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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934 For the Quarterly Period - Ended September 28, 2002 or
[ ] Transition Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934 For the Transition Period From __________ to _________
Commission file number: 0-19557
Salton, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-3777824
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
1955 Field Court 60045
Lake Forest, IL (Zip Code)
(Address of principal executive offices)
(847) 803-4600
(Registrant's telephone number, including area code)
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
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of November 7, 2002,
10,994,742 shares of its $.01 par value Common Stock.
1
PAGE NO.
PART I FINANCIAL --------
INFORMATION
Item 1: Consolidated Financial Statements
Consolidated Balance Sheets - September 28, 2002 (Unaudited) and
June 29, 2002 3
Consolidated Statements of Earnings (Unaudited) Thirteen weeks
ended September 28, 2002 and September 29, 2001 4
Consolidated Statements of Cash Flows (Unaudited) Thirteen weeks
ended September 28, 2002 and September 29, 2001 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 3: Quantitative and Qualitative Disclosures About Market Risk 20
Item 4: Controls and Procedures 20
PART II OTHER INFORMATION
Item 1: Legal Proceedings 21
Item 2: Changes in Securities and Use of Proceeds 21
Item 6: Exhibits and Reports on Form 8-K 22
Signature 23
2
SALTON, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 28,
(IN THOUSANDS EXCEPT SHARE DATA) 2002 JUNE 29, 2002
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash $ 28,224 $ 31,055
Accounts receivable, net of allowances 230,360 217,468
Inventories 277,063 244,160
Prepaid expenses and other current assets 10,298 12,889
Prepaid income taxes 527 2,781
Deferred income taxes 8,036 7,906
---------------- ----------------
Total Current Assets 554,508 516,259
Property, Plant and Equipment, net 58,254 56,550
Patents and Trademarks 182,484 182,538
Cash in Escrow for Pifco Loan Notes 5,478 18,676
Goodwill 30,097 29,976
Other Assets, net 24,506 21,569
---------------- ----------------
TOTAL ASSETS $ 855,327 $ 825,568
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit and other current debt $ 168,628 $ 150,101
Accounts payable 40,136 25,364
Accrued expenses 71,200 60,994
Foreman guarantee 1,010 1,393
---------------- ----------------
Total Current Liabilities 280,974 237,852
Non-Current Deferred Income Taxes 1,106 1,076
Senior Subordinated Notes Due 2005 125,000 125,000
Senior Subordinated Notes due 2008, including an adjustment
of $16,068 and $8,384, respectively, to the carrying value
related to interest rate swap agreements 164,699 156,954
Loan Notes to Pifco Shareholders - 4,908
Term Loan and Other Notes Payable 28,753 49,721
Other Long Term Liabilities 5,085 5,021
---------------- ----------------
605,617 580,532
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; authorized, 2,000,000
shares; 40,000 shares issued
Common Stock, $.01 par value; authorized, 40,000,000
shares; issued and outstanding, 2003-10,993,082 shares,
2002-10,992,582 shares 146 146
Treasury Stock - at cost (67,019) (67,019)
Additional Paid-in Capital 93,315 93,557
Accumulated Other Comprehensive Income 1,761 745
Retained Earnings 221,507 217,607
---------------- ----------------
Total Stockholders' Equity 249,710 245,036
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 855,327 $ 825,568
================ ================
See Notes to Consolidated Financial Statements.
3
SALTON, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA) 13 WEEKS ENDED
----------------------------------
September 28, September 29,
2002 2001
---------------- ----------------
NET SALES $ 200,052 $ 198,350
Cost of Goods Sold 119,811 117,147
Distribution Expenses 13,900 13,348
---------------- ----------------
GROSS PROFIT 66,341 67,855
Selling, General and Administrative Expenses 49,294 44,560
Impairment Loss on Intangible Asset 800 -
---------------- ----------------
OPERATING INCOME 16,247 23,295
Interest Expense, net 10,007 11,603
Fair Market Value Adjustment on Derivatives 267 -
---------------- ----------------
INCOME BEFORE INCOME TAXES 5,973 11,692
Income Tax Expense 2,073 4,327
---------------- ----------------
NET INCOME $ 3,900 $ 7,365
================ ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,062,162 11,059,729
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 14,876,165 15,056,304
Net Income per Common Share: Basic $ 0.35 $ 0.67
Net Income per Common Share: Diluted $ 0.26 $ 0.49
See Notes to Consolidated Financial Statements.
4
SALTON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA) 13 WEEKS ENDED
-------------------------------
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,900 $ 7,365
Adjustments to Reconcile Net Income to Net Cash from
Operating Activities:
Imputed interest on notes payable 235 1,453
Deferred income tax provision 108 -
Gain on sale of investment - (200)
Depreciation and amortization 3,864 7,188
Loss on disposal of equipment 45 -
Equity in net income of investee (92) (231)
Impairment loss on intangible asset 800 -
Fair value adjustment for derivatives 267 -
Changes in assets and liabilities:
Accounts receivable (12,395) (44,081)
Inventories (32,197) (43,484)
Prepaid expenses and other current assets 2,608 349
Accounts payable 14,691 1,986
Taxes payable 2,113 4,965
Accrued expenses 8,061 14,709
--------------- ---------------
NET CASH FROM OPERATING ACTIVITIES (7,992) (49,981)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,218) (2,883)
Increase in other non-current assets (250) (704)
Proceeds from sale of investment - 501
Acquisition of business - (6,091)
Additional payment for patents and trademarks (20,750) (18,029)
Additions to intangibles, patents and trademarks - (9,810)
--------------- ---------------
NET CASH FROM INVESTING ACTIVITIES (25,218) (37,016)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit and other debt 25,000 111,000
Repayment of long-term debt (64) (7,449)
Proceeds from termination of Swap transaction 6,074 -
Costs associated with refinancing - (331)
Common stock issued 3 39
Purchase of treasury stock - (1,125)
--------------- ---------------
NET CASH FROM FINANCING ACTIVITIES 31,013 102,134
--------------- ---------------
The Effect of Exchange Rate Changes on Cash (634) 35
--------------- ---------------
Net Change in Cash (2,831) 15,172
Cash, Beginning of Period 31,055 30,097
--------------- ---------------
Cash, End of Period $28,224 $45,269
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Interest $ 1,300 $ 2,093
Income taxes $ 337 $ 27
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In the quarter ended September 28, 2002, the Company incurred a capital lease
obligation of $418.
In the quarter ended September 28, 2002, the Company authorized the issuance of
184,980 shares of common stock for payment of executive bonuses.
