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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 December 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 of 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 February 6, 2003
11,182,218 shares of its $.01 par value Common Stock.
1
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements
Consolidated Balance Sheets - December 28, 2002 (Unaudited) and 3
June 29, 2002
Consolidated Statements of Earnings (Unaudited) Thirteen weeks 4
ended December 28, 2002 and December 29, 2001 and Twenty-six weeks
ended December 28, 2002 and December 29, 2001
Consolidated Statements of Cash Flows (Unaudited) Twenty-six weeks 5
ended December 28, 2002 and December 29, 2001
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2: Management's Discussion and Analysis of Financial Condition and 17
Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk 23
Item 4: Controls and Procedures 24
PART II OTHER INFORMATION
Item 1: Legal Proceedings 25
Item 4: Submission of Matters to a Vote of Security Holders 25
Item 6: Exhibits and Reports on Form 8-K 26
Signature 27
Certifications 28
2
SALTON, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 28,
(IN THOUSANDS EXCEPT SHARE DATA) 2002 JUNE 29,2002
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash $ 70,415 $ 31,055
Accounts receivable, net of allowances 286,802 217,468
Inventories 250,156 244,160
Prepaid expenses and other current assets 17,085 12,889
Prepaid income taxes - 2,781
Deferred income taxes 7,671 7,906
--------- ---------
Total Current Assets 632,129 516,259
Property, Plant and Equipment, net 61,086 56,550
Patents and Trademarks 183,581 182,538
Cash in Escrow for Pifco Loan Notes 5,645 18,676
Goodwill 30,294 29,976
Other Assets, net 20,557 21,569
--------- ---------
TOTAL ASSETS $ 933,292 $ 825,568
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit and other current debt $ 152,943 $ 150,101
Accounts payable 95,732 25,364
Accrued expenses 73,422 60,994
Foreman guarantee - 1,393
Income taxes payable 10,810 -
--------- ---------
Total Current Liabilities 332,907 237,852
Non-Current Deferred Income Taxes 1,152 1,076
Senior Subordinated Notes Due 2005 125,000 125,000
Senior Subordinated Notes due 2008, including an adjustment of
$13,331 and $8,384, respectively, to the carrying value related
to interest rate swap agreements 162,023 156,954
Loan Notes to Pifco Shareholders - 4,908
Term Loan and Other Notes Payable 23,989 49,721
Other Long Term Liabilities 3,289 5,021
--------- ---------
648,360 580,532
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, 2003-11,181,434 shares,
2002-10,992,582 shares 148 146
Treasury Stock - at cost (67,019) (67,019)
Additional Paid-In Capital 95,997 93,557
Accumulated Other Comprehensive Income 9,329 745
Retained Earnings 246,477 217,607
--------- ---------
Total Stockholders' Equity 284,932 245,036
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 933,292 $ 825,568
========= =========
See Notes to Consolidated Financial Statements.
3
SALTON, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA) 13 WEEKS ENDED 26 WEEKS ENDED
-------------------------------- --------------------------------
December 28, December 29, December 28, December 29,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
NET SALES $ 339,252 $ 318,489 $ 539,304 $ 516,839
Cost of Goods Sold 210,652 186,279 330,463 303,426
Distribution Expenses 17,225 18,428 31,125 31,776
------------ ------------ ------------ ------------
GROSS PROFIT 111,375 113,782 177,716 181,637
Selling, General and Administrative Expenses 65,023 68,320 114,317 112,880
Impairment loss on intangible asset - - 800 -
------------ ------------ ------------ ------------
OPERATING INCOME 46,352 45,462 62,599 68,757
Interest Expense, net 10,627 11,835 20,634 23,438
Fair market value adjustment on derivatives (1,009) - (742) -
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 36,734 33,627 42,707 45,319
Income Tax Expense 11,764 12,441 13,837 16,768
------------ ------------ ------------ ------------
NET INCOME $ 24,970 $ 21,186 $ 28,870 $ 28,551
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,179,452 10,983,074 11,120,807 11,021,401
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 15,192,676 14,910,745 15,063,214 14,985,409
Net Income per Common Share: Basic $ 2.23 $ 1.93 $ 2.60 $ 2.59
Net Income per Common Share: Diluted $ 1.64 $ 1.42 $ 1.92 $ 1.91
See Notes to Consolidated Financial Statements.
