net sales $19,958 $9,503
======= ======
</TABLE>
Note 6. Legal Proceedings
On March 17, 2000, plaintiff Rocco Attolico, a former employee of the
Company, filed a complaint in the Superior Court of the State of California for
the County of Ventura (Case No. SC026211) (the "Attolico action"), against the
Company, the President of the Company, a Vice President of the Company, and Does
1 through 50, inclusive. The complaint was subsequently amended on June 29,
2000. This lawsuit arises out of the termination of the plaintiff's employment
by the Company. The first amended complaint in the Attolico action (a) alleges
against the Company, among other things, racial discrimination, harassment, and
retaliation in employment, retaliation for whistle blowing, wrongful
termination, intentional infliction of emotional distress, negligent
investigation, defamation, and unfair competition and (b) alleges against the
Company's President and Vice President, among other things, intentional and
negligent infliction of emotional distress, defamation, and unfair competition.
The first amended complaint notes that, and alleges that, (i) on
November 5, 1999, the Moorpark, California Police Department arrested and booked
plaintiff on the charge of embezzlement and (ii) the Ventura County District
Attorney's office has failed to file a complaint against plaintiff.
The first amended complaint also alleges in substance that plaintiff was
terminated because he allegedly complained that (a) the Company improperly
filled customer orders and (b) a member of senior management of the Company
engaged in conduct which benefited him personally at the expense of the Company.
Plaintiff also alleges that the Company's President and Vice President, among
others, told the Moorpark, California Police Department false information
alleging embezzlement by plaintiff.
7
<PAGE>
In his Statement of Damages, plaintiff claims damages in the amount of $1.7
million and punitive damages in the amount of $1 million. Plaintiff also seeks
treble damages, attorney's fees and costs.
The first amended complaint was served upon the defendants on July 28,
2000. On August 9, 2000, the Company tendered the defense and coverage of the
Attolico action to its primary insurance carrier who subsequently accepted the
tender. The Company's insurance policy with its primary insurance carrier
affords limits of liability for covered losses in the amount of $2 million and a
$25,000 retention. On September 11, 2000, the defendants filed an answer to the
plaintiff's first amended complaint denying the allegations of the first amended
complaint. On November 28, 2000, plaintiff and the defendants entered into a
confidential Settlement Agreement whereby the Company made a payment to the
plaintiff in consideration for the plaintiff releasing the defendants from any
further liability with respect to this action and all claims that it had against
the defendants
On October 31, 2000, Razor USA LLC, a Delaware limited liability company,
filed a complaint in the United States District Court for the Central District
of California in Los Angeles against the Company and 17 other entities (the
"Razor Action"). The Complaint alleges, among other things, that the Company's
"Stinger" model nonmotorized scooter, as originally designed, infringes a patent
issued to the plaintiff on October 31, 2000, the day the lawsuit was filed. The
Complaint seeks unspecified monetary damages, costs, expenses, and attorneys'
fees, an injunction, and the destruction of all allegedly infringing
In August 2000, prior to the issuance of the patent in the Razor Action,
the Company redesigned the "Stinger" model nonmotorized scooter. On November
14, 2000, during a hearing on the plaintiff's application for a temporary
restraining order, the plaintiff acknowledged that the Company's "Stinger" model
nonmotorized scooter, as currently designed, did not infringe plaintiff's
patent. Accordingly, the Court did not include the Company as a party subject
to a temporary restraining order issued against the other defendants.
Similarly, the Court did not include the Company as a party subject to a
preliminary injunction order issued against several of the other defendants on
December 5, 2000. The Company does not believe that any of its currently
existing scooter models infringe plaintiff's patent or any of the plaintiff's
competing products' trade dress.
The Company does not believe that either the outcome of the Razor Action,
or the costs incurred in defending the Razor Action, or the efforts of
management in connection with this matter, will have a material adverse effect
on the Company's business, financial condition, results of operations or cash
flows.
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, scooters, recreational protective equipment (such
as wrist guards, elbow pads and knee
8
<PAGE>
pads used by skaters and skateboarders) and helmets, portable instant canopies,
and springless trampolines. 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 2001 (the quarter
----------
ended October 31, 2000) totaled $19,958,000 compared to $9,503,000 for the first
quarter of fiscal 2000, representing an increase of $10,455,000, or 110%. The
increase in net sales primarily resulted from increases in sales of the
Company's scooters and skateboards, in addition to increases in sales of
recreational protective helmets, trampolines, and canopies, somewhat offset by
decreases in sales of in-line skates. 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 for the first quarter of fiscal 2001 compared to
the first quarter of fiscal 2000. Action sport products include in-line skates,
skateboards, and scooters (which were separately reported for the first quarter
of fiscal 2000). The outdoor products include portable instant canopies and
springless trampolines (which were separately reported for the first quarter of
fiscal 2000). Protective products include recreational protective equipment,
such as wrist guards, elbow pads and knee pads, and helmets (which were reported
as recreational safety and athletic protective products for the first quarter of
fiscal 2000):
<TABLE>
<CAPTION>
Quarter Ended
October 31,
2000 1999
---- ----
<S> <C> <C>
Action sport products 71% 76%
Outdoor products 15% 10%
Protective products 14% 11%
Other Products (*) 3%
---- ----
Total 100% 100%
==== ====
</TABLE>
(*) Less than one-half of one percent
Gross Profit. Gross profit for the first quarter of fiscal 2001 totaled
-------------
$4,194,000, compared to $1,916,000 for the first quarter of fiscal 2000, an
increase of $2,278,000, or 119%. The Company's gross margin was 21.0% of net
sales for the quarter ended October 31, 2000, compared to 20.2% for the quarter
ended October 31, 1999. The increase in gross margin percentage was primarily
the result of the increased sales of higher margin products such as canopies,
recreational protective helmets, trampolines, and skateboards, offset to a
lesser degree by sales of lower margin products such as mini-scooters 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
------------------
$1,641,000, for the first quarter of 2001, compared to $882,000 in the first
quarter of 2000, an increase of $759,000 or 86%. Selling and marketing expenses
for the first quarter of fiscal 2001 amounted to 8.2% of net sales, compared to
9.3% during the first quarter of fiscal 2000. The increase in the dollar amount
was primarily due to increases in various expenses, such as co-op advertising
and sales commissions, that are directly related to sales and increased
correspondingly with the higher sales level discussed in the net sales section.
