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Variflex, Inc.

Variflex, Inc.

5152 North Commerce Avenue
Moorpark, California 93021
U.S.A.
Telephone: (805) 523-0322
Toll Free: (800) 327-0821
Fax: (805) 523-7384
Web site: http://www.variflex.com

Public Company
Incorporated:
1977
Employees: 93
Sales: $59.2 million
Stock Exchanges: NASDAQ
Ticker Symbol: VFLX
NAIC: 339920 Sporting and Athletic Good Manufacturing

Variflex, Inc. is a distributor and wholesaler of sporting goods, including in-line skates, recreational protective equipment, springless trampolines, portable canopies, skateboards, scooters, and safety helmets. Variflex designs and develops its products, but outsources production to contracted manufacturers. The company markets its products through independent sales representatives and marketing organizations, selling its brand name goods to national and regional mass merchandisers, sporting goods chains, mail-order businesses, and home improvement chains. Los Angeles investment firm REMY Capital Partners IV LP holds a 41 percent stake in Variflex.

Origins

Variflex began as a family affair, a sporting goods company founded by Raymond H. Losi and his son, Raymond H. Losi II, in California in August 1977. Upon Variflexs inception, Raymond Losi served as the companys board chairman and president. His 25-year-old son was given the task of heading the companys product development. Losis wife, Barbara Losi, served as chief financial officer.

Variflex registered its greatest success as a designer and developer of in-line skates, which featured wheels mounted in a straight line, functioning much like the blade on an ice skate. The company did not manufacture its highly popular in-line skates, preferring instead to outsource the production of its products to independent contractors located in Taiwan, mainland China, and South Korea. The height of the companys success occurred during the mid-1990s, when in-line skate sales in the United States fanned excitement throughout the sporting goods industry. The companys peak years of financial performance occurred not long after Variflex completed its initial public offering (IPO) of stock, which also coincided with companys fall from its historic highs. Variflexs June 17, 1994 conversion to public ownership cast its performance in the spotlight, enabling industry observers to scrutinize the companys struggle to wean itself from a product that had once delivered rousing success.

The market for in-line skates in the United States peaked between late 1994 and early 1995, when industry-wide sales reached approximately 17 million units. Variflex, which derived nearly 90 percent of its business from marketing in-line skates, rode the crest of the popularity wave, enjoying substantial gains in revenue and net income. From $58 million in 1992, the companys annual sales soared to $100 million in 1995. The companys net income swelled during the three-year period as well, jumping from $1.6 million to nearly $7 million. Unfortunately for the Losi family, the financial figures posted in 1995 would be the last year-end totals it could look at with unmitigated enthusiasm. For the remainder of the 1990s, waning financial strength would become the norm, as the Losis struggled to add new revenue streams to replace the once powerful river of profits supplied by in-line skate sales.

To their credit, the Losis recognized the decline in in-line skates and began to diversify to offset the losses rather than remaining obdurately steadfast to in-line skates as the companys nearly exclusive source of financial sustenance. When in-line skate sales began to falter, Variflex was involved in marketing several other products, including skateboards and athletic protective equipment such as knee pads, elbow pads, wrist guards, and bicycle and recreational safety helmets. (As with in-line skates, Variflex did not manufacture any of the products it developed and marketed.) In 1994, the sales generated from marketing these secondary products accounted for 10 percent of Variflexs business. The Losis intended to augment these product offerings to invigorate sales and profits by delving into other areas of the sporting goods industry. At the time of the strategic switch, Raymond Losi, by then a septuagenarian, had added the title of chief executive officer in addition to his post as board chairman. His son Raymond Losi II, then in his mid-40s, continued to serve as the director of product development, having added the titles of president and chief operating officer in 1992. Barbara Losi relinquished her title as chief financial officer in 1991 but continued to serve as Variflexs secretary and as one of its directors when the diversification program began in 1995.