4
SALTON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA) 26 WEEKS ENDED
-------------------------------
DECEMBER 28, DECEMBER 29,
2002 2001
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 28,870 $ 28,551
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Imputed interest on notes payable 289 2,906
Deferred income tax provision 281 -
Gain on sale of investment - (200)
Depreciation and amortization 8,234 15,062
Loss on disposal of equipment 45 -
Equity in net income of investee (640) (272)
Impairment loss on intangible asset 800 -
Fair value adjustment for derivatives (742) -
Changes in assets and liabilities:
Accounts receivable (67,603) (66,088)
Inventories (4,098) (46,751)
Prepaid expenses and other current assets (4,123) 262
Accounts payable 70,113 8,154
Taxes payable 13,471 17,376
Accrued expenses 14,037 20,840
---------- ----------
NET CASH FROM OPERATING ACTIVITIES 58,934 (20,160)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10,378) (8,332)
Increase in other non-current assets 160 (802)
Proceeds from sale of investment - 501
Acquisition of business - (6,251)
Additional payment for patents and trademarks (22,248) (18,029)
Additions to intangibles, patents and trademarks - (19,814)
---------- ----------
NET CASH FROM INVESTING ACTIVITIES (32,466) (52,727)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit and other debt 10,000 96,000
Repayment of long-term debt (4,823) (7,459)
Proceeds from termination of Swap transaction 8,058 -
Costs associated with refinancing (88) (1,050)
Common stock issued 25 56
Purchase of treasury stock - (1,125)
---------- ----------
NET CASH FROM FINANCING ACTIVITIES 13,172 86,422
---------- ----------
The Effect of Exchange Rate Changes on Cash (280) 363
---------- ----------
Net Change in Cash 39,360 13,898
Cash, Beginning of Period 31,055 30,097
---------- ----------
Cash, End of Period $ 70,415 $ 43,995
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Interest $ 19,087 $ 19,013
Income taxes $ 4,093 $ 2,926
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
In the opinion of management, the accompanying consolidated balance
sheets and related interim consolidated statements of earnings and cash flows
include all adjustments, consisting only of normal recurring items, as well as
the accounting changes to adopt Statement of Financial Accounting Standards
(""SFAS'') No. 142 "Goodwill and Other Intangible Assets" and SFAS No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets," necessary for
their fair presentation in conformity with U.S. generally accepted accounting
principles. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses. Significant estimates include the allowance for doubtful accounts,
reserve for returns and allowances and depreciation among others. Actual results
may differ from these estimates. Our business is highly seasonal, with operating
results varying from quarter to quarter. Interim results are not necessarily
indicative of results for a full year. The information included in this Form
10-Q should be read in conjunction with Management's Discussion and Analysis and
consolidated financial statements and notes thereto included in the Salton, Inc.
2002 Form 10-K. Certain reclassifications have been made for consistent
presentation.
2. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
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, amortization of goodwill and certain intangible assets ceased. Goodwill and
certain other intangible assets are now subject to fair-value based impairment
tests performed, at a minimum, on an annual basis. In addition, a transitional
goodwill and other intangible assets impairment test is required as of the
adoption date. These impairment tests are conducted on each business of the
Company where goodwill and other intangible assets are recorded, and may require
two steps. The initial step is designed to identify potential 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 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 fiscal 2003. The Company completed the
required transitional impairment tests of goodwill and intangible assets with
indefinite lives as of the beginning of fiscal 2003. As of the beginning of
fiscal 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 abandon
the Welbilt tradename and discontinue the related product line. A $0.8 million
charge was recognized in the first quarter of 2003 to record this impairment.
