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, 2001 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 11, 2001, there were 4,603,771 shares of Common Stock, $.001 par
value, outstanding.
VARIFLEX, INC.
INDEX
Page No.
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Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at
October 31, 2001 and July 31, 2001.......................... 3
Consolidated Statements of Operations for the
Three Months Ended October 31, 2001 and 2000................ 4
Consolidated Statements of Cash Flows for the
Three Months Ended October 31, 2001 and 2000................ 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........................................... 11
Item 6. Exhibits and Reports on Form 8-K............................ 11
2
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
VARIFLEX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
October 31, July 31,
2001 2001
----------- ---------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 17,546 $ 16,612
Trade accounts receivable, less allowances of $439 and
$436 as of October 31, 2001 and July 31, 2001, respectively 7,272 8,067
Inventory (finished goods) 7,297 7,437
Inventory (raw materials and work-in-process) 553 727
Deferred income taxes 902 1,337
Prepaid expenses and other current assets 1,740 1,677
--------- --------
Total current assets 35,310 35,857
Property and equipment, net 330 295
Intangible assets 2,728 2,848
Other assets 476 574
--------- --------
Total assets $ 38,844 $ 39,574
========= ========
Liabilities and stockholders' equity
Current liabilities:
Trade acceptances payable $ 725 $ 537
Accounts payable 1,536 1,141
Accrued warranty 807 848
Accrued salaries and related liabilities 554 684
Accrued co-op advertising 2,015 1,882
Accrued returns and allowances 864 730
Accrued product liability claims 368 418
Other accrued expenses 286 573
Current maturities of note payable 200 200
--------- --------
Total current liabilities 7,355 7,013
Note payable, less current maturities 669 846
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, 6,044,736 issued and outstanding as of
October 31, 2001 and July 31, 2001 9 9
Common stock warrants 702 702
Additional paid-in capital 21,023 21,023
Retained earnings 17,801 18,696
Treasury stock, at cost, 1,440,965 shares
as of October 31, 2001 and July 31, 2001 (8,715) (8,715)
--------- --------
Total stockholders' equity 30,820 31,715
Total liabilities and stockholders' equity --------- --------
$ 38,844 $ 39,574
========= ========
See accompanying notes.
3
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months ended
October 31,
-------------------------------
2001 2000
------------ ----------
Net sales $ 9,738 $ 19,126
Cost of goods sold 8,713 15,764
-------- ---------
Gross profit 1,025 3,362
-------- ---------
Operating expenses:
Selling and marketing 505 809
General and administrative 1,531 1,282
-------- ---------
Total operating expenses 2,036 2,091
-------- ---------
Income (loss) from operations (1,011) 1,271
-------- ---------
Other income (expense):
Interest expense (23) (26)
Interest income and other 139 218
-------- ---------
Total other income (expense) 116 192
-------- ---------
Income (loss) before income taxes (895) 1,463
Provision for income taxes - 459
-------- ---------
Net income (loss) $ (895) $ 1,004
======== =========
Net income (loss) per share of common stock:
Basic $ (0.19) $ 0.22
======== =========
Diluted $ (0.19) $ 0.21
======== =========
Weighted average shares outstanding:
Basic 4,599 4,584
======== =========
Diluted 4,599 4,677
======== =========
See accompanying notes.
4
VARIFLEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended
October 31,
------------------------------
2001 2000
---------- ------------
Operating activities
Net income (loss) $ (895) $ 1,004
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 29 36
Amortization of intangibles 120 120
Non-cash interest charge 23 26
Deferred income taxes 435 (732)
Provision (recovery) for bad debts 3 (1)
Changes in operating assets and liabilities:
Trade accounts receivable 792 (4,890)
Inventory 314 (4,073)
Prepaid expenses and other current assets (63) 1,131
Trade acceptances payable 188 1,869
Accounts payable 395 323
Accrued product recall expenses - (56)
Other current liabilities (241) 1,322
---------- ------------
Net cash provided by (used in) operating activities 1,100 (3,921)
---------- ------------
Investing activities
Purchases of property and equipment (64) (30)
Other assets 98 17
---------- ------------
Net cash provided by (used in) investing activities 34 (13)
---------- ------------
Financing activities
Principal payment on note payable (200) (200)
---------- ------------
Net cash used in financing activities (200) (200)
---------- ------------
Net increase (decrease) in cash 934 (4,134)
Cash and cash equivalents at beginning of period 16,612 14,066
---------- ------------
Cash and cash equivalents at end of period $ 17,546 $ 9,932
========== ============
Cash paid during the period for:
Interest $ - $ -
Income taxes $ - $ 315
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 months ended October 31, 2001 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, 2001.
