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, 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 June 9, 2000, there were 4,584,432 shares of Common Stock, $.001 par
value, outstanding.
VARIFLEX, INC.
INDEX
Page No.
--------
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at
April 30, 2000 and July 31, 1999........................................................... 3
Consolidated Statements of Operations for the
Three Month and Nine Month Periods Ended April 30, 2000 and 1999........................... 4
Consolidated Statements of Cash Flows for the
Nine Months Ended April 30, 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 5. Other Information.......................................................................... 14
Item 6. Exhibits and Reports on Form 8-K........................................................... 14
2
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
VARIFLEX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
April 30, July 31,
2000 1999
----------- -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 5,892 $ 5,343
Marketable securities available for sale 9,784 19,892
Trade accounts receivable, less allowances of $434 and
$430 as of April 30, 2000 and July 31, 1999, respectively 10,894 6,900
Inventory (finished goods) 7,977 5,194
Inventory (raw materials and work-in-process) 1,664 554
Deferred income taxes 743 604
Prepaid expenses and other current assets 495 641
----------- -----------
Total current assets 37,449 39,128
Property and equipment, net 278 283
Other assets 4,110 1,206
----------- -----------
Total assets $ 41,837 $ 40,617
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Trade acceptances payable $ 982 $ 133
Accounts payable 2,178 466
Accrued warranty 1,235 844
Accrued salaries and related liabilities 916 410
Accrued co-op advertising 1,856 1,612
Accrued returns and allowances 480 429
Accrued product liability claims 250 267
Income taxes payable 31 272
Other accrued expenses 1,194 623
Current maturities of note payable 200 -
----------- -----------
Total current liabilities 9,322 5,056
Note payable, less current maturities 912 -
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
April 30, 2000 and July 31, 1999 9 9
Common stock warrants 702 702
Additional paid-in capital 21,023 21,023
Retained earnings 19,527 19,333
Accumulated other comprehensive loss (3,193) (2,432)
Treasury stock, at cost, 1,025,054 shares and 512,979 shares as of
April 30, 2000 and July 31, 1999, respectively (6,465) (3,074)
----------- -----------
Total stockholders' equity 31,603 35,561
----------- -----------
Total liabilities and stockholders' equity $ 41,837 $ 40,617
=========== ===========
See accompanying notes.
3
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Nine months ended Three months ended
April 30, April 30,
---------------------------- ----------------------------
2000 1999 2000 1999
--------- ---------- ---------- ----------
Net sales $ 37,553 $ 29,897 $ 17,109 $ 10,395
Cost of goods sold 29,210 23,106 13,032 7,997
--------- ---------- ---------- ----------
Gross profit 8,343 6,791 4,077 2,398
--------- ---------- ---------- ----------
Operating expenses:
Selling and marketing 3,707 3,608 1,681 1,225
General and administrative 5,399 3,963 2,333 1,326
--------- ---------- ---------- ----------
Total operating expenses 9,106 7,571 4,014 2,551
--------- ---------- ---------- ----------
Income (loss) from operations (763) (780) 63 (153)
--------- ---------- ---------- ----------
Other income (expense):
Loss on sale of marketable securities (313) - - -
Interest income and other 1,270 1,517 343 471
--------- ---------- ---------- ----------
Total other income (expense) 957 1,517 343 471
--------- ---------- ---------- ----------
Income before income taxes 194 737 406 318
Provision for income taxes - 180 - -
--------- ---------- ---------- ----------
Net income $ 194 $ 557 $ 406 $ 318
========= ========== ========== ==========
Net income per share of common stock:
Basic $ 0.04 $ 0.09 $ 0.08 $ 0.06
========= ========== ========== ==========
Diluted $ 0.04 $ 0.09 $ 0.08 $ 0.06
========= ========== ========== ==========
Weighted average shares outstanding:
Basic 5,241 5,899 5,000 5,654
========= ========== ========== ==========
Diluted 5,368 5,945 5,080 5,697
========= ========== ========== ==========
See accompanying notes.
4
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended
April 30,
--------------------------------
2000 1999
---------- ----------
Operating activities
Net income $ 194 $ 557
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 203 307
Non-cash interest charge 2 -
Deferred income taxes (139) (215)
Loss on sale of marketable securities 313 2
Loss on disposal of fixed assets 2
Changes in operating assets and liabilities:
Trade accounts receivable (3,994) (1,378)
Inventory (3,893) 846
Prepaid expenses and other current assets 146 731
Trade acceptances payable 849 1,071
Accounts payable 1,712 348
Other current liabilities 1,505 1,048
---------- ----------
Net cash provided by (used in) operating activities (3,100) 3,317
---------- ----------
Investing activities
Purchases of property and equipment (131) (106)
Proceeds from sale of assets 4 -
Gross purchases of available-for-sale securities (1,117) (1,289)
Gross sales of available-for-sale securities 10,151 2
Other assets (1,867) (1,128)
Purchase of treasury shares (3,391) (2,295)
---------- ----------
Net cash provided by (used in) investing activities 3,649 (4,816)
---------- ----------
Financing activities - -
Net increase (decrease) in cash 549 (1,499)
Cash and cash equivalents at beginning of period 5,343 7,522
---------- ----------
Cash and cash equivalents at end of period $ 5,892 $ 6,023
========== ==========
Cash paid during the period for:
Interest - -
Income taxes $ 378 $ 512
See accompanying notes.
