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VENTURA COUNTY BUSINESS | THE BUSINESS BEAT

Skateboard Firm Variflex Keeps Rolling by Diversifying

November 21, 2000|ROSEMARY CLANDOS | SPECIAL TO THE TIMES

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.

*

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.

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