<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, 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 March 13, 2000, there were 5,000,343 shares of Common Stock, $.001 par
value, outstanding.
<PAGE>
VARIFLEX, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at
January 31, 2000 and July 31, 1999.......................................... 3
Consolidated Statements of Operations for the
Three Month and Six Month Periods Ended January 31, 2000 and 1999........... 4
Consolidated Statements of Cash Flows for the
Six Months Ended January 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...................................... 9
Part II - Other Information
Item 1. Legal Proceedings........................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders...................... 14
Item 6. Exhibits and Reports on Form 8-K......................................... 14
</TABLE>
2
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
VARIFLEX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
January 31, July 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,803 $ 5,343
Marketable securities available for sale 9,938 19,892
Trade accounts receivable, less allowances of $429 and
$430 as of January 31, 2000 and July 31, 1999, respectively 10,840 6,900
Inventory (finished goods) 10,428 5,194
Inventory (raw materials and work-in-process) 1,542 554
Deferred income taxes 307 604
Prepaid expenses and other current assets 878 641
-------- ---------
Total current assets 36,736 39,128
Property and equipment, net 285 283
Other assets 1,696 1,206
-------- ---------
Total assets $ 38,717 $ 40,617
======== =========
Liabilities and stockholders' equity Current liabilities:
Trade acceptances payable $ 1,147 $ 133
Accounts payable 1,575 466
Accrued warranty 1,200 844
Accrued salaries and related liabilities 434 410
Accrued co-op advertising 1,625 1,612
Accrued returns and allowances 24 429
Accrued product liability claims 254 267
Income taxes payable - 272
Other accrued expenses 818 623
-------- ---------
Total current liabilities 7,077 5,056
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares
authorized, none issued and outstanding - -
Common stock, $.001 par value, 40,000,000 shares
authorized, 6,025,397 issued and outstanding as of
January 31, 2000 and July 31, 1999 9 9
Common stock warrants 702 702
Additional paid-in capital 21,023 21,023
Retained earnings 19,121 19,333
Accumulated other comprehensive loss (2,750) (2,432)
Treasury stock, at cost, 1,025,054 shares and 512,979 shares as of
January 31, 2000 and July 31, 1999, respectively (6,465) (3,074)
-------- ---------
Total stockholders' equity 31,640 35,561
-------- ---------
Total liabilities and stockholders' equity $ 38,717 $ 40,617
======== =========
</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,
---------------------------- ---------------------------
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales $ 20,444 $ 19,502 $ 10,941 $ 10,626
Cost of goods sold 16,178 15,109 8,591 7,887
--------- -------- --------- --------
Gross profit 4,266 4,393 2,350 2,739
--------- -------- --------- --------
Operating expenses:
Selling and marketing 2,026 2,383 1,144 1,427
General and administrative 3,066 2,637 1,631 1,545
--------- -------- --------- --------
Total operating expenses 5,092 5,020 2,775 2,972
--------- -------- --------- --------
Loss from operations (826) (627) (425) (233)
--------- -------- --------- --------
Other income (expense):
Loss on sale of marketable securities (313) - (313) -
Interest income and other 927 1,046 421 544
--------- -------- --------- --------
Total other income (expense) 614 1,046 108 544
--------- -------- --------- --------
Income (loss) before income taxes (212) 419 (317) 311
Provision for income taxes - 180 - 180
--------- -------- --------- --------
Net income (loss) $ (212) $ 239 $ (317) $ 131
========= ======== ========= ========
Net income (loss) per share of common stock:
Basic $ (0.04) $ 0.04 $ (0.06) $ 0.02
========= ======== ========= ========
Diluted $ (0.04) $ 0.04 $ (0.06) $ 0.02
========= ======== ========= ========
Weighted average shares outstanding:
Basic 5,359 6,017 5,206 6,009
========= ======== ========= ========
Diluted 5,359 6,065 5,206 6,084
========= ======== ========= ========
</TABLE>
4
<PAGE>
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
January 31,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
Operating activities
Net income (loss) $ (212) $ 239
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 129 223
Deferred income taxes 297 (616)
Loss on sale of marketable securities 313 2
Loss on disposal of fixed assets 2 -
Changes in operating assets and liabilities:
Trade accounts receivable (3,940) (2,881)
Inventory (6,222) 118
Prepaid expenses and other current assets (237) 803
Trade acceptances payable 1,014 161
Accounts payable 1,109 95
Other current liabilities (102) 2,381
-------- --------
Net cash provided by (used in) operating activities (7,849) 525
-------- --------
Investing activities
Purchases of property and equipment (96) (83)
Proceeds from sale of assets 4 -
Gross purchases of available-for-sale securities (828) (883)
Gross sales of available-for-sale securities 10,151 2
Other assets (531) (991)
Purchase of treasury shares (3,391) (2,294)
-------- --------
Net cash provided by (used in) investing activities 5,309 (4,249)
-------- --------
Financing activities - -
Net decrease in cash (2,540) (3,724)
Cash and cash equivalents at beginning of period 5,343 7,522
-------- --------
Cash and cash equivalents at end of period $ 2,803 $ 3,798
======== ========
Cash paid during the period for:
Interest - -
Income taxes $ 378 $ 112
</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 and six month periods ended
January 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, 1999.