See Notes to Consolidated Financial Statements.
5
SALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements have been prepared from Salton's
records without audit and are subject to year end adjustments. The interim
consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments), which are, in the opinion of management,
necessary for a fair presentation of financial information. The interim
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Salton, Inc.
2002 Annual Report on Form 10-K. Certain reclassifications of prior year's
amounts have been made to conform with the current year presentation. The
results of operations for the interim periods should not be considered
indicative of results to be expected for the full year.
2. IMPLEMENTATION OF NEW ACCOUNTING STANDARD
Effective at the beginning of fiscal year 2003, the Company adopted
SFAS No. 142, "Goodwill and Other Intangible Assets." Upon adoption of SFAS No.
142, goodwill amortization ceased. Goodwill is now subject to fair-value based
impairment tests performed, at a minimum, on an annual basis. In addition, a
transitional goodwill impairment test is required as of the adoption date. These
impairment tests are conducted on each business of the Company where goodwill is
recorded, and may require two steps. The initial step is designed to identify
potential goodwill impairment by comparing an estimate of fair value for each
applicable business to its respective carrying value. For those businesses where
the carrying value exceeds fair value, a second step is performed to measure the
amount of goodwill impairment in existence, if any.
The Company had approximately $30.0 million of goodwill and $180.3
million of intangible assets with indefinite lives recorded in its consolidated
balance sheet at the beginning of 2003. The Company completed the required
transitional impairment tests of goodwill and intangible assets with indefinite
lives as of the beginning of the first quarter of 2003. As of the beginning of
the first quarter of 2003, the Company determined that no impairment of goodwill
or intangible assets with indefinite lives has occurred. The increase in the
carrying value of goodwill since June 29, 2002 reflects the impact of changes in
foreign currency exchange rates.
During the first quarter of fiscal year 2003, the Company recorded an
impairment charge of $0.8 million related to the Company's decision to
discontinue the product line under the Welbilt tradename. The fair value of the
product line was estimated using the expected present value of associated future
cash flows and market values of comparable product lines where available. A $0.8
million charge was recognized in the first quarter of 2003 to record this
impairment.
Actual results of operations for the first quarter ended September 28,
2002 and pro forma results of operations for the first quarter ended September
29, 2001 had the Company applied the nonamortization provisions of SFAS No. 142
in that period are as follows:
6
13 WEEKS ENDED
September 28, Sept. 29,
(In thousands, except per share amounts) 2002 2001
--------------- ---------------
Net income:
Reported net income $ 3,900 $ 7,365
Goodwill amortization, net of tax 0 485
Indefinite-life intangibles amortization, net of tax 0 2,317
--------------- ---------------
ADJUSTED NET INCOME $ 3,900 $ 10,167
=============== ===============
Basic income per share:
Reported income per basic share $ 0.35 $ 0.67
Goodwill amortization, net of tax per basic share 0.00 0.04
Indefinite-life intangibles amortization net of tax
per basic share 0.00 0.21
--------------- ---------------
ADJUSTED BASIC INCOME PER SHARE $ 0.35 $ 0.92
=============== ===============
Diluted income per share:
Reported income per diluted share $ 0.26 $ 0.49
Goodwill amortization, net of tax per diluted share 0.00 0.03
Indefinite-life intangibles amortization net of tax
per diluted share 0.00 0.16
--------------- ---------------
ADJUSTED DILUTED INCOME PER SHARE $ 0.26 $ 0.68
=============== ===============
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations". This statement addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs, and requires that such costs
be recognized as a liability in the period in which incurred. This statement is
effective for financial statements issued for fiscal years beginning after June
15, 2002. The Company adopted SFAS No. 143 as of the beginning of the first
quarter of fiscal year 2003. The adoption of SFAS No. 143 did not have a
material impact on the Company's financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121 and requires that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired and by
broadening the presentation of discontinued operations to include more disposal
transactions. This statement is effective for financial statements issued for
fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144
as of the beginning of the first quarter of fiscal year 2003. The adoption of
SFAS No. 144 did not have a material impact on the Company's financial condition
or results of operations.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. This statement is effective for financial
statements issued for fiscal years beginning after December 31, 2002. The
Company does not expect the adoption of this statement to have a material impact
to the financial statements.
4. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE.
Basic net income per common share is computed based upon the weighted
average number of common shares outstanding. Diluted net income per common share
is computed based upon the weighted average number of common shares outstanding,
adjusted for dilutive common stock equivalents applying the treasury stock
method for options and warrants and the if-converted method for convertible
securities.
Options to purchase 270,000 shares at a price of $29.25 per share were
outstanding at September 28, 2002 and September 28, 2001 but were not included
in the computation of diluted EPS because the options are contingent upon the
Company's share price reaching specified targets for a specified period of time.
Options to purchase 1,392,463 shares of common stock at a price range of $9.84
to $37.00 per share and 940,827 shares of common stock at a price range of
$17.50 to $37.00 per share were outstanding at September 28, 2002 and September
29, 2001, respectively, but were not included in the computation of diluted EPS
because the exercise prices were greater than the average market price of the
common shares.
5. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to manage interest
rate and foreign currency risk. The Company does not enter into derivative
financial instruments for trading purposes. Interest rate swap agreements are
used as part of the Company's program to manage the fixed and floating interest
rate mix of the Company's total debt portfolio and related overall cost of
borrowing. The Company's European subsidiary uses forward exchange contracts to
hedge foreign currency payables for periods consistent with the expected cash
flow of the underlying transactions. The contracts generally mature within one
year and are designed to limit exposure to exchange rate fluctuations, primarily
related to the British pound.
At June 29, 2002, the Company had an interest rate swap contract to pay
a variable-rate interest of six-month LIBOR plus 7.02% and receive fixed-rate
interest of 12.25% on $150.0 million notional amount of indebtedness. This
contract was terminated in the first quarter of fiscal 2003 resulting in the
receipt of $6.1 million. A gain of $4.4 million from the early termination of
this contract was deferred as an adjustment to the carrying
7
amount of the outstanding debt and is being amortized as an adjustment to
interest expense related to the debt over the remaining period originally
covered by the terminated swap. The Company simultaneously entered into another
interest rate swap contract to pay a variable-rate interest of six-month LIBOR
plus 7.78% and receive fixed-rate interest of 12.25% on $150.0 million notional
amount of indebtedness. As of September 28, 2002, the Company's balance sheet
included approximately $3.9 million representing the fair value of the swap and
call feature. As the terms of the swap and call feature match those of the
designated underlying hedged debt instrument, the change in fair value of this
swap and call feature was offset by a corresponding change in fair value
recorded on the hedged debt, and resulted in no net earnings impact. See Note 10
"Subsequent Event."