Actual results of operations for the thirteen and twenty-six weeks
ended December 28, 2002 and pro forma results of operations for the thirteen and
twenty-six weeks ended December 29, 2001 had the Company applied the
nonamortization provisions of SFAS No. 142 in that period are as follows:
6
13 WEEKS ENDED 26 WEEKS ENDED
December 28, December 29, December 28, December 29,
(In thousands, except per share amounts) 2002 2001 2002 2001
-------------- -------------- -------------- --------------
Net income:
Reported net income $ 24,970 $ 21,186 $ 28,870 $ 28,551
Goodwill amortization, net of tax - 485 - 970
Indefinite-life intangibles amortization, net of tax - 2,675 - 4,992
-------- -------- -------- --------
ADJUSTED NET INCOME $ 24,970 $ 24,346 $ 28,870 $ 34,513
======== ======== ======== ========
Basic income per share:
Reported income per basic share $ 2.23 $ 1.93 $ 2.60 $ 2.59
Goodwill amortization, net of tax per basic share - 0.04 - 0.09
Indefinite-life intangibles amortization net of tax
per basic share - 0.24 - 0.45
-------- -------- -------- --------
ADJUSTED BASIC INCOME PER SHARE $ 2.23 $ 2.21 $ 2.60 $ 3.13
======== ======== ======== ========
Diluted income per share:
Reported income per diluted share $ 1.64 $ 1.42 $ 1.92 $ 1.91
Goodwill amortization, net of tax per diluted share - 0.03 - 0.07
Indefinite-life intangibles amortization net of tax
per diluted share - 0.18 - 0.33
-------- -------- -------- --------
ADJUSTED DILUTED INCOME PER SHARE $ 1.64 $ 1.63 $ 1.92 $ 2.31
======== ======== ======== ========
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 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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB
Statement No. 123." This Statement amends FASB Statement No. 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
This statement is effective for annual periods ending after December 15, 2002
and for interim periods beginning after December 15, 2002. The Company does not
expect the adoption of this statement to have a material impact to the financial
statements.
7
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 December 28, 2002 and December 29, 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 1,241,802 shares of common stock at a price range of $13.92
to $37.00 per share and 959,807 shares of common stock at a price range of
$14.80 to $37.00 per share were outstanding at December 28, 2002 and December
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 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. This contract was terminated in the second quarter of fiscal 2003,
resulting in the receipt of $2.0 million. A gain of $1.8 million from 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. The Company did not have an interest rate swap
agreement in affect as of December 28, 2002.
All foreign exchange contracts have been recorded on the balance sheet
at fair value of ($2.6) million classified within accrued expenses. The change
in the fair value of contracts in the second quarter that qualify as foreign
currency cash flow hedges and are highly effective was $0.3 million. This amount
was recorded in other comprehensive income, net of tax. In the second quarter,
the changes in the fair value of contracts that do not qualify as foreign
currency cash flow hedges of $1.0 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
over the next twelve months. At December 28, 2002, the Company's European
subsidiary had foreign exchange contracts for the purchase of 74.0 million U.S.
dollars. Contracts for the purchase of 45.0 million U.S. dollars were entered
into during the second quarter of fiscal 2003.
8
6. COMPREHENSIVE INCOME
For the thirteen and twenty-six weeks ended December 28, 2002 and
December 29, 2001, components of other comprehensive income include foreign
currency translation adjustments and derivative liability adjustments.
13 Weeks Ended 26 Weeks Ended
---------------------------- ----------------------------
(In thousands) 12/28/2002 12/29/2001 12/28/2002 12/29/2001
------------ ------------ ------------ ------------
Net Income $ 24,970 $ 21,186 $ 28,870 $ 28,551
Other Comprehensive Income 7,568 (230) 8,584 1,183
-------- -------- -------- --------
Comprehensive Income $ 32,538 $ 20,956 $ 37,454 $ 29,734
======== ======== ======== ========
Accumulated other comprehensive income is comprised of minimum pension
liability of ($1.7) million as of December 28, 2002 and June 29, 2002, as well
as foreign currency translation adjustments of $11.5 million and $3.0 million as
of December 28, 2002 and June 29, 2002, respectively, and derivative liability
of ($0.5) million and ($0.6) million as of December 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.