Note 2. Reclassifications
Certain reclassifications have been made to the fiscal 2001 financial
statements to conform with fiscal 2002 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 months ended
October 31, 2001, diluted earnings per share excluded the effect of all options
and warrants as their effect would have been antidilutive. For the three months
ended October 31, 2000, the number of shares used in the calculation of diluted
earnings per share included 93,252 shares issuable under stock options and
warrants using the treasury stock method.
Note 4. Cooperative Advertising
As of August 1, 2001, the Company adopted the Emerging Issue Task Force
(EITF) Issue 00-25, "Vendor Income Statement Characterization of Consideration
from a Vendor to a Retailer." EITF 00-25 requires consideration paid by a vendor
to a retailer, such as slotting fees and cooperative advertising, be classified
as a reduction of revenue in the vendor's income statement (instead of an
expense) unless certain criteria are met. Accordingly, certain charges for
cooperative advertising are reflected as a reduction of revenue. Prior year
financial statements have been reclassified to conform to the requirements of
EITF 00-25.
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 its assessment of performance as a single operating
unit, that during the three months ended October 31, 2001 and 2000, 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:
Three months ended
October 31,
-------------------------------
2001 2000
--------- ----------
(In thousands)
Action sport products $ 5,160 $ 14,610
Outdoor products 3,456 3,082
Protective products 1,764 2,816
Other products 177 229
--------- ----------
Total gross sales 10,557 20,737
Returns and allowances (526) (779)
Cooperative advertising (293) (832)
========= ==========
Total net sales $ 9,738 $ 19,126
========= ==========
Note 6. Legal Proceedings
From time to time, the Company is involved in claims and lawsuits
(including those involved in product liability) arising in the ordinary course
of its business. In the opinion of management, all of these claims and lawsuits
are covered by insurance. Management has set up reserves for estimated potential
liabilities and does not believe these matters will have a material and adverse
effect on the Company's business, financial condition, results of operations, or
cash flows.
7
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 protective equipment (such
as wrist guards, elbow pads and knee 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 2002 (the quarter
---------
ended October 31, 2001) totaled $9,738,000 compared to $19,126,000 for the first
quarter of fiscal 2001, representing a decrease of $9,388,000 or 49%. The
decrease in net sales primarily resulted from a decrease in sales of the
Company's mini-scooters, a product that was extremely popular for the 2000
holiday season. Smaller decreases in sales of other products were largely offset
by increases in sales of canopies. The decrease in sales of the other product
categories is primarily attributable to the slowdown in consumer retail
spending.
The following table shows the Company's major product categories as a
percentage of total gross sales for the first quarter of fiscal 2002 compared to
the first quarter of fiscal 2001. Action sport products include in-line skates,
skateboards, and scooters. The outdoor products include portable instant
canopies and springless trampolines. Protective products include recreational
protective equipment, such as wrist guards, elbow pads and knee pads, and
helmets:
Quarter Ended October 31,
2001 2000
---- ----
Action sport products 50% 71%
Outdoor products 33% 15%
Protective products 17% 14%
Other products (*) (*)
----- -----
Total 100% 100%
===== =====
(*) Less than one-half of one percent.
Gross Profit. Gross profit for the first quarter of fiscal 2002 totaled
------------
$1,025,000 compared to $3,362,000 for the first quarter of fiscal 2001, a
decrease of $2,337,000 or 70%. The Company's gross margin was 10.5% of net sales
for the quarter ended October 31, 2001, compared to 17.6% for the quarter ended
October 31, 2000. The decrease in gross margin percentage was primarily due to
an increase in labor and overhead costs as a percentage of sales. A substantial
amount of labor and overhead costs are basically fixed in amount and do not
decrease with lower sales volume. In addition, the Company incurred increased
warranty costs, workers' compensation insurance costs, and product liability
insurance costs.