All foreign exchange contracts have been recorded on the balance sheet
at fair value of ($3.8) million classified within accrued expenses. The change
in the fair value of contracts that qualify as foreign currency cash flow hedges
and are highly effective was ($0.1) million. This amount was recorded in other
comprehensive income, net of tax. The changes in the fair value of contracts
that do not qualify as foreign currency cash flow hedges of ($0.3) million were
recorded through earnings. The Company anticipates that all gains and losses in
accumulated other comprehensive income related to foreign exchange contracts
will be reclassified into earnings during fiscal year 2003. At September 28,
2002, the Company's European subsidiary had foreign exchange contracts for the
purchase of 61.0 million U.S. dollars. No new contracts were entered into
during the quarter.
6. COMPREHENSIVE INCOME
For the thirteen weeks ended September 28, 2002 and September 29, 2001,
components of other comprehensive income include foreign currency translation
adjustments.
13 Weeks Ended
-----------------------------------
(In thousands) 09/28/02 09/29/01
----------------- ----------------
Net Income $ 3,900 $ 7,365
Other Comprehensive Income 1,016 1,413
----------------- ----------------
Comprehensive Income $ 4,916 $ 8,778
================= ================
Accumulated other comprehensive income is comprised of minimum pension
liability of ($1.7) million as of September 28, 2002 and June 29, 2002, as well
as foreign currency translation adjustments of $4.2 million and $3.0 million as
of September 28, 2002 and June 29, 2002, respectively, and derivative liability
of ($0.7) million and ($0.6) million as of September 28, 2002 and June 29, 2002,
respectively
7. OPERATING SEGMENTS
The Company consists of a single operating segment that designs,
markets and distributes housewares, including small appliances, tabletop, time
and lighting products and personal care/wellness products. This segmentation is
appropriate because the Company makes operating decisions and assesses
performance based upon brand management and such brand management encompasses a
wide variety of products and types of customers. Most of the Company's products
are procured through independent manufacturers, primarily in the Far East and
are distributed through similar distribution channels.
8
Product Information - Net Sales
13 Weeks Ended
------------------------
(In thousands) 09/28/02 09/29/01
----------- ------------
Small Appliances $170,748 $ 176,976
Salton At Home 21,913 16,275
Personal Care and Wellness Products 7,391 5,099
----------- ------------
Total $200,052 $ 198,350
=========== ============
Geographic Information
Net Sales Long-Lived Assets
13 Weeks Ended As Of
--------------------------------------------------------
(In thousands) 09/28/02 09/29/01 09/28/02 06/29/01
--------------------------- --------------------------
United States $ 134,275 $ 163,080 $ 222,550 $ 219,721
Great Britain 36,681 19,948 55,232 71,248
Other foreign countries 29,096 15,322 23,037 18,340
--------------------------- --------------------------
Total $ 200,052 $ 198,350 $ 300,819 $ 309,309
=========================== ==========================
Net sales by geographic area are based upon revenues generated from each
country's operations.
8. LEGAL PROCEEDINGS
On May 6, 2002, Philips Oral Healthcare, Inc. ("Philips") filed suit
against the Company in the federal court of the Western District of Washington.
In its complaint, Philips challenges various advertising claims made by the
Company about the Ultrasonex(TM) electric toothbrush. Phillips alleges causes of
action for false advertising and seeks to enjoin from using various claims in
the Company's advertising of the product.
On August 28, 2002, the Court entered an order granting Philips' motion
for preliminary injunction. As a result of this order, the Company is
preliminarily enjoined from airing two commercials or developing new advertising
for the Ultrasonex(TM) using one of the specific advertising claims at issue.
The preliminary order does not enjoin the sale of the toothbrush or require that
the Company modify the product's packaging in any way. Under the current
scheduling order, a trial on the merits is scheduled for September 2003.
On September 5, 2002, the Company entered into an agreement with the
Attorney Generals of New York and Illinois governing the Company's future
conduct with retailers relating to the Company's indoor electric grills.
Forty-seven states, Puerto Rico and the District of Columbia have joined this
agreement. This agreement provides for the Company to make a payment of $1.2
million upon final approval of the agreement and two additional payments of $3.5
million each on March 1, 2003 and 2004, respectively. The settlement agreement
has been filed in the United States District Court for the Southern District of
New York.
The Company is a party to various other actions and proceedings
incident to the Company's normal business operations. The Company believes that
the outcome of any litigation will not have a material adverse effect on the
Company's business, financial condition or results of operations. The Company
also has product liability and general liability insurance policies in amounts
the Company believes to be reasonable given the Company's current level of
business. Although historically the Company has not had to pay any material
product liability claims, it is conceivable that the Company could incur claims
for which the Company is not insured.
9
9. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The payment obligations of the Company under the 12 1/4% senior
subordinated notes are guaranteed by certain of the Company's wholly-owned
domestic subsidiaries (Subsidiary Guarantors). Such guarantees are full,
unconditional and joint and several. Separate financial statements of the
Subsidiary Guarantors are not presented because the Company's management has
determined that they would not be material to investors. In the first half of
fiscal 2002, the Company formed a new wholly owned subsidiary, Salton
Toastmaster Logistics LLC, to which certain assets and operating activities were
transferred from Salton, Inc. Such assets and operating activities are included
in the Guarantor subsidiary financial information as of July 1, 2001. The
following supplemental financial information sets forth, on a combined basis,
balance sheets, statements of earnings and statements of cash flows for the
Subsidiary Guarantors, the Company's non-guarantor subsidiaries and for Salton,
Inc.