5
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, 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 exclude any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share include the
dilutive effects of stock options and warrants. For the three and nine month
periods ended April 30, 2000 the number of shares used in the calculation of
diluted earnings per share included 79,526 shares and 126,944 shares,
respectively, and 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.
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 ($37,000) and ($567,000), respectively, for
the three and nine month periods ended April 30, 2000 and amounted to $426,000
and ($810,000), respectively, for the three and nine month periods ended April
30, 1999.
6
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 April 30, 2000 and 1999, it operated in
only one segment.
Sales of similar products for that segment are as follows:
Nine months ended Three months ended
April 30, April 30,
------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- -----------
(In thousands) (In thousands)
In-line skates $ 16,639 $ 16,444 $ 4,526 $ 4,428
Canopies 6,288 4,339 4,100 3,170
Trampolines 6,117 - 5,680 -
Skateboards 4,748 4,765 1,458 1,346
Other 5,183 5,464 2,025 1, 725
---------- ---------- ---------- -----------
Total gross sales 38,975 31,012 17,787 10,669
Returns and allowances (1,422) (1,115) (680) (274)
---------- ---------- ---------- -----------
Total net sales $ 37,553 $ 29,897 $ 17,109 $ 10,395
========== ========== ========== ===========
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. Other Assets
In April 2000, the Company purchased a patent from KD Kanopy, Inc.
which involves a collapsible canopy with a telescoping roof support structure.
The Company purchased the patent for an initial cash payment of $1,450,000 and a
promissory note payable in installments of $200,000 each to be paid annually
over an eight-year period commencing on August 1, 2000. The note was recorded at
its present value of $1,110,000, based on the Company's estimated incremental
borrowing rate of interest. The total cost recorded for the patent was
$2,560,000.
Note 8. 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 (the
"Carter action") 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
"Lynch action"). In the Carter action, Service Merchandise Company, Inc., a
customer of the Company, was also named as a defendant. In September 1998, the
Company received a demand for defense and indemnification
7
from Service Merchandise Company, Inc. with respect to the claims filed against
it in the Carter action. For further details concerning these actions, please
see Note 7 in the Form 10-Q filed by the Company with respect to its fiscal
quarter ended January 31, 2000.
On May 12, 2000 the Company entered into a Settlement Agreement with
plaintiffs in the Carter action, pursuant to which the Carter case was dismissed
with prejudice by the Court on May 22, 2000 with respect to the Company and
Service Merchandise Company, Inc. Accordingly, the defense and indemnification
action brought by Service Merchandise Company, Inc. against the Company has also
been dismissed with prejudice.
On April 26, 2000 the Company entered into a Settlement Agreement with
plaintiffs in the Lynch action, which includes the purchase by the Company from
Lynch and KD Kanopy of U.S. Patent No. 4,779,635 (see Note 7 above), pursuant to
which the Lynch action was dismissed with prejudice by the Court on June 5,
2000. Under this settlement, plaintiffs' claims of infringment of U.S. Patent
No. 5,224,001 were dismissed with prejudice, with no finding of infringement or
non-infringment as to the Company's Quik-Shade I Product and a finding of
non-infringment as to the Company's Quik-Shade II Product, and all of
plaintiffs' remaining claims and the Company's counterclaims were dismissed with
prejudice.
In the Carter action, SAFECO Insurance Company of America ("SAFECO")
agreed to provide the Company with a defense, subject to a reservation of rights
to deny certain 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 certain coverage liability in the Carter
action. The Company answered the Coverage Action, denying its material
allegations.
On January 13, 2000, the Company tendered to SAFECO the defense of the
Lynch action referenced above. On March 7, 2000 SAFECO issued a letter that
denied any coverage for the Lynch action but which also agreed to provide a
defense of the action, subject to a reservation of rights to deny coverage and
to terminate the defense at any time.