Search for New Business Begins in 1995

The first new addition to the company broke with Variflex tradition, moving it into manufacturing for the first time. In April 1995, the company formed a new subsidiary named Static Snowboards, Inc. to acquire an existing snowboard manufacturer named Plunkett Snowboards, Inc. Completed in May

1995, the acquisition cost Variflex the equivalent of $400,000, giving it a manufacturing facility in Huntington Beach in Southern California. The snowboards were manufactured under the Static brand name. Also in 1995, Variflex began marketing Scoot Skates, which were skateboards with an upright handle that replicated the experience of riding a scooter.

The financial figures released in July 1996 for the previous fiscal year delivered the first indication of a company on decline. From $100 million the year before, sales plummeted 28 percent to $72 million. The companys in-line skate product line, comprising 30 models that retailed for between $29 and $169, suffered a 31 percent decline in revenue, as sales dropped by 1.2 million units to 2.6 million units. The decline in in-line skate sales was compounded by losses suffered by the companys other product lines, including a 32 percent drop in athletic protective equipment sales and a 51 percent decrease in safety helmet sales. Skateboard sales represented the one area of financial growth for the company, as sales leaped 300 percent to $7.3 million, but this surge was not enough to offset the other losses. For the year, the companys net income shriveled from $6.9 million to $564,000.

Searching to remedy its financial woes, Variflex turned to its nascent snowboard manufacturing business. In September 1996, the company announced a joint manufacturing agreement with Barfoot Snoboards, one of the first companies to produce snowboards. Under the terms of the agreement, Variflex, through its subsidiary Static Snowboards, agreed to manufacture, market, and distribute all Barfoot snowboards for an initial one-year term. The agreement with Barfoot was not enough, however, to compensate for further distressing financial news. When the next annual financial figures were released in July 1997, a net loss of $1.8 million triggered alarms at the companys Moorpark, California, headquarters. Hobbled by declining in-line skate sales, which led to a drop in annual sales to $51 million, the company exited the upper end of this market.

Several months after the results for 1997 were announced, help arrived in the form of an investment partner. In November 1997, a Los Angeles investment firm named REMY Capital Partners IV LP acquired 28 percent of Variflex, purchasing the stock from Raymond Losi, who stepped aside as Variflexs board chairman, remaining a director of the company. Losis son, Raymond Losi II, was elected chief executive officer, while Mark S. Siegel, a REMY executive, assumed the post of board chairman. Losi II, who controlled 22 percent of Variflex stock, welcomed the arrival of REMY, remarking in a December 2, 1997 interview with the Los Angeles Times: We are extremely pleased that REMY has recognized the inherent value in Variflex. We believe that REMYs knowledge of the consumer products market and their financial expertise, coupled with Variflexs existing strengths, will enable us to move forward and take advantage of the growth opportunities in this industry.

Late 1990s Diversification

In the wake of the REMY investment and the subsequent boardroom shakeup, Variflex turned to the task of developing new products. Two new additions to the companys stable of products were a line of safety helmets featuring textured, three-dimensional graphics, which debuted at roughly the same time REMY purchased its stake in Variflex, and a more promising product called Quik-Shade. Marketed as an instant canopy that could be erected in less than a minute, Quik-Shade was introduced in the spring of 1997, designated by the company as a principal product. By the end of 1997, 45,000 units of Quik-Shade canopies were sold, accounting for 1 percent of Variflexs total sales. In 1998, to accelerate the growth of the Quik-Shade line, Variflex doubled the distribution network established for the sale of the portable canopies, which led to an increase in revenue that represented 8 percent of total sales in 1998.

Company Perspectives:

Variflex is a leading distributor of outdoor recreational products. Our products are designed with fun and fitness in mind for the whole family. Exciting brands marketed by us include not only Variflex but also Static, QuikShade and Airzone. Our product line include in-line skates, skateboards, safety helmets, athletic protective equipment, trampolines, and recreational canopies. We distribute our products throughout the world.

In a November 3, 1998 interview with the Los Angeles Times, chairman Siegel attempted to quell the reaction to the companys financial results for fiscal 1998.This has been a year of rebuilding for Variflex,he said,as we focused on taking the steps we believe necessary to position the company for long-term growth and profitability.The totals were discouraging, reflective of a worrisome pattern that had begun more than two years earlier. For the year, the company lost $3.5 million on sales of $43.1 million. Industry-wide sales of in-line skates were expected to fall to 9.5 million units in 1998, far below the 17 million units sold three years earlier. Variflex management believed the unit volume sales would plateau at 1998 levels, and remain there for the next several years, but the prospect that sales would cease their downward slide offered little solace. Despite the efforts to find additional revenue streams, the companys annual sales totals had plunged from $100 million in 1995 to $43 million during the following three-year period.