10
CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 28, 2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
---------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 3,434 $ 24,790 $ - $ - $ 28,224
Accounts receivable, net of allowances 164,570 65,790 - - 230,360
Inventories 285,216 46,379 16,139 (70,671) 277,063
Prepaid expenses and other current assets 4,038 3,866 2,394 - 10,298
Intercompany (174,524) (50,116) 224,640 - -
Prepaid income taxes (12,098) (8,510) 21,135 527
Deferred income taxes 3,846 755 3,435 - 8,036
--------------------------------------------------------------------------
Total Current Assets 274,482 82,954 267,743 (70,671) 554,508
Property, Plant and Equipment,
Net of Accumulated Depreciation 14,743 24,719 18,792 - 58,254
Investments in Subsidiaries - 79,742 412,552 (492,294) -
Patents and Trademarks 10,781 31,970 139,733 - 182,484
Cash in Escrow for Pifco Loan Notes - 5,478 - - 5,478
Goodwill 23,671 6,426 - - 30,097
Other Assets, net (413) 9,698 15,221 - 24,506
--------------------------------------------------------------------------
Total Assets $ 323,264 $ 240,987 $ 854,041 $ (562,965) $ 855,327
==========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other current debt $ 139,244 $ 5,119 $ 24,265 $ - $ 168,628
Accounts payable 11,109 35,048 (6,021) - 40,136
Accrued expenses 23,388 18,622 29,190 - 71,200
Foreman guarantee - - 1,010 - 1,010
--------------------------------------------------------------------------
Total current liabilities 173,741 58,789 48,444 - 280,974
Non-current Deferred Income Taxes (906) 1,516 496 - 1,106
Senior subordinated notes due 2005 - - 125,000 - 125,000
Senior subordinated notes due 2008, including an
adjustment of $16,068 to the carrying value
related to interest rate swap agreements - - 164,699 - 164,699
Other notes payable 28,753 - - - 28,753
Other Long Term Liability - - 5,085 5,085
--------------------------------------------------------------------------
Total liabilities 201,588 60,305 343,724 - 605,617
Stockholders' Equity 121,676 180,682 510,317 $ (562,965) 249,710
--------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 323,264 $ 240,987 $ 854,041 $ (562,965) $ 855,327
==========================================================================
11
CONSOLIDATING BALANCE SHEET AS OF JUNE 29, 2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
---------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 7,931 $ 20,327 $ 2,797 $ - $ 31,055
Accounts receivable 165,446 51,249 773 - 217,468
Inventories 193,851 47,914 2,395 - 244,160
Prepaid expenses and other current assets 3,061 5,329 4,499 - 12,889
Intercompany (135,451) (76,536) 211,987 - -
Prepaid income taxes (12,348) (7,170) 22,299 - 2,781
Deferred income taxes 3,846 625 3,435 - 7,906
---------------------------------------------------------------------------
Total Current Assets 226,336 41,738 248,185 - 516,259
Property, Plant and Equipment,
Net of Accumulated Depreciation 14,205 23,282 19,063 - 56,550
Investments in Subsidiaries (833) 79,742 375,521 (454,430) -
Patents and Trademarks 10,781 31,347 140,410 - 182,538
Cash in escrow for Pifco loan notes - 18,676 - - 18,676
Goodwill 23,675 6,301 - - 29,976
Other Assets, net 534 10,006 11,029 - 21,569
---------------------------------------------------------------------------
Total Assets $ 274,698 $ 211,092 $ 794,208 $ (454,430) $ 825,568
===========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other current debt $ 114,026 $ 13,325 $ 22,750 $ - $ 150,101
Accounts payable 3,457 13,504 8,403 - 25,364
Accrued expenses 18,789 21,202 21,003 - 60,994
Foreman guarantee - - 1,393 - 1,393
---------------------------------------------------------------------------
Total Current Liabilities 136,272 48,301 53,549 - 237,852
Non-Current Deferred Income Taxes (906) 1,487 495 - 1,076
Senior Subordinated Notes due 2005 - - 125,000 - 125,000
Senior Subordinated Notes due 2008, including an
adjustment of $8,384 to the carrying value
related to interest rate swap agreements - - 156,954 - 156,954
Loan Notes to Pifco Shareholders - 4,908 - - 4,908
Other Notes Payable 28,617 - 26,125 - 54,742
---------------------------------------------------------------------------
Total liabilities 176,331 61,596 342,605 - 580,532
Stockholders' Equity 110,715 156,666 432,085 $ (454,430) 245,036
---------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 274,698 $ 211,092 $ 794,208 $ (454,430) $ 825,568
===========================================================================
12
CONSOLIDATING STATEMENT OF EARNINGS FOR THE THIRTEEN WEEKS ENDED
SEPTEMBER 28, 2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
---------------------------------------------------------------------------
Net Sales $ 233,839 $ 181,101 $ 127,482 $ (342,370) $ 200,052
Cost of Goods Sold 182,178 145,979 61,429 (269,775) 119,811
Distribution Expenses 11,861 2,039 - - 13,900
---------------------------------------------------------------------------------
Gross Profit (Loss) 39,800 33,083 66,053 (72,595) 66,341
Selling, General and Administrative expenses 26,904 9,449 15,033 (2,092) 49,294
Impairment Loss on Intangible Asset - - 800 - 800
---------------------------------------------------------------------------------
Operating Income 12,896 23,634 50,220 (70,503) 16,247
Interest Expense, Net (1,726) (1,022) (7,259) - (10,007)
Fair Market Value Adjustment on Derivatives - (267) - - (267)
Equity in Earnings of Subsidiaries - - 32,367 (32,367) -
---------------------------------------------------------------------------------
Income Before Income Taxes 11,170 22,345 75,328 (102,870) 5,973
Income Tax Expense (Benefit) (94) 1,242 925 - 2,073
---------------------------------------------------------------------------------
Net Income $ 11,264 $ 21,103 $ 74,403 $ (102,870) $ 3,900
---------------------------------------------------------------------------------
CONSOLIDATING STATEMENT OF EARNINGS FOR THE THIRTEEN WEEKS ENDED
SEPTEMBER 29, 2001
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
---------------------------------------------------------------------------
Net Sales $ 54,693 $ 99,407 $ 117,830 $ (73,580) $ 198,350
Cost of Goods Sold 36,201 87,581 65,445 (72,080) 117,147
Distribution Expenses 5,704 955 6,689 - 13,348
----------------------------------------------------------------------------
Gross Profit (Loss) 12,788 10,871 45,696 (1,500) 67,855
Selling, General and Administrative expenses 10,974 5,438 29,648 (1,500) 44,560
----------------------------------------------------------------------------
Operating Income 1,814 5,433 16,048 - 23,295
Interest Expense, Net (23) 159 11,467 - 11,603
Equity in Earnings of Subsidiaries (225) - 5,212 (4,987) -
----------------------------------------------------------------------------
Income (Loss) Before Income Taxes 1,612 5,274 9,793 (4,987) 11,692
Income Tax Expense 812 1,087 2,428 - 4,327
----------------------------------------------------------------------------