Product Information - Net Sales
13 Weeks Ended 26 Weeks Ended
---------------------------- ----------------------------
(In thousands) 12/28/2002 12/29/2001 12/28/2002 12/29/2001
------------ ------------ ------------ ------------
Small Appliances $ 294,756 $ 280,167 $ 466,498 $ 457,143
Salton At Home 31,648 29,759 52,568 46,034
Personal Care and Wellness Products 12,848 8,563 20,238 13,662
--------- --------- --------- ---------
Total $ 339,252 $ 318,489 $ 539,304 $ 516,839
========= ========= ========= =========
Geographic Information
Net Sales Net Sales Long-Lived Assets
13 Weeks Ended 26 Weeks Ended As Of
--------------------------- --------------------------- --------------------------
(In thousands) 12/28/2002 12/29/2001 12/28/2002 12/29/2001 12/28/2002 6/29/2002
------------ ------------ ------------ ------------ ------------ -----------
North America $ 251,498 $ 277,825 $ 394,071 $ 448,298 $ 216,434 $ 219,721
European Union 74,610 33,662 115,259 53,610 56,919 71,248
Other Foreign Regions 13,144 7,002 29,974 14,931 27,810 18,340
--------- --------- --------- --------- --------- ---------
Total $ 339,252 $ 318,489 $ 539,304 $ 516,839 $ 301,163 $ 309,309
========= ========= ========= ========= ========= =========
9
Net sales by geographic area are based upon revenues generated from each
region's operations. Other foreign regions' sales include direct sales to
customers in North America, the European Union and other regions.
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 challenged various advertising claims made by the
Company about the Ultrasonex(TM) electric toothbrush. Philips alleged causes of
action for false advertising and sought to enjoin the Company 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.
The parties have agreed to settle subject to completion of a formal
settlement agreement. Once the settlement agreement is finalized, the lawsuit
will be dismissed with prejudice with each party paying its own legal fees and
expenses.
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 $4.5
million on March 1, 2003 and an additional payment of $3.5 million on March 1,
2004. The settlement agreement has been filed in the United States District
Court for the Southern District of New York, which entered an order dated
January 13, 2003 preliminarily approving the settlement. A hearing is scheduled
for May 30, 2003 at which time the court will determine whether to grant final
approval of the settlement.
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 such 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. 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 DECEMBER 28, 2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
-------------- -------------- -------------- -------------- --------------
ASSETS
Current Assets:
Cash $ 16,161 $ 54,259 $ (5) $ - $ 70,415
Accounts receivable, net of allowances 207,299 79,503 - - 286,802
Inventories 241,911 54,814 12,362 (58,931) 250,156
Prepaid expenses and other current assets 6,964 7,693 2,428 - 17,085
Intercompany (182,531) (46,924) 229,455 -
Deferred income taxes 3,846 390 3,435 7,671
---------- --------- --------- ---------- ---------
Total Current Assets 293,650 149,735 247,675 (58,931) 632,129
Property, Plant and Equipment,
Net of Accumulated Depreciation 14,209 29,290 17,587 - 61,086
Investments in Subsidiaries - 79,742 428,339 (508,081) -
Patents and Trademarks 10,781 32,944 139,856 - 183,581
Cash in Escrow for Pifco Loan Notes - 5,645 - - 5,645
Goodwill 23,671 6,623 - - 30,294
Other Assets, net (672) 10,246 10,983 - 20,557
---------- --------- --------- ---------- ---------
Total Assets $ 341,639 $ 314,225 $ 844,440 $ (567,012) $ 933,292
========== ========= ========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other current debt $ 124,248 $ 5,393 $ 23,302 $ - $ 152,943
Accounts payable 23,797 80,477 (8,542) - 95,732
Accrued expenses 23,515 28,560 21,347 - 73,422