The decrease in expenses as a percentage of net sales
9
<PAGE>
was primarily due to certain expenses, such as salaries and wages and some
promotional expenses, that are basically fixed in amount and are not directly
related to the increased net sales discussed above.
General and administrative expenses totaled $1,282,000 in the first quarter
of 2001, compared to $1,435,000 in the first quarter of 2000, a decrease of
$153,000, or 11%. General and administrative expenses for the first quarter of
fiscal 2001 amounted to 6.4% of net sales, compared to 15.1% during the first
quarter of fiscal 2000. The decrease in general and administrative expenses was
primarily due to a decrease in legal expenses, offset to a lesser extent by an
increase in amortization of intangible assets.
Other Income (Expense). Other income totaled $192,000 in the first quarter
----------------------
of 2001, compared to $506,000 in the first quarter of 2000, a decrease of
$314,000 or 62%. The decrease was primarily due to decreased interest income as
a result of the Company having a reduced amount of marketable securities and
cash equivalents.
Provision for Income Taxes. The income tax provision for the first quarter
---------------------------
of fiscal 2001 was $459,000 or 31% of income before income taxes. The effective
rate is less than the federal statutory rate due to changes in the valuation
allowance. There was no provision for income taxes for the first quarter of
fiscal 2000 due to changes in the valuation allowance. At October 31, 2000, the
Company has a valuation allowance of approximately $1.9 million against its net
deferred tax assets. To the extent that the Company generates sufficient
ordinary income in the future, approximately $451,000 of the valuation allowance
may be further reversed as a reduction of income tax expense and thereby reduce
the effective tax rate. Approximately $1.5 million of the valuation allowance
would only be reversed and reflected as a reduction of income tax expense if the
Company generates qualifying capital gain income, which is not expected to occur
in the foreseeable future.
Liquidity and Capital Resources
-------------------------------
The Company has a credit agreement with a major bank providing a
$16,000,000 revolving line of credit which is subject to a borrowing base that
is calculated monthly. The borrowing base is based on a percentage of eligible
receivables, inventory and short-term investments. The line of credit provides
for cash advances to a maximum of $7,000,000 and the issuance of commercial
letters of credit. The agreement, which expires December 31, 2001, is secured
by inventory and receivables and contains certain financial covenants, which the
Company must satisfy.
Cash and cash equivalents totaled $9,932,000 as of October 31, 2000,
compared to $14,066,000 as of July 31, 2000. Net working capital as of October
31, 2000 was $28,165,000, compared to $27,192,000 as of July 31, 2000, and the
Company's current ratio was 2.8:1 as of October 31, 2000, compared to 3.3:1 as
of July 31, 2000. The decreases in working capital and current ratio were
primarily due to cash used in and generated from operations, and increases in
inventory and accounts receivable, offset by increases in various liabilities
such as trade acceptances and accruals for various expenses.
The Company had long-term debt of $768,000 as of October 31, 2000, compared
to $942,000 as of July 31, 2000, with the decrease due to a payment made during
the first quarter. The Company had net stockholders' equity of $31,373,000 as of
October 31, 2000, compared to $30,369,000 as of July 31, 2000, with the
difference due to operating results for the three months ended October 31, 2000.
10
<PAGE>
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 in short-term instruments and
money market funds. The Company also has interest rate sensitivity related to
its revolving direct advance line of credit.
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, development, and sale 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; (6) the risks inherent in legal proceedings;
(7) the uncertainty regarding the consumer response to the recall of certain of
the Company's X Games helmets which did not comply with all applicable Consumer
Product Safety Commission standards; and (8) the uncertainty regarding the
reaction of the retailers to the recall. 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.
11
<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 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits.
---------
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
On October 6, 2000, the Company filed a Form 8-K with the
Securities and Exchange Commission relating to the
announcement that the Company was working with the Consumer
Product Safety Commission ("CPSC") on an expected recall of
certain of its X Games helmets which did not comply with
all applicable CPSC standards.
12
<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 15, 2000 /s/ Raymond H. Losi II
--------------------------------------
Raymond H. Losi II
Chief Executive Officer
(Principal Executive Officer)
December 15, 2000 /s/ Roger M. Wasserman
---------------------------------------
Roger M. Wasserman
Chief Financial Officer
(Principal Financial and Accounting
Officer)
13