Net Income (Loss) $ 800 $ 4,187 $ 7,365 $ (4,987) $ 7,365
============================================================================
13
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THIRTEEN WEEKS ENDED
SEPTEMBER 28, 2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
------------ ------------ ------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 11,266 $ 21,102 $ 74,403 $ (102,871) $ 3,900
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Imputed interest on notes payable -- 112 123 -- 235
Deferred income tax provision -- 108 -- -- 108
Depreciation and amortization 890 908 2,066 -- 3,864
Loss on disposal of equipment -- 45 -- -- 45
Equity in net income of unconsolidated affiliate/
consolidated subsidiaries 167 (92) (32,367) 32,200 (92)
Impairment loss on intangible asset -- -- 800 -- 800
Fair value adjustments for derivatives -- 267 -- -- 267
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable 876 (14,045) 774 -- (12,395)
Inventories (91,365) 2,241 (13,744) 70,671 (32,197)
Prepaid expenses and other current assets (977) 1,480 2,105 -- 2,608
Intercompany 39,072 (27,070) (12,002) -- --
Accounts payable 7,652 19,222 (12,183) -- 14,691
Taxes payable (250) 1,199 1,164 -- 2,113
Accrued expenses 4,604 (3,125) 6,582 8,061
------------ ------------ ------------ ------------ ------------
NET CASH FROM OPERATING ACTIVITIES (28,065) 2,352 17,721 -- (7,992)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,368) (2,109) (741) -- (4,218)
Increase in other non-current assets -- -- (250) -- (250)
Proceeds from sale of investment -- -- -- -- --
Acquisition of businesses, net of cash acquired -- -- -- -- --
Additional payment for patents and trademarks -- -- (20,750) -- (20,750)
Additions to intangibles, patents and trademarks -- -- -- -- --
------------ ------------ ------------ ------------ ------------
NET CASH FROM INVESTING ACTIVITIES (1,368) (2,109) (21,741) -- (25,218)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line
of credit and other debt 25,000 -- -- -- 25,000
Repayment of long-term debt (64) -- -- (64)
Proceeds from termination of Swap transaction -- -- 6,074 -- 6,074
Costs associated with refinancing -- -- -- -- --
Common stock issued -- -- 3 -- 3
Purchase of treasury stock -- -- -- -- --
------------ ------------ ------------ ------------ ------------
NET CASH FROM FINANCING ACTIVITIES 24,936 -- 6,077 -- 31,013
------------ ------------ ------------ ------------ ------------
The Effect of Exchange Rate Changes on Cash -- 4,220 (4,854) -- (634)
Net Change in Cash (4,497) 4,463 (2,797) -- (2,831)
Cash, Beginning of Period 7,931 20,327 2,797 -- 31,055
------------ ------------ ------------ ------------ ------------
$ 3,434 $ 24,790 $ -- $ -- $ 28,224
============ ============ ============ ============ ============
14
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THIRTEEN WEEKS ENDED
SEPTEMBER 29, 2001
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
---------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 800 $ 4,187 $ 7,365 $ (4,987) $ 7,365
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Imputed interest on note payable - 324 1,129 - 1,453
Gain on sale of investment - (200) - - (200)
Depreciation and amortization 1,080 1,282 4,826 - 7,188
Equity in net income of unconsolidated affiliate/
consolidated subsidiaries 225 (231) (5,212) 4,987 (231)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (8,446) (3,086) (32,549) - (44,081)
Inventories (16,127) (7,132) (20,225) - (43,484)
Prepaid expenses and other current assets 815 (748) 282 - 349
Intercompany (93,912) 18,696 75,216 - -
Accounts payable 1,243 (410) 1,153 - 1,986
Taxes payable 1,476 1,082 2,407 - 4,965
Accrued expenses 2,738 3,123 8,848 14,709
--------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES (110,108) 16,887 43,240 - (49,981)
--------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (72) (569) (2,242) - (2,883)
Increase in other non-current assets (30) 174 (848) - (704)
Proceeds from sale of investment - 501 - - 501
Acquisition of businesses - (5,589) (502) - (6,091)
Additional payment for patents and trademarks - - (18,029) - (18,029)
Additions to intangibles, patents and trademarks - - (9,810) - (9,810)
--------------------------------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES (102) (5,483) (31,431) - (37,016)
--------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds of revolving line of credit 111,000 - - - 111,000
Repayment of long-term debt (4,699) - (2,750) - (7,449)
Proceeds from long-term debt - - - - 0
Proceeds from senior subordinated notes - - - - 0
Costs associated with refinancing - - (331) - (331)
Common stock issued - - 39 - 39
Treasury stock purchase - - (1,125) - (1,125)
--------------------------------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES 106,301 - (4,167) - 102,134
--------------------------------------------------------------------------
The effect of exchange rate changes on cash - 35 - - 35
Cash, beginning of the period 8,242 15,615 6,240 - 30,097
Net Change in Cash (3,909) 11,439 7,642 - 15,172
--------------------------------------------------------------------------
Cash, end of period $ 4,333 $ 27,054 $ 13,882 $ - $ 45,269
==========================================================================
10. SUBSEQUENT EVENT
On November 1, 2002, the existing interest rate swap contract was
terminated resulting in the receipt of $2.0 million. The gain of $1.8 million
from early termination of this contract will be deferred as an adjustment to the
carrying amount of the outstanding debt and will be amortized as an adjustment
to interest expense related to the debt over the remaining period originally
covered by the terminated swap.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
We are a leading designer, marketer and distributor of a broad range of
branded, high quality small appliances under well-recognized brand names such as
Salton(R), George Foreman(TM), Toastmaster(R), Breadman(R), Juiceman(R),
Juicelady(R), Westinghouse(R), Farberware(R), Melitta(R), Russell Hobbs(R),
Tower(R), Haden(R) and Pifco(R). We believe that we have the leading domestic
market share in indoor grills, toasters, juice extractors, bread makers,
griddles, waffle makers and buffet ranges/hotplates and a significant market
share in other product categories. We outsource most of our production to
independent manufacturers, primarily in the Far East. We also design and market
tabletop products, time products, lighting products and personal care and
wellness products under brand names such as Block China(R), Atlantis(R) Crystal,
Sasaki(R), Calvin Klein(R), Timex(R) timers, Ingraham(R), Westclox(R), Big
Ben(R), Spartus(R), Stiffel(R), Ultrasonex(TM), Relaxor(R), Carmen(R),
Hi-Tech(R), Mountain Breeze(R) and Salton(R).
We predominantly sell our products to mass merchandisers, department
stores, specialty stores and mail order catalogs. We also sell certain of our
products directly to consumers through infomercials and our Internet websites.
