Skateboard Firm Variflex Keeps Rolling by Diversifying

To survive in the highly competitive sporting goods and recreational products industry, Variflex Inc. has had to be as nimble as a rider of one of its skateboards.

Lately, it has succeeded in increasing revenues--although it still posted a loss--and developing new product lines to reduce its dependence on old markets, particularly the one for in-line skates.

But as Variflex tries to reshape its business, the Moorpark-based company has encountered legal challenges, product recalls and a rapidly changing market in which some long-standing customers have left and new ones have materialized.

A new product, Quik Shade, a canopy used outdoors, pushed Variflex into court when two competitors, K-D Canopy and H & H Canopies and Tents, sued the company for patent infringement. After spending $4.3 million on legal fees, Variflex settled out of court and ended up buying one of K-D Canopy’s patents.

Said Mark Siegel, Variflex’s chairman of the board: “The result is that while it cost us some significant dollars, we now enjoy a substantial position in a valuable market and the litigation is behind us.”

Almost.

Just when Variflex might have been taking a sigh of relief, it and 14 other companies were hit recently with another lawsuit for patent infringement. The suit was initiated by Razor, a rival company that designs collapsible scooters.

Last week in U.S. District Court in Los Angeles, a judge issued a temporary restraining order prohibiting scooter sales by 13 of the 15 defendants in the Razor lawsuit. But Variflex was dropped from the suit.

“We got a clean bill of health,” said Variflex’s attorney, Chuck Diamond of O’Melveny & Myers in Los Angeles. “We were held up by the Razor lawyers as a model of how to fairly compete. The other defendants didn’t do so well.”

He said Razor had taken a closer look at the facts surrounding its claim against Variflex and found the company had not infringed on its patent.

“This market is competitive, and people are being much more competitive with their patents,” said Debbie Favilla, investor relations manager at First Team Sports, one of Variflex’s top competitors. “These lawsuits cost a lot of money, time and negative publicity. So I can’t imagine [Variflex would] purposely [infringe on another company’s patent].”

Siegel said he does not think the Razor suit will have serious long-term consequences for the company. “In any event, scooters represent a relatively small part of Variflex’s business, so we don’t expect this to be significant,” Siegel said.

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After last week’s court session Siegel said, “We were pleased that Razor agreed in court that Variflex’s Stinger [scooter] design does not infringe on any of their patent or other rights.”

Siegel came to Variflex through his role as president and founder of REMY Investors & Consultants Inc., a Los Angeles-based investment firm that bought $9 million worth of Variflex stock three years ago. REMY specializes in investing in struggling companies, augmenting management and reviving their business.

At Variflex, Siegel stirred up management. Raymond “Jay” Losi II, the son of the company’s founder, took over as chief executive, Steven Muellner came in as president, and Roger Wasserman joined as chief financial officer.

According to its annual report filed with the U.S. Securities and Exchange Commission, Variflex reported revenues of $55.2 million for the fiscal year ending July 31 but a net loss of $1.9 million. For the previous year, Variflex reported net income of $803,000 on $37.3 million of revenues. The 48% increase in revenues represented the company’s first full year since 1995 in which it had a jump in year-to-year sales.

Variflex’s sales for 2000 were significantly higher for scooters, protective helmets and portable canopies. But the losses from the sale of marketable securities and a $1.75-million recall charge for its X-Games helmets turned an operating profit into a loss of $1.9 million for the year.

A month after Variflex voluntarily reported to the Consumer Product Safety Commission that some of its helmets did not meet safety requirements, the commission issued a recall of nearly 240,000 Variflex X-Games Aggressive helmets. Variflex officials said they were not aware of any injuries related to the X-Games helmet. Variflex holds a license to use the X-Games name on logos for certain products.

The commission is investigating Variflex’s recall, but officials there would not comment further.

“The company has clearly run into difficult situations,” said Paul Williams, associate professor of finance at California Lutheran University. But, he added, “they’ve estimated what the costs are going to be and it sounds like they have more than ample revenue to cover it. Potentially, that’s like a little bump in the road.

“I think they understand the nature of their business,” he said. “It’s clearly one of taking risks. We have a very litigious society. I think it’s one of the issues that manufacturers of sports equipment for kids all face. They all have to deal with it.”

To avoid lawsuits in the future, Siegel said, “we consistently consult with counsel with every new product that we develop to insure that no other parties’ rights are infringed, and we do our best to avoid litigation in all circumstances. The problem, however, is that in America, litigation is one weapon in a competitive universe.”

Variflex must also navigate the complex shoals of international trade and finance. Although it designs many of its products, almost all of them are made overseas, primarily in China. That means monitoring the constantly changing nature of trade relations with that nation and watching the fluctuations in foreign exchange rates.

Dealing with conflict and turning companies around is not new to Siegel, an attorney turned businessman who since 1995 has also been chairman of the board at UTI Energy Corp. After Siegel’s investment group plunked almost $8 million into UTI in 1995, the company’s market capitalization has grown from $15 million to more than $750 million.

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From 1990 to 1993, Siegel ran Sound Warehouse and Show Industries, known as Music Plus. Improvements in operations, particularly video, led Blockbuster Entertainment to acquire the companies and to name Siegel president of the music division.

Between 1988 and 1992, Siegel served as executive vice president of Shamrock Holdings, the investment vehicle for the family of Roy E. Disney. Disney is vice chairman of Walt Disney Co. and the nephew of the founder. Siegel was involved in all aspects of corporate transactions, including acquisitions and dispositions of several businesses. He also spent nearly 15 years as one of the counselors to the Roy E. Disney family.

Siegel said his investment company looks “for strong operating management with people who understand their business and who we can help with strategic advice and direction.”

Variflex, he said, was very successful at finding new products. “It was their idea to diversify, but it was one that we thought we could bolster and support. The company was skillful in not being stuck with lots of inventory when product categories declined, and they managed the reduction of sales very efficiently.”

Variflex’s major customers are mass merchandisers such as Wal-Mart, K mart, Target, Toys R Us and Home Depot. In addition to First Team Sports, its competitors include Rollerblade and Bell Sports.

“We expect sales growth to continue, and we will continue to add new products to the product line,” Siegel said. The theory, he said, is to concentrate on the results of the turnaround before telling the world about it.

“This is a blocking-and-tackling line of business,” Siegel said. “The winners simply execute better.”

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AMPED UP

AML Communications received a $2-million order for multi-carrier amplifiers. B6

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