Foreman guarantee - - - - -
Prepaid income taxes 17,862 9,032 (16,084) - 10,810
---------- --------- ---------- ---------- ---------
Total current liabilities 189,422 123,462 20,023 - 332,907
Non-current Deferred Income Taxes (906) 1,562 496 - 1,152
Senior subordinated notes due 2005 - - 125,000 - 125,000
Senior subordinated notes due 2008, including an
adjustment of $13,331 to the carrying value
related to interest rate swap agreements - - 162,023 - 162,023
Other notes payable 23,989 - - - 23,989
Other Long Term Liability - - 3,289 3,289
---------- --------- ------- ---------- ---------
Total liabilities 212,505 125,024 310,831 - 648,360
Stockholders' Equity 129,134 189,201 533,609 $ (567,012) 284,932
---------- --------- ------- ---------- ---------
Total Liabilities and Stockholders' Equity $ 341,639 $ 314,225 $ 844,440 $ (567,012) $ 933,292
========== ========= ========= ========== =========
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 48,031 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 163,983 54,426 362,123 - 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 DECEMBER 28,
2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
-------------- -------------- -------------- -------------- --------------
Net Sales $ 327,405 $ 228,240 $ 90,612 $ (307,005) $ 339,252
Cost of Goods Sold 268,643 195,631 63,623 (317,245) 210,652
Distribution Expenses 13,748 3,477 - - 17,225
---------- --------- --------- ---------- ---------
Gross Profit 45,014 29,132 26,989 10,240 111,375
Selling, General and Administrative expenses 30,106 21,687 15,011 (1,781) 65,023
Impairment Loss on Intangible Asset - - - - -
---------- --------- --------- ---------- ---------
Operating Income 14,908 7,445 11,978 12,021 46,352
Interest Expense, Net 1,685 1,229 7,713 - 10,627
Fair Market Value Adjustment on Derivatives - (1,009) - - (1,009)
Equity in Earnings of Subsidiaries - - (10,177) 10,177 -
---------- --------- --------- ---------- ---------
Income Before Income Taxes 13,223 7,225 14,442 1,844 36,734
Income Tax Expense 5,766 4,505 1,493 - 11,764
---------- --------- --------- ---------- ---------
Net Income $ 7,457 $ 2,720 $ 12,949 $ 1,844 $ 24,970
========== ========= ========= ========== =========
CONSOLIDATING STATEMENT OF EARNINGS FOR THE THIRTEEN WEEKS ENDED DECEMBER 29,
2001
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
-------------- -------------- ------------- -------------- --------------
Net Sales $ 510,824 $ 158,341 $ 118,090 $ (468,766) $ 318,489
Cost of Goods Sold 425,480 136,891 91,174 (467,266) 186,279
Distribution Expenses 23,312 1,379 (6,263) - 18,428
---------- --------- --------- ---------- ---------
Gross Profit 62,032 20,071 33,179 (1,500) 113,782
Selling, General and Administrative expenses 40,861 10,010 18,949 (1,500) 68,320
---------- --------- --------- ---------- --------
Operating Income 21,171 10,061 14,230 - 45,462
Interest Expense, Net 5,269 332 6,234 - 11,835
Equity in Earnings of Subsidiaries 49 - (16,664) 16,615 -
---------- --------- --------- ---------- ---------
Income Before Income Taxes 15,853 9,729 24,660 (16,615) 33,627
Income Tax Expense 7,136 1,832 3,473 - 12,441
---------- --------- --------- ---------- ---------
Net Income $ 8,717 $ 7,897 $ 21,187 $ (16,615) $ 21,186
========== ========= ========= ========== =========
13
CONSOLIDATING STATEMENT OF EARNINGS FOR THE TWENTY-SIX WEEKS ENDED DECEMBER 28,
2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
-------------- -------------- -------------- -------------- --------------
Net Sales $ 561,245 $ 409,341 $ 218,094 $ (649,376) $ 539,304
Cost of Goods Sold 450,821 341,610 125,052 (587,020) 330,463
Distribution Expenses 25,609 5,516 - - 31,125
---------- --------- --------- ---------- ---------
Gross Profit 84,815 62,215 93,042 (62,356) 177,716
Selling, General and Administrative expenses 57,010 31,136 30,044 (3,873) 114,317