The disagreements between the Company and SAFECO include (a) whether
SAFECO is required to cover sums paid by the Company in connection with the
settlement of the Carter and Lynch claims, (b) the proper hourly rate of
reimbursement for attorneys' fees incurred in the defense of the Carter and
Lynch actions for which SAFECO has already reimbursed the Company and (c)
whether SAFECO is required to reimburse the Company for the balance of the
attorneys' fees incurred by the Company in connection with its defense of the
Carter and Lynch actions. The Company intends vigorously to defend SAFECO's
Coverage Action and to pursue its claims against SAFECO for all of the foregoing
amounts. The Company shortly will file against SAFECO an arbitration proceeding
pursuant to California Civil Code section 2860 to resolve these disputes. There
can be no assurance that the Company will prevail on its claims against SAFECO
or that the Company will not be required to return amounts already received from
SAFECO subject to its reservation of rights. The Company does not believe that
either the outcome of the Coverage Action or its other disagreements with
SAFECO, or the costs to be incurred in defending the Coverage Action or pursuing
its claims against SAFECO, or the efforts of management in
8
connection with these matters, will have a material and adverse effect on the
Company's business, financial condition or results of operations.
From time to time the Company is involved in other claims and lawsuits
arising in the ordinary course of its business. In the opinion of management,
all of these claims and lawsuits are covered by insurance or these matters will
not have a material and adverse effect on the Company's business, financial
condition or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
Overview
--------
The Company is a leading distributor and wholesaler in the United
States of in-line skates, skateboards, recreational safety helmets and athletic
protective equipment (such as wrist guards, elbow pads and knee pads used by
skaters and skateboarders) 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 third quarter of fiscal 2000 (the quarter
----------
ended April 30, 2000) totaled $17,109,000 compared to $10,395,000 for the third
quarter of fiscal 1999, representing an increase of $6,714,000, or 65%. For the
nine months ended April 30, 2000, net sales totaled $37,553,000 compared to
$29,897,000 for the corresponding period of the prior year, representing an
increase of $7,656,000, or 26%. The increase in net sales for the third quarter
and the nine 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
The following table shows the Company's major product categories as a percentage
of total gross sales:
Quarter Ended April 30, Nine Months Ended April 30,
2000 1999 2000 1999
---- ---- ---- ----
In-line skates 26% 42% 43% 53%
Canopies 23% 30% 16% 14%
Trampolines 32% - 16% -
Skateboards and scooters 8% 13% 12% 17%
Recreational safety helmets 9% 5% 8% 5%
Athletic protective equipment 2% 1% 3% 2%
Yo-yo's - 9% 1% 6%
Snowboards - - 1% 3%
Other (*) (*) (*) (*)
--- --- --- ---
Total 100% 100% 100% 100%
=== === === ===
---------------------
(*) Less than one-half of one percent.
Gross Profit. Gross profit for the third quarter of fiscal 2000 totaled
------------
$4,077,000, compared to $2,398,000 for the third quarter of fiscal 1999, an
increase of $1,679,000, or 70%. The Company's gross margin was 23.8% of net
sales for the quarter ended April 30, 2000, compared to 23.1% for the quarter
ended April 30, 1999. The increase in gross margin percentage was primarily the
result of the increased sales of the higher margin canopies, recreational safety
helmets and trampolines, offset to a lesser degree by increases in ocean freight
costs and decreases in sales prices of in-line skates as discussed above. Gross
margin was 22.2% for the nine months ended April 30, 2000, compared to 22.7% for
the nine months ended April 30, 1999. The decrease in gross margin was primarily
due to increases in ocean freight costs and decreases in sales prices of in-line
skates due to competitive pressures as discussed above, offset to a lesser
degree by the increased sales of the higher margin canopies, recreational safety
helmets and trampolines. The Company's gross margin of 23.8% for the third
quarter of fiscal 2000 represents an increase from 21.5% for the quarter ended
January 31, 2000. There can be no assurance that the Company can continue to
increase or maintain sales of higher margin products and 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 $1,681,000 for the third quarter of 2000, compared to $1,225,000 in the
third quarter of 1999, an increase of $456,000 or 37%. Selling and marketing
expenses for the third quarter of fiscal 2000 thus amounted to 9.8% of net
sales, compared to 11.8% during the third quarter of fiscal 1999. For the nine
months ended April 30, 2000, selling and marketing expenses totaled $3,707,000
compared to $3,608,000 for the corresponding period of the prior year,
representing an increase of $99,000 or 3%. Selling and marketing expenses for
the first nine months of fiscal 2000 thus amounted to 9.9% of net sales,
compared to 12.1% during the first nine months of fiscal 1999. The increase in
the dollar amount for both the third quarter and first nine months of fiscal
2000 was primarily due to increases in sales commission expense. The decrease as
a percentage of net sales for both the third quarter and first nine months of
fiscal 2000 was primarily due to decreases in advertising and promotional
expenses and the result of certain other expenses that are basically fixed in
amount and are not directly related to the increased net sales discussed above.