We market and sell our products primarily through our own sales force and a
network of independent commissioned sales representatives.
Within the first quarter, there was a work slowdown in the West Coast
ports, which led to a lock-out and an ultimate bottleneck of incoming product.
There was and remains an uncertain economic environment in the United States and
a shift in buying patterns to lower price-point products. Our wide range of
products at different price points and our growing global presence have given us
a solid foundation to actively face the difficult environment.
THIRTEEN WEEKS ENDED SEPTEMBER 28, 2002 COMPARED WITH THIRTEEN WEEKS ENDED
SEPTEMBER 29, 2001.
Net Sales. Net sales in the quarter ended September 28, 2002 ("first
quarter of fiscal 2003") were $200.1 million, an increase of approximately $1.7
million or 0.9%, compared to net sales of $198.4 million in the quarter ended
September 29, 2001 ("first quarter of fiscal 2002"). Worldwide Sales increases
from Salton(R), The Look For acquisition, George Foreman(TM), Westclox(R),
Russell Hobbs(R) and Stiffel(R) brands more than offset decreased sales of
Toastmaster(R) and White-Westinghouse(R) product lines.
Gross Profit. Gross profit in the first quarter of fiscal 2003 was
$66.3 million or 33.1% of net sales as compared to $67.9 million or 34.2% of net
sales in the same period in fiscal 2002. Cost of goods sold during the first
quarter of fiscal 2003 increased to 59.9% of net sales compared to 59.0% in the
same period in fiscal 2002. Distribution expenses were $13.9 million or 7.0% of
net sales in the first quarter of fiscal 2003 compared to $13.3 million or 6.7%
of net sales in the same period in fiscal 2002. Gross profit in the first
quarter of fiscal 2003, as a percentage of net sales, resulted in little change
from the same period in fiscal 2002 as we saw a return to a product mix of lower
price point items within several of the major brands.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to 24.6% of net sales or $49.3 million in the
first quarter of fiscal 2003 compared to 22.5% of net sales or $44.6 million for
the same period in fiscal 2002. Expenditures for television, royalty expenses,
certain other media and cooperative advertising and trade show expenses were
9.9% of net sales or $19.7 million in the first quarter of fiscal 2003 when
compared to 9.8% of net sales or $19.5 million in the same period in fiscal
2002. The slight increase in these expenses from the prior year is primarily
related to increased cooperative advertising offset partially by a reduction in
infomercial advertising. The remaining selling, general and administrative costs
increased to 14.8% of net sales or $29.6 million in the first quarter of fiscal
2003 compared to 12.7% of net sales or $25.1 million in the first quarter of
fiscal 2002. The primary reasons for these increases are salaries, legal and
other professional expenses related to legal matters and domestic corporate
restructuring for improved reporting purposes and increases in certain other
administrative expenses to support the Company.
16
Operating Income. As a result of the foregoing, operating income
decreased by $7.1 million or 30.0%, to $16.2 million in the first quarter of
fiscal 2003 from $23.3 million in the same period in fiscal 2002. Operating
income as a percentage of net sales decreased to 8.1% in the first quarter of
fiscal 2003 from 11.7% in the same period of fiscal 2002.
Net Interest Expense. Net interest expense was approximately $10.0
million for the first quarter of fiscal 2003 compared to $11.6 million in the
first quarter of fiscal 2002. In the first quarter of fiscal 2003, interest
expense includes imputed interest of approximately $0.4 million related to the
note payable associated with the George Foreman name acquisition and $0.1
million related to the loan notes issued to Pifco shareholders. In the first
quarter of fiscal 2002, interest expense includes imputed interest of
approximately $0.8 million related to the note payable associated with the
George Foreman name acquisition. Our rate of interest on amounts outstanding
under the revolver, term loan and senior subordinated debt was a weighted
average annual rate of 8.5% in the first quarter of fiscal 2003 compared to 9.2%
in the same period in fiscal 2002. The decrease in our weighted average annual
interest rate is primarily due to lower interest rates and a higher proportion
of variable rate debt. The average amount of all debt outstanding, excluding
adjustments to the carrying value of the senior subordinated notes due 2008
related to interest rate swap agreements, was $465.5 million for the first
quarter of fiscal 2003 compared to $483.9 million for the same period in fiscal
2002.
Income Tax Expense. Tax expense was $2.1 million in the first quarter
of fiscal 2003 as compared to tax expense of $4.3 million in the same period in
fiscal 2002.
Net Income. Net income decreased 47.3% to $3.9 million in the first
quarter of fiscal 2003, compared to $7.4 million in the first quarter of fiscal
2002.
Earnings per Share. Basic earnings per common share were $0.35 per
share on weighted average common shares outstanding of 11,062,162 in the first
quarter of fiscal 2003 compared to earnings of $0.67 per share on weighted
average common shares outstanding of 11,059,729 in the same period in fiscal
2002. Diluted earnings per common share were $0.26 per share on weighted average
common shares outstanding, including dilutive common stock equivalents, of
14,876,165 in the first quarter of fiscal 2003 compared to diluted earnings per
common share of $0.49 per share on weighted average common shares outstanding,
including dilutive common stock equivalents, of 15,056,304 in the same period in
fiscal 2002.
17
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of fiscal 2003, we used net cash of $8.0
million in operating activities and $25.2 million in investing activities. The
cash used in operating activities was primarily related to seasonal increases in
accounts receivable and inventory, partially offset by increases in accounts
payable and accrued expenses. The cash used in investing activities was
primarily related to the payment to George Foreman in connection with the
obligation under the note payable due to him, as well as, capital expenditures.
The above was financed primarily by increases under the revolving line of
credit.
At September 28, 2002, we had debt outstanding of $166.9 million under
the Third Amended and Restated Credit Agreement ("Credit Agreement") and had the
ability to borrow up to an additional $37.6 million under the revolving credit
facility. Typically, given the seasonal nature of our business, borrowings tend
to be the highest in mid-fall and early winter. Additionally, at September 28,
2002, we had $125.0 million of 10 3/4% senior subordinated notes due 2005 and
$148.6 million of 12 1/4% senior subordinated notes due 2008 (excluding $16.1
million related to the fair value of interest rate swap agreements that have
been substantially monetized).