Impairment Loss on Intangible Asset - - 800 - 800
---------- --------- --------- ---------- ---------
Operating Income 27,805 31,079 62,198 (58,483) 62,599
Interest Expense, Net 3,411 2,251 14,972 - 20,634
Fair market value adjustment on derivatives - (742) - - (742)
Equity in Earnings of Subsidiaries - - (42,545) 42,545 -
---------- --------- --------- ---------- ---------
Income Before Income Taxes 24,394 29,570 89,771 (101,028) 42,707
Income Tax Expense 5,671 5,748 2,418 - 13,837
---------- --------- --------- ---------- ---------
Net Income $ 18,723 $ 23,822 $ 87,353 $ (101,028) $ 28,870
========== ========= ========= ========== =========
CONSOLIDATING STATEMENT OF EARNINGS FOR THE TWENTY-SIX WEEKS ENDED DECEMBER 29,
2001
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
------------ ------------ ------------ ------------ ------------
Net Sales $ 565,517 $ 257,543 $ 235,920 $ (542,141) $ 516,839
Cost of Goods Sold 461,682 224,267 156,618 (539,141) 303,426
Distribution Expenses 29,016 2,333 427 - 31,776
---------- --------- --------- ---------- ---------
Gross Profit 74,819 30,943 78,875 (3,000) 181,637
Selling, General and Administrative expenses 51,837 15,447 48,596 (3,000) 112,880
---------- --------- --------- ---------- ---------
Operating Income 22,982 15,496 30,279 - 68,757
Interest Expense, Net 5,245 492 17,701 - 23,438
Equity in Earnings of Subsidiaries 274 - (21,875) 21,601 -
---------- --------- --------- ---------- ---------
Income Before Income Taxes 17,463 15,004 34,453 (21,601) 45,319
Income Tax Expense 7,948 2,918 5,902 - 16,768
---------- --------- --------- ---------- ---------
Net Income $ 9,515 $ 12,086 $ 28,551 $ (21,601) $ 28,551
========== ========= ========= ========== =========
14
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE TWENTY - SIX WEEKS ENDED DECEMBER
28, 2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
-------------- -------------- -------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 18,723 $ 23,822 $ 87,353 $ (101,028) $ 28,870
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Imputed interest on notes payable - 228 61 - 289
Deferred income tax provision - 281 - - 281
Depreciation and amortization 1,773 2,223 4,238 - 8,234
Loss on disposal of equipment - 45 - - 45
Equity in net income of unconsolidated affiliate/
consolidated subsidiaries 448 (640) (42,545) 42,097 (640)
Impairment loss on intangible asset - - 800 - 800
Fair value adjustments for derivatives - (742) - - (742)
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable (41,853) (26,524) 774 - (67,603)
Inventories (48,060) (5,002) (9,967) 58,931 (4,098)
Prepaid expenses and other current assets (3,903) (2,291) 2,071 - (4,123)
Intercompany 47,080 (30,264) (16,816) - -
Accounts payable 20,340 64,477 (14,704) - 70,113
Taxes payable 5,514 1,742 6,215 - 13,471
Accrued expenses 4,728 11,148 (1,839) 14,037
---------- --------- --------- ---------- ---------
NET CASH FROM OPERATING ACTIVITIES 4,790 38,503 15,641 - 58,934
---------- --------- --------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,737) (7,652) (989) - (10,378)
Increase in other non-current assets - 410 (250) - 160
Additional payment for patents and trademarks - - (22,248) - (22,248)
---------- --------- --------- ---------- ---------
NET CASH FROM INVESTING ACTIVITIES (1,737) (7,242) (23,487) - (32,466)
---------- --------- --------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit and
other debt 10,000 - - - 10,000
Repayment of long-term debt (4,823) - - - (4,823)
Proceeds from termination of Swap transaction - - 8,058 - 8,058
Costs associated with refinancing - - (88) - (88)
Common stock issued - - 25 - 25
---------- --------- --------- ---------- ---------
NET CASH FROM FINANCING ACTIVITIES 5,177 - 7,995 - 13,172
---------- --------- --------- ---------- ---------
The Effect of Exchange Rate Changes on Cash - 2,671 (2,951) - (280)
Net Change in Cash 8,230 33,932 (2,802) - 39,360