Note 2. Reclassifications
Certain reclassifications have been made to the fiscal 1999 financial
statements to conform with fiscal 2000 presentation.
Note 3. Earnings per Share
Basic earnings per share excludes any dilutive effects of options, warrants
and convertible securities. Diluted earnings per share includes the dilutive
effects of stock options and warrants. For the three and six month periods
ended January 31, 2000 diluted earnings per share excluded the effect of all
options and warrants as their effect would have been antidilutive. 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.
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 $21,000 and ($530,000), respectively, for the
three and six month periods ended January 31, 2000 and amounted to $585,000 and
($1,236,000), respectively, for the three and six month periods ended January
31, 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 January 31, 2000 and 1999, it operated in only one segment.
Sales of similar products for that segment are as follows:
<TABLE>
<CAPTION>
Six months ended Three months ended
January 31, January 31,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
In-line skates $ 12,113 $ 12,016 $ 5,865 $ 7,073
Skateboards 3,290 3,419 2,093 1,830
Canopies 2,188 1,169 1,281 468
Other 3,595 3,739 2,101 1,698
------------- ------------- ------------- -------------
Total gross sales 21,186 20,343 11,340 11,069
Returns and allowances (742) (841) (399) (443)
------------- ------------- ------------- -------------
Total net sales $ 20,444 $ 19,502 $ 10,941 $ 10,626
============= ============= ============= =============
</TABLE>
Note 6. Treasury Stock
In December 1999, the Company purchased 512,075 shares of its common stock,
which were tendered as a result of a self-tender offer, at a price of $6.50 per
share. 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 (a)
alleges, among other things, that the Company's Quik Shade(R) product infringes
a patent owned by the plaintiff and used in a competing instant set-up,
collapsible canopy product, and infringes plaintiff's trade dress, and (b) prays
for unspecified monetary damages, treble damages, punitive damages, costs and
attorney's fees, an injunction and the destruction of all allegedly infringing
products. The second Complaint (a) alleges that the Company's Quik Shade(R)
product infringes two patents owned by the plaintiff and (b) prays for an
accounting, general damages, treble damages, an injunction and costs and
attorney's fees. The Company has filed an answer in both lawsuits denying the
allegations of the Complaints and has filed counterclaims in both lawsuits
seeking declarations of patent invalidity and non-infringement as to the
plaintiffs' patents, as well as damages against the plaintiffs for alleged
antitrust violations and restitution for unfair competition violations.
On September 8, 1999 the Court allowed plaintiffs Carter and E-Z Up to
amend their Complaint to state an additional claim against the Company for
alleged infringement of an additional patent. The Company has answered this
amended Complaint, denying its material
7
<PAGE>
allegations, and pleading an amended counterclaim for similar alleged wrongs as
previously pleaded in its counterclaim.
In September 1998, the Company received a demand for defense and
indemnification of Service Merchandise Company, Inc. in that action entitled
Mark C. Carter, et. al. v. Service Merchandise Company, Inc., (Case No. C98-
03274 DLJ ENB) in the United States District Court for the Northern District of
California. The Complaint in this action is virtually identical to the
Complaint against Service Merchandise in the above-referenced action by Carter
in the Central District of California in Los Angeles. The Company has agreed to
indemnify and defend Service Merchandise (which is a retailer of the Company's
product) in this action. Service Merchandise filed an answer to the Complaint
in the Central District of California (Los Angeles) action. Thereafter, the
plaintiff dismissed without prejudice the Northern District of California
action, and the claim proceeded in the Los Angeles action. Thereafter, Service
Merchandise filed a Chapter 11 bankruptcy petition, so the case is now stayed as
to that defendant only. No party has taken action to obtain an order for relief
from the automatic stay as to defendant Service Merchandise.