8
Operating Expenses. The Company's selling and marketing expenses
------------------
totaled $505,000 for the first quarter of 2002, compared to $809,000 in the
first quarter of 2001, a decrease of $304,000 or 38%. Selling and marketing
expenses for the first quarter of fiscal 2002 amounted to 5.2% of net sales,
compared to 4.2% during the first quarter of fiscal 2001. The decrease in the
dollar amount was primarily due to a decrease in sales commissions' expense as a
result of the lower sales level discussed in the net sales section, offset to a
lesser extent by increased international sales expenses. The increase in
expenses as a percentage of net sales was primarily due to certain expenses,
such as salaries and wages and trade show expenses, that are basically fixed in
amount and are not directly related to the decreased net sales discussed above.
General and administrative expenses totaled $1,531,000 in the first
quarter of 2002, compared to $1,282,000 in the first quarter of 2001, an
increase of $249,000 or 19%. General and administrative expenses for the first
quarter of fiscal 2002 amounted to 15.7% of net sales, compared to 6.7% during
the first quarter of 2001. The increase in general and administrative expenses
was primarily due to an increase in product development expenses, as a result of
increased emphasis by the Company in product development, and an insurance
recovery in fiscal 2001 related to prior fiscal years, which resulted in lower
expenses in fiscal 2001.
Other Income (Expense). Other income totaled $116,000 in the first
----------------------
quarter of 2002, compared to $192,000 in the first quarter of 2001, a decrease
of $76,000 or 40%. The decrease was primarily due to decreased interest income
as a result of the decreased interest rates available on the Company's
marketable securities and cash equivalents.
Provision for Income Taxes. The income tax provision for the first
--------------------------
quarter of fiscal 2002 was zero due to changes in the valuation allowance. The
income tax provision for the first quarter of fiscal 2001 was $459,000 or 31% of
income before income taxes. The effective rate differs from the federal
statutory rate due to changes in the valuation allowance, certain expenses not
deductible for tax purposes and state taxes. At October 31, 2001, the Company
has a valuation allowance of approximately $2.0 million against its net deferred
tax assets. To the extent that the Company generates sufficient ordinary income
in the future, approximately $700,000 of the valuation allowance may be further
reversed as a reduction of income tax expense and thereby reduce the effective
tax rate. Approximately $1.3 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
-------------------------------
Cash and cash equivalents totaled $17,546,000 as of October 31, 2001,
compared to $16,612,000 as of July 31, 2001. The cash equivalents are invested
in money market funds which consist of investment-grade short-term instruments.
The Company currently plans to continue investing cash equivalents in this
manner. Net working capital as of October 31, 2001 was $27,955,000, compared to
$28,844,000 as of July 31, 2001, and the Company's current ratio was 4.8:1 as of
October 31, 2001, compared to 5.1:1 as of July 31, 2001. The decreases in
working capital and current ratio were primarily due to decreases in accounts
receivable, inventory and deferred income taxes, and increases in current
liabilities. Short-term investments fluctuate on a daily basis as a result of
changes in working capital components.
9
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. At October 31, 2001, approximately $7,000,000 was
available for borrowing and no cash advances were outstanding under the credit
facility. 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. At October 31, 2001, approximately $1,500,000 in letters of credit were
issued. The agreement, which expires December 31, 2001, is secured by inventory
and receivables and contains certain financial covenants. The Company is
currently negotiating an extension of this agreement. The cash advances portion
of the line of credit bears interest at the bank's prime rate, which was 5.5% at
October 31, 2001.
The Company had long-term debt of $669,000 as of October 31, 2001,
compared to $846,000 as of July 31, 2001, with the decrease due to a payment
made during the first quarter. The Company had net stockholders' equity of
$30,820,000 as of October 31, 2001, compared to $31,715,000 as of July 31, 2001,
with the difference due to operating results for the three months ended October
31, 2001.
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.
10
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.
--------
None.
(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.
11
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 11, 2001 /s/ Raymond H. Losi II
-------------------------------------------------------
Raymond H. Losi II
Chief Executive Officer (Principal Executive
Officer)
December 11, 2001 /s/ Roger M. Wasserman
-------------------------------------------------------
Roger M. Wasserman
Chief Financial Officer (Principal Financial and
Accounting Officer)
12