Our principal uses of liquidity will be to meet debt service
requirements, pay royalties and other fees under our license and other
agreements, finance capital expenditures and possible acquisitions and fund
working capital. We expect that ongoing requirements for debt service, royalty
payments, capital expenditures, potential acquisitions and working capital will
be funded by internally generated cash flow and borrowings under our Credit
Agreement. We anticipate capital expenditures of approximately $18.0 million and
$20.0 million for fiscal years 2003 and 2004, respectively. We incurred
approximately $4.2 million for capital expenditures during the first quarter of
fiscal 2003.
Our senior credit facilities contain a number of significant covenants
that, among other things, restrict our ability to dispose of assets, incur
additional indebtedness, prepay other indebtedness, pay dividends, repurchase or
redeem capital stock, enter into certain investments, enter into sale and
lease-back transactions, make certain acquisitions, engage in mergers and
consolidations, create liens, or engage in certain transactions with affiliates
and otherwise restrict our corporate and business activities. In addition, under
the senior credit facilities, we are required to comply with specified financial
ratios and tests, including a minimum net worth test, a minimum fixed charge
coverage ratio, a minimum interest coverage ratio and a minimum leverage ratio.
Our ability to make scheduled payments of principal of, or to pay the
interest or liquidated damages, if any, on, or to refinance, indebtedness
(including the notes), to pay royalties and other fees under our license and
other agreements or to fund planned capital expenditures and/or possible
acquisitions, will depend upon our future performance, which, in turn, is
subject to general economic, financial, competitive and other factors that are
beyond our control. Based upon our current level of operations and anticipated
growth, we believe that future cash flow from operations, together with
available borrowings under our Credit Agreement and other sources of debt
funding, will be adequate to meet our anticipated requirements for capital
expenditures, potential acquisitions, royalty payments, working capital,
interest payments and scheduled principal payments. We cannot assure you that
our business will continue to generate sufficient cash flow from operations in
the future to service our debt and make necessary capital expenditures after
satisfying certain liabilities arising in the ordinary course of business. If
unable to do so, we may be required to refinance all or a portion of our
existing debt, including the notes, sell assets or obtain additional financing.
We cannot assure you that any refinancing would be available or that any sales
of assets or additional financing could be obtained.
As of September 28, 2002, the Company is in compliance with all debt
covenants.
18
SEASONALITY
Our business is highly seasonal, with operating results varying from
quarter to quarter. We have historically experienced higher sales during the
months of August through November primarily due to increased demand by customers
for our products attributable to holiday sales. This seasonality has also
resulted in additional interest expense to us during this period due to an
increased need to borrow funds to maintain sufficient working capital to finance
product purchases and customer receivables for the seasonal period.
ACCOUNTING PRONOUNCEMENTS
Effective at the beginning of fiscal year 2003, we adopted SFAS No.
142, "Goodwill and Other Intangible Assets." Upon adoption of SFAS No. 142,
goodwill amortization ceased. Goodwill is now subject to fair-value based
impairment tests performed, at a minimum, on an annual basis. In addition, a
transitional goodwill impairment test is required as of the adoption date. These
impairment tests are conducted on each business of the Company where goodwill is
recorded, and may require two steps. The initial step is designed to identify
potential goodwill impairment by comparing an estimate of fair value for each
applicable business to its respective carrying value. For those businesses where
the carrying value exceeds fair value, a second step is performed to measure the
amount of goodwill impairment in existence, if any.
We had approximately $30.0 million of goodwill and $180.3 million of
intangible assets with indefinite lives recorded in our consolidated balance
sheet at the beginning of 2003. We completed the required transitional
impairment tests of goodwill and intangible assets with indefinite lives as of
the beginning of the first quarter of 2003. As of the beginning of the first
quarter of fiscal year 2003, we determined that no impairment of goodwill or
intangible assets with indefinite lives has occurred.
During the first quarter of fiscal year 2003, we recorded an impairment
charge of $0.8 million related to our decision to discontinue the product line
under the Welbilt tradename. The fair value of the product line was estimated
using the expected present value of associated future cash flows and market
values of comparable product lines where available. A $0.8 million charge was
recognized in the first quarter of 2003 to record this impairment.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations". This statement addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs, and requires that such costs
be recognized as a liability in the period in which incurred. This statement is
effective for financial statements issued for fiscal years beginning after June
15, 2002. We adopted SFAS No. 143 as of the beginning of the first quarter of
fiscal year 2003. The adoption of SFAS No. 143 did not have a material impact on
the financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121 and requires that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired and by
broadening the presentation of discontinued operations to include more disposal
transactions. This statement is effective for financial statements issued for
fiscal years beginning after December 15, 2001. We adopted SFAS No. 144 as of
the beginning of the first quarter of fiscal year 2003. The adoption of SFAS No.
144 did not have a material impact on the financial condition or results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. This statement is effective for financial
statements issued for fiscal years beginning after December 31, 2002. We do not
expect the adoption of this statement to have a material impact to the financial
statements.
FORWARD LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements, or industry results, to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: our degree of leverage; economic conditions and retail
environment; the timely development, introduction and customer acceptance of our
products; competitive products and pricing; dependence on foreign suppliers and
supply and manufacturing constraints; our relationship and contractual
arrangements with key customers, suppliers and licensors; cancellation or
reduction of orders; the availability and success of future acquisitions;
international business activities; the risks relating to pending legal
proceedings; the risks related to intellectual property rights; the risks
relating to regulatory matters and other factors both referenced and not
referenced in our filings with the Securities and Exchange Commission. When used
in this Quarterly Report on Form 10-Q, the words "estimate," "project,"
"anticipated," "expect," "intend," "believe" and similar expressions are
intended to identify forward-looking statements.
19
EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE
The results of operations for the periods discussed have not been
significantly affected by inflation or foreign currency fluctuation. We
generally negotiate our purchase orders with our foreign manufacturers in United
States dollars. Thus, our cost under any purchase order is not subject to change
after the time the order is placed due to exchange rate fluctuations. However,
the weakening of the United States dollar against local currencies could result
in certain manufacturers increasing the United States dollar prices for future
product purchases.
Salton Europe currently uses foreign exchange contracts to hedge
anticipated foreign currency transactions, primarily U.S. dollar inventory
purchases. The contracts generally mature within one year and are designed to
limit exposure to exchange rate fluctuations, primarily the British Pound
Sterling against United States dollars.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We use derivative financial instruments to manage interest rate and
foreign currency risk. Our objectives in managing our exposure to interest rate
changes are to limit the impact of interest rate changes on earnings and cash
flows and to lower our overall borrowing costs through the use of interest rate
swaps. Our objectives in managing our exposure to foreign currency fluctuations
is to reduce the impact of changes in foreign exchange rates on consolidated
results of operations and future foreign currency denominated cash flows. We do
not enter into derivative financial instruments for trading purposes. Our policy
is to manage interest rate risk through the use of a combination of fixed and
variable rate debt and hedge foreign currency commitments of future payments and
receipts by purchasing foreign currency forward contracts.