The Los Angeles action has had extensive discovery taken, with a trial date
presently set for May 2, 2000. In July, 1999 the Denver action was ordered
transferred to the federal court in Los Angeles, with a recommendation for
consolidation with the previously pending Los Angeles action. However, the Los
Angeles court did not act to consolidate the two actions, and the parties
recently have stipulated, and the Court has ordered, that the Denver action
remain separate from the Los Angeles action. Thus, only the Los Angeles action
is now set for trial on May 2, 2000.
On October 21, 1999, the Court denied a motion for summary judgement by
Variflex directed against plaintiffs' trade dress infringement claims due to the
existence of triable issues of material fact concerning such claims. This order
will allow plaintiffs' trade dress infringement claims to go to trial and be
determined by a jury.
On February 7, 2000 the Court granted counterclaim defendants' motion for
summary judgment against Variflex regarding Variflex's counterclaims for
antitrust and related state law violations. However, Variflex's counterclaims
for declarations of patent invalidity and non-infringement remain in the case.
On March 1, 2000 the Court held a hearing on the parties' cross-motions for
claim interpretation on the patent claims. The Court took the matter under
submission, and has not yet made a ruling. Variflex in turn plans to file a
motion for summary judgment on plaintiffs' patent infringement claims, which
motion is expected to be filed shortly.
In the Carter action, SAFECO Insurance Company of America has agreed to
provide a defense with a reservation of rights. SAFECO denies coverage for the
patent claims and reserves rights as to trade dress and advertising injury
claims, asserting numerous defenses to coverage. On September 28, 1999 SAFECO
filed, and on October 11, 1999 caused to be served on the Company, a Complaint
for Declaratory Relief entitled SAFECO Insurance Company of America vs.
Variflex, Inc., et al., (Case No. BC217286) in the Superior Court of the State
of California for the County of Los Angeles ("the Coverage Action"). The
Coverage Action asserts a single cause of action for declaratory relief by which
SAFECO seeks a declaration concerning seven different theories of defense to
coverage liability in the underlying Carter action. The Company answered the
Coverage Action, denying its material allegations. SAFECO propounded requests
for admissions and interrogatories, to which the Company has responded. On
February 17, 2000 the Court granted the Company's motion to stay the Coverage
Action pending the outcome of the underlying action. If and when the stay is
lifted, the Company intends vigorously to defend the Coverage Action.
8
<PAGE>
On January 13, 2000, the Company tendered to SAFECO the defense of the
Lynch action referenced above. SAFECO has not yet responded to this tender of
defense and indemnification.
The Company believes it has meritorious defenses to the claims alleged in
the Carter and Lynch Complaints and intends to conduct a vigorous defense. The
Company also intends to vigorously pursue its counterclaims. An unfavorable
outcome in the above matters could have a material and adverse effect on the
Company's business prospects and financial condition.
In addition, even if the ultimate outcome in both cases is resolved in
favor of the Company, the defense of such litigation may involve considerable
costs, which could be material, and could divert the efforts of management,
which could have a material and adverse effect on the Company's business and
results of operations.
From time to time the Company is involved in other claims and lawsuits
arising in the ordinary course of its business. In the opinion of management,
all of these claims and lawsuits are covered by insurance or these matters will
not have a material and adverse effect on the Company's business, financial
condition, results of operations or cash flows.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Overview
--------
The Company is a leading distributor and wholesaler in the United States of
in-line skates, skateboards, recreational safety helmets and athletic protective
equipment (such as wrist guards, elbow pads and knee pads used by skaters and
skateboarders) to the mass market. The Company also sells Quik Shade(R), a
convenient and innovative portable instant canopy, snowboards and related
accessories, and the Airzone(TM) "springless" trampoline. The Company designs
and develops these products which are then manufactured to the Company's
detailed specifications by independent contractors. The Company distributes its
products throughout the United States and in foreign countries.
Results of Operations
---------------------
Net Sales. Net sales for the second quarter of fiscal 2000 (the quarter
----------
ended January 31, 2000) totaled $10,941,000 compared to $10,626,000 for the
second quarter of fiscal 1999, representing an increase of $315,000, or 3%. For
the six months ended January 31, 2000, net sales totaled $20,444,000 compared to
$19,502,000 for the corresponding period of the prior year, representing an
increase of $942,000, or 5%. The increase in net sales for the second quarter
and the six months primarily resulted from increases in sales of the Company's
canopies, recreational safety helmets, and trampolines (a new product introduced
in the fourth quarter of fiscal 1999), offset by decreases in sales of yo-yo's
and snowboards. Net sales were also adversely affected by competitive pressures
on in-line skates, which caused sales prices to decline in this product
category.