10
General and administrative expenses totaled $2,333,000 in the third
quarter of 2000, compared to $1,326,000 in the third quarter of 1999, an
increase of $1,007,000, or 76%. General and administrative expenses for the
third quarter of 2000 amounted to 13.6% of net sales, compared to 12.8% during
the third quarter of 1999. For the nine months ended April 30, 2000, general and
administrative expenses totaled $5,399,000 compared to $3,963,000 for the
corresponding period of the prior year, representing an increase of $1,436,000,
or 36%. General and administrative expenses for the first nine months of fiscal
2000 amounted to 14.4% of net sales, compared to 13.3% during the first nine
months of fiscal 1999. These increases in both the third quarter and first nine
months of fiscal 2000 was primarily due to an increase in expenses related to
the legal proceedings described in Note 8 in the notes to the consolidated
financial statements, and to a lesser extent to an increase in product
development expenses, offset by an insurance recovery related to prior fiscal
years.
Other Income (Expense). Other income totaled $343,000 in the third
-----------------------
quarter of 2000, compared to $471,000 in the third quarter of 1999, a decrease
of $128,000 or 27%. For the nine months ended April 30, 2000, other income
totaled $957,000 compared to $1,517,000 for the corresponding period of the
prior year, a decrease of $560,000 or 37%. The decrease in other income for the
third quarter of fiscal 2000 was primarily due to decreased interest income as a
result of the Company having a reduced amount of marketable securities. The
decrease in other income for the nine months of fiscal 2000 was primarily due to
realized losses from the sale of marketable securities and to decreased interest
income due to the reduced amount of the marketable securities.
Provision for Income Taxes. There is no provision for income taxes for
---------------------------
the third quarter and first nine months of fiscal 2000 due to changes in the
valuation allowance. No provision for income taxes was recorded for the third
quarter of fiscal 1999. A provision for income taxes of $180,000 was recorded
for the first nine months of fiscal 1999. At April 30, 2000 the Company has a
valuation allowance of approximately $2.2 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, as amended March 2000, with a major
bank providing a $8,000,000 revolving line of credit for the issuance of
commercial letters of credit. The agreement, which expires December 31, 2001, is
secured by inventory and receivables and contains certain financial covenants,
which the Company must satisfy.
Cash and marketable securities available for sale totaled $15,676,000
as of April 30, 2000, compared to $25,235,000 as of July 31, 1999. Net working
capital as of April 30, 2000 was $28,127,000, compared to $34,072,000 as of July
31, 1999, and the Company's current ratio was 4.0:1 as of April 30, 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), for the purchase of the patent (as described in Note 7 in the notes
to consolidated financial statements) and for working capital purposes. The
Company expects that it will sell marketable securities, for working capital
purposes, during the fourth quarter which are anticipated to result in
additional realized losses.
11
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 began in the third quarter of fiscal 2000 and are expected to
be completed in the fourth quarter 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 long-term debt of $912,000 as of April 30, 2000,
compared to no long-term debt as of July 31, 1999, with the difference due to
the acquisition of a patent described in Note 7 in the notes to the consolidated
financial statements. The Company had net stockholders' equity of $31,603,000 as
of April 30, 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 nine months ended April 30, 2000, and a decrease in accumulated
other comprehensive income due to unrealized losses on investments in marketable
securities.
In May 2000 the Company, in a private sale transaction, purchased an
aggregate of 415,911 shares of its common stock for an aggregate of $2,250,079
pursuant to an unsolicited offer to sell received by the Company.
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.
Risks Associated With Forward Looking Statements
------------------------------------------------
From time to time, the Company may make certain statements that contain
"forward-looking" information or statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Words such as "anticipate", "believe",
"expect", "estimate", "project", and similar expressions are intended to
identify such forward-looking statements. Forward-looking statements may be made
by management orally or in writing, including, but not limited to, in press
releases, as part of the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in this Report, and in the
Company's other filings with the Securities Exchange Commission. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Such forward-looking statements are subject to
certain risks, uncertainties and assumptions, including, without limitation
those identified below. Should one or more of these risks or uncertainties
materialize, or should any of the underlying assumptions prove incorrect, actual
results of current or future operations may vary materially from those
anticipated, estimated,
12
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
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Note 8 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 May 2000 the Company, in a private sale transaction, purchased an
aggregate of 415,911 shares of its common stock for an aggregate of
$2,250,079 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
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 14, 2000 /s/ Raymond H. Losi II
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Raymond H. Losi II
Chief Executive Officer (Principal Executive Officer)
June 14, 2000 /s/ Roger M. Wasserman
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Roger M. Wasserman
Chief Financial Officer (Principal Financial and
Accounting Officer)
15