At this point in the companys struggles, another change in senior management was made. In September 1998, Steven L. Muellner was named president of the company, replacing Losi II, who continued to serve as chief executive officer. Under the new leadership combination of Siegel, Losi II, and Muellner, the company added another link to its chain of new product introductions, moving from snowboards to portable canopies to trampolines. In December 1998, Variflex announced that it was introducing a springless trampoline. The company had signed an exclusive license agreement with Product Resource and Development, which had a patent pending on a springless trampoline system that used a series of elastic straps to connect the mat to the frame. Purported to provide increased bounce, lift, and safety, the springless trampoline was slated for limited distribution before Christmas, with full-scale distribution scheduled for the first quarter of 1999. Retailing for between $200 and $229, the trampoline, called Ultra-Flex, was available initially in a 14-foot model, with smaller sizes planned for later introduction.

For the first time in years, the announcement of annual financial totals for 1999 could be greeted with a modicum of satisfaction. Although revenues continued to shrink, falling from $43 million to $37 million, the pattern of annual net losses was interrupted. Variflex earned $803,000 for the year, but the relief proved only temporary. The following year the company registered a net loss of $2 million as it became embroiled in a patent infringement lawsuit and felt the sting of a product recall. In October 2000, Variflex announced it was voluntarily recalling 150,000 of its X-Games safety helmets. Manufactured by a third-party contractor, the X-Games helmets did not comply with federal safety standards. Variflex also spent a considerable amount of money to settle a lawsuit filed by International E-Z Up, which claimed that the portable canopies marketed by Variflex infringed on E-Z Ups patent.

As Variflex prepared for its 25th anniversary and the years beyond, its financial condition began to improve. Sales increased to $59 million as profits climbed, reaching $1.3 million in 2001. Variflex completed its helmet recall in 2001, concurrent with the expansion of its international marketing efforts. In 1987, the company had established a subsidiary named Oketa Ltd., through which Variflex conducted sales and shipping agreements with international customers. In 2001, the company closed Oketa, opting instead to conduct its international expansion directly through Variflex.

Principal Subsidiaries

Static Snowboards, Inc.

Principal Competitors

Bell Sports Corp.; K2 Inc.; Rollerblade, Inc.

Key Dates:

1977:
Variflex is founded.
1987:
Oketa Ltd. formed to promote expansion internationally.
1994:
Variflex completes its initial public offering of stock.
1995:
Static Snowboards, Inc., a Variflex subsidiary, is formed.
1997:
Investment firm REMY Capital Partners purchases 28 percent of Variflex stock.
1998:
Variflex introduces springless trampolines.
2001:
Variflex completes the recall of 150,000 X-Games safety helmets.

Further Reading

Firm Hopes for Jump-Start; Variflex Sees Sales in New Trampoline, Daily News, December 8, 1998, p. B2.

Lawsuit Lowers Variflex Profits, Daily News, October 31, 2000, p. Bl.

McNary, Dave, Variflex Patents Canopy Product, Daily News, January 14, 1998, p. B2. Murphy, Barbara,Variflex Suffers Losses, Continues to Rebuild,Los Angeles Times, November 3, 1998, p. 1.

, Variflex, Inc. to Manufacture, Distribute Barfoot Snowboards for 1 Year, Los Angeles Times, September 3, 1996, p. 4.

, Skateboard Maker Variflex Predicts Profit Resurgence, Los Angeles Times, June 18, 1996, p. 4.

Quarterly Earnings Fall at Skate Manufacturer, Daily News, June 1, 1996, p. Bl.

Sports Gear Maker Seeks Helmet Recall, Daily News, October 7, 2000, p. Bl.

Rivero, Enrique,Stock Buy-In Brings Overhaul to Variflex, Daily News, November 20, 1997, p. Bl.

Jeffrey L. Covell

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