9
<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,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
In-line skates 52% 64% 58% 60%
Skateboards and scooters 18% 18% 16% 18%
Canopies 11% 4% 10% 6%
Recreational safety helmets 10% 4% 8% 5%
Trampolines 3% - 2% -
Yo-yo's 2% 6% 1% 4%
Athletic protective equipment 1% 3% 3% 3%
Snowboards 1% 1% 1% 4%
Other 2% (*) 1% (*)
---- ---- ---- ----
Total 100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
_____________________
(*) Less than one-half of one percent.
Gross Profit. Gross profit for the second quarter of fiscal 2000 totaled
-------------
$2,350,000, compared to $2,739,000 for the second quarter of fiscal 1999, a
decrease of $389,000, or 14%. The Company's gross margin was 21.5% of net sales
for the quarter ended January 31, 2000, compared to 25.8% for the quarter ended
January 31, 1999. The decrease in gross margin percentage was primarily the
result of increases in ocean freight costs and decreases in sales prices of in-
line skates as discussed above. Gross margin was 20.9% for the six months ended
January 31, 2000, compared to 22.5% for the six months ended January 31, 1999.
The decrease in gross margin was primarily due to the same factors that impacted
the second quarter, as discussed above. The Company's gross margin of 21.5% for
the second quarter of fiscal 2000 represents an increase from 20.2% for the
quarter ended October 31, 1999. 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 in-line skates in order
to sustain or improve present gross profit margins.
Operating Expenses. The Company's selling and marketing expenses totaled
------------------
$1,144,000 for the second quarter of 2000, compared to $1,427,000 in the second
quarter of 1999, a decrease of $283,000 or 20%. Selling and marketing expenses
for the second quarter of fiscal 2000 thus amounted to 10.5% of net sales,
compared to 13.4% during the second quarter of fiscal 1999. The decrease in
selling and marketing expenses and the decrease as a percentage of net sales are
primarily due to decreases in promotional and co-op advertising expenses. For
the six months ended January 31, 2000, selling and marketing expenses totaled
$2,026,000 compared to $2,383,000 for the corresponding period of the prior
year, representing a decrease of $357,000 or 15%. Selling and marketing
expenses for the first six months of fiscal 2000 thus amounted to 9.9% of net
sales, compared to 12.2% during the first six months of fiscal 1999. The
decrease in dollar amount and the decrease as a percentage of net sales are
primarily due to decreases in promotional, co-op advertising, freight-out and
sales commission expenses.
General and administrative expenses totaled $1,631,000 in the second
quarter of 2000, compared to $1,545,000 in the second quarter of 1999, an
increase of $86,000, or 6%. General and administrative expenses for the second
quarter of 2000 amounted to 14.9% of net sales, compared to 14.5% during the
second quarter of 1999. For the six months ended January 31, 2000, general and
administrative expenses totaled $3,066,000 compared to $2,637,000 for the
corresponding period of the prior year, representing an increase of $429,000, or
16%. General and administrative expenses
10
<PAGE>
for the first six months of fiscal 2000 amounted to 15.0% of net sales, compared
to 13.5% during the first six months of fiscal 1999. These increases in both the
second quarter and first six months of fiscal 2000 are 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, and to a lesser extent to
an increase in product development expenses.
Other Income (Expense). Other income totaled $108,000 in the second
----------------------
quarter of 2000, compared to $544,000 in the second quarter of 1999, a decrease
of $436,000 or 80%. For the six months ended January 31, 2000, other income
totaled $614,000 compared to $1,046,000 for the corresponding period of the
prior year, a decrease of $432,000 or 41%. The decreases in other income for
both the second quarter and six months of fiscal 2000 were primarily due to
realized losses from the sale of marketable securities and to a lesser extent to
decreased interest income due to the reduced amount of the Company's marketable
securities.
Provision for Income Taxes. There is no provision for income taxes for the
---------------------------
second quarter and first six months of fiscal 2000 due to changes in the
valuation allowance. A provision for income taxes of $180,000 was recorded for
the second quarter and first six months of fiscal 1999. At January 31, 2000 the
Company has a valuation allowance of approximately $2.4 million against its net
deferred tax assets. To the extent that the Company generates sufficient income
in the future, the valuation allowance may be reversed as a reduction of income
tax expense and thereby reduce the effective tax rate.