At June 29, 2002, we had an interest rate swap contract to pay a
variable-rate interest of six-month LIBOR plus 7.02% and receive fixed-rate
interest of 12.25% on $150.0 million notional amount of indebtedness. This
contract was terminated in the first quarter of fiscal 2003 resulting in the
receipt of $6.1 million. A gain of $4.4 million from the early termination of
this contract was deferred as an adjustment to the carrying amount of the
outstanding debt and is being amortized as an adjustment to interest expense
related to the debt over the remaining period originally covered by the
terminated swap. We simultaneously entered into another interest rate swap
contract to pay a variable-rate interest of six-month LIBOR plus 7.78% and
receive fixed-rate interest of 12.25% on $150.0 million notional amount of
indebtedness. As of September 28, 2002, the balance sheet included approximately
$3.9 million representing the fair value of the swap and call feature. As the
terms of the swap and call feature match those of the designated underlying
hedged debt instrument, the change in fair value of this swap and call feature
was offset by a corresponding change in fair value recorded on the hedged debt,
and resulted in no net earnings impact.
On November 1, 2002, the existing interest rate swap contract was
terminated resulting in a payment of $2.0 million. The gain of $1.8 million
from early termination of this contract will be deferred as an adjustment to the
carrying amount of the outstanding debt and will be amortized as an adjustment
to interest expense related to the debt over the remaining period originally
covered by the terminated swap.
All foreign exchange contracts have been recorded on the balance sheet
at fair value of ($3.8) million classified within accrued expenses. The change
in the fair value of contracts that qualify as foreign currency cash flow hedges
and are highly effective was ($0.1) million. This amount was recorded in other
comprehensive income, net of tax. The changes in the fair value of contracts
that do not qualify as foreign currency cash flow hedges of ($0.3) million were
recorded through earnings. We anticipate that all gains and losses in
accumulated other comprehensive income related to foreign exchange contracts
will be reclassified into earnings during fiscal year 2003. At September 28,
2002, our European subsidiary had foreign exchange contracts for the purchase of
61.0 million U.S. dollars. No new contracts were entered into during the
quarter.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
as of a date within 90 days of the filing date of this Quarterly Report on
Form 10-Q, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act")) are effective to
ensure that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
20
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On May 6, 2002, Philips Oral Healthcare, Inc. ("Philips") filed suit
against us in the federal court of the Western District of Washington. In its
complaint, Philips challenges various advertising claims made by us about the
Ultrasonex(TM) electric toothbrush. Phillips alleges causes of action for false
advertising and seeks to enjoin us from using various claims in its advertising
of the product.
On August 28, 2002, the Court entered an order granting Philips' motion
for preliminary injunction. As a result of this order, we are preliminarily
enjoined from airing two commercials or developing new advertising for the
Ultrasonex(TM) using one of the specific advertising claims at issue. The
preliminary order does not enjoin the sale of the toothbrush or require that we
modify the product's packaging in any way. Under the current scheduling order, a
trial on the merits is scheduled for September 2003.
On September 5, 2002, we entered into an agreement with the Attorney
Generals of New York and Illinois governing our future conduct with retailer
relating to our indoor electric grills. Forty-seven states, Puerto Rico and the
District of Columbia have joined this agreement. This agreement provides for us
to make a payment of $1.2 million upon final approval of the agreement and two
additional payments of $3.5 million each on March 1, 2003 and 2004,
respectively. The settlement agreement has been filed in the United States
District Court for the Southern District of New York.
OTHER
We are a party to various other actions and proceedings incident to our
normal business operations. We believe that the outcome of such litigation will
not have a material adverse effect on our financial condition or annual results
of operations. We also have product liability and general liability insurance
policies in amounts we believe are reasonable given our current level of
business. Although historically we have not had to pay any material product
liability claims, it is conceivable that we could incur claims for which we are
not insured.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On August 25, 2002, we issued 61,660 shares of our common stock to each of
Messrs. David Sabin, Leonhard Dreimann and William Rue. Exemption from
registration is claimed pursuant to Section 4(2) of the Securities Act, no
public sale having been involved.
21
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.38 Employment Agreement effective as of January 1, 2003 between Salton,
Inc. and David C. Sabin
10.39 Employment Agreement effective as of January 1, 2003 between Salton,
Inc. and Leonhard Dreimann
10.40 Employment Agreement effective as of January 1, 2003 between Salton,
Inc. and William B. Rue
10.41 Employment Agreement effective as of January 1, 2003 between Salton,
Inc. and David M. Mulder
(b) Reports on Form 8-K
A current report on Form 8-K was filed on September 6, 2002 reporting,
under Item 5 Other Events, the Company's announcement of its fiscal 2002 annual
earnings results.
22
SIGNATURES
Pursuant to the requirements 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.
Date: November 12, 2002 SALTON, INC.
/s/ DAVID M. MULDER
--------------------------
David M. Mulder
Executive Vice President, Chief Administrative
Officer and Senior Financial Officer
(Duly Authorized Officer of the Registrant)
23
CERTIFICATIONS
I, Leonhard Dreimann, Chief Executive Officer of Salton, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Salton, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002
By: /s/ Leonhard Dreimann
------------------------
LEONHARD DREIMANN
CHIEF EXECUTIVE OFFICER
24
CERTIFICATIONS
I, David M. Mulder, Executive Vice President, Chief Administrative
Officer and Senior Financial Officer of Salton, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Salton Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002
By: /s/ David M. Mulder
-----------------------------------------------
DAVID M. MULDER
EXECUTIVE VICE PRESIDENT, CHIEF ADMINISTRATIVE
OFFICER AND SENIOR FINANCIAL OFFICER
25
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
10.38 Employment Agreement effective as of January 1, 2003 between
Salton, Inc. and David C. Sabin*
10.39 Employment Agreement effective as of January 1, 2003 between
Salton, Inc. and Leonhard Dreimann *
10.40 Employment Agreement effective as of January 1, 2003 between
Salton, Inc. and William B. Rue*
10.41 Employment Agreement effective as of January 1, 2003 between
Salton, Inc. and David M. Mulder*
12 Computation of Ratio of Earnings to Fixed Charges
- -------------------
* Incorporated by reference to the Company's current report on
Form 8-K filed on October 23, 2002.
26