Liquidity and Capital Resources
-------------------------------
The Company has a credit agreement with a major bank providing a $8,000,000
revolving line of credit for the issuance of commercial letters of credit. The
agreement, which expires April 1, 2000, is unsecured and contains certain
financial covenants, which the Company must satisfy.
Cash and marketable securities available for sale totaled $12,741,000 as of
January 31, 2000, compared to $25,235,000 as of July 31, 1999. Net working
capital as of January 31, 2000 was $29,659,000, compared to $34,072,000 as of
July 31, 1999, and the Company's current ratio was 5.2:1 as of January 31, 2000,
compared to 7.7:1 as of July 31, 1999. The decreases in working capital and
current ratio were primarily due to the use of approximately $10,000,000 of
proceeds from the sale of marketable securities for the purchase of treasury
stock (as described in Note 6 in the notes to consolidated financial statements)
and for working capital purposes. The Company expects that it will sell
additional marketable securities, for working capital purposes, during the third
quarter which are anticipated to result in additional realized losses.
Increases in inventory were primarily a result of orders received from one
customer for trampoline systems aggregating approximately $6.2 million in sales.
Such sales are expected to be completed in the third and fourth quarters of
fiscal 2000. The arrangements with this customer include an agreement on the
part of the Company to indemnify the customer for certain occurrences and could
result in a requirement that the Company buy back any unsold trampoline systems
(at average retail price sold) if the customer is required to stop selling these
products.
The Company had no long-term debt as of January 31, 2000 and July 31, 1999.
The Company had net stockholders' equity of $31,640,000 as of January 31, 2000,
compared to $35,561,000 as of July 31, 1999, with the difference due to the
purchase of treasury stock described above, operating results for the six months
ended January 31, 2000, and a decrease in accumulated other comprehensive income
due to unrealized losses on investments in marketable securities.
11
<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 portfolio of 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 with the Year 2000, these date codes needed to
accept four digit entries to distinguish 21st century dates from 20th century
dates. Residual Year 2000 issues may create 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 residual Year 2000 issues could result in
system failures and the generation of erroneous data.
State of Readiness. The Company has worked 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, home improvement chains and sporting goods chains, for the sale of its
products. Prior to January 1, 2000, the Company sent questionnaires to its
primary vendors, suppliers, customers and other third party providers of
significant services to determine that they had a program in place to address
Year 2000 issues and that they expected to be Year 2000 compliant. Over 90% of
the third parties with whom the Company has a material relationship provided
written assurances that they would be Year 2000 compliant.
As of the date hereof, the Company has not experienced any interruptions or
problems related to the Year 2000 issue.
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.
12
<PAGE>
Risks. The Company believes it has an effective program in place to
------
resolve the Year 2000 issue. 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, if any were to occur,
resulting from Year 2000 issues could also materially and adversely affect the
Company.
Contingency Plans. The Company has manual workaround contingency plans for
------------------
certain critical applications and other systems. The Company currently has
contingency plans in place to have on hand sufficient additional inventory if
significant third party suppliers are not Year 2000 compliant.
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. Submissions of Matters to Vote of Security Holders
--------------------------------------------------
At the Annual Meeting of Stockholders on December 6, 1999, 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 5,481,795
shares voted, representing 99.4% 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 5,469,624 12,171
Michael T. Carr 5,469,624 12,171
Loren Hildebrand 5,469,624 12,171
Raymond H. Losi 5,469,624 12,171
Raymond H. Losi II 5,469,624 12,171
Mark S. Siegel 5,469,624 12,171
</TABLE>
2. The Board's selection of Ernst & Young LLP as the Company's
independent public accountants for the fiscal year ended July 31, 2000 was
ratified. 5,441,750 shares of common stock voted in favor of the proposal,
10,545 shares voted against and 29,500 shares abstained.
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.
March 16, 2000 /s/ Raymond H. Losi II
------------------------
Raymond H. Losi II
Chief Executive Officer (Principal Executive Officer)
March 16, 2000 /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> 6-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 2,803
<SECURITIES> 9,938
<RECEIVABLES> 11,269
<ALLOWANCES> 429
<INVENTORY> 11,970
<CURRENT-ASSETS> 36,736
<PP&E> 5,014
<DEPRECIATION> 4,729
<TOTAL-ASSETS> 38,717
<CURRENT-LIABILITIES> 7,077
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 31,631
<TOTAL-LIABILITY-AND-EQUITY> 38,717
<SALES> 20,444
<TOTAL-REVENUES> 20,444
<CGS> 16,178
<TOTAL-COSTS> 16,178
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (212)
<INCOME-TAX> 0
<INCOME-CONTINUING> (212)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (212)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