Cash, Beginning of Period 7,931 20,327 2,797 - 31,055
---------- --------- --------- ---------- ---------
Cash, End of Period $ 16,161 $ 54,259 $ (5) $ - $ 70,415
========== ========= ========= ========== =========
15
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE TWENTY - SIX WEEKS ENDED DECEMBER
29, 2001
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES SALTON, INC. ELIMINATIONS TOTALS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 9,515 $ 12,086 $ 28,551 $ (21,601) $ 28,551
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Imputed interest on note payable - 648 2,258 - 2,906
Gain on sale of investment - (200) - - (200)
Depreciation and amortization 2,512 2,746 9,804 - 15,062
Equity in net income of unconsolidated affiliate/
consolidated subsidiaries 274 (272) (21,875) 21,601 (272)
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable (173,705) (8,061) 115,678 - (66,088)
Inventories (43,512) (3,803) 564 - (46,751)
Prepaid expenses and other current assets 562 (1,108) 808 - 262
Intercompany 94,063 (140) (93,923) - -
Accounts payable 144 7,018 992 - 8,154
Taxes payable 8,371 849 8,156 - 17,376
Accrued expenses 10,850 809 9,181 - 20,840
--------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES (90,926) 10,572 60,194 - (20,160)
--------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (681) (4,219) (3,432) - (8,332)
Increase in other non-current assets - 186 (988) - (802)
Proceeds from sale of investment - 501 - - 501
Acquisition of businesses, net of cash
acquired - (951) (5,300) - (6,251)
Additional payment for patents and trademarks - - (18,029) - (18,029)
Additions to intangibles, patents and
trademarks - - (19,814) - (19,814)
--------------------------------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES (681) (4,483) (47,563) - (52,727)
--------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit 96,000 - - - 96,000
Repayment of long-term debt (4,709) - (2,750) - (7,459)
Costs associated with refinancing - - (1,050) - (1,050)
Common stock issued - - 56 - 56
Treasury stock purchase - - (1,125) - (1,125)
--------------------------------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES 91,291 - (4,869) - 86,422
--------------------------------------------------------------------------
The effect of exchange rate changes on cash - 363 - - 363
Net Change in Cash (316) 6,452 7,762 - 13,898
Cash, beginning of the period 8,242 15,615 6,240 - 30,097
--------------------------------------------------------------------------
Cash, End of Period $ 7,926 $ 22,067 $ 14,002 $ - $ 43,995
==========================================================================
16
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), Farberware(R), Melitta(R), Russell Hobbs(R), Tower(R), Haden(R)
and Westinghouse(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), Ingraham(R), Westclox(R), Big Ben(R), Spartus(R),
Timex(R) timers, Stiffel(R), Ultrasonex(TM), Relaxor(R), Carmen(R), Hi-Tech(R),
Mountain Breeze(R), Salton(R), Pifco(R) and Starck(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 twenty-six weeks of fiscal 2003 ("first half of fiscal
2003"), there was a work slowdown in West Coast ports, which led to a lock-out
and ultimate bottleneck as well as increased surcharges and container fees. In
addition, a weak market, a shift in buying patterns to lower price-point
products and a short holiday season led to a challenging first half of fiscal
2003. There was and remains an uncertain economic environment and an intense
focus on world events. However, our wide range of current products as well as
the introduction of our new innovative and market defining products and
expanding global presence have given us a solid foundation to actively face the
difficult environment.
THIRTEEN WEEKS ENDED DECEMBER 28, 2002 COMPARED WITH THIRTEEN WEEKS ENDED
DECEMBER 29, 2001.
Net Sales. Net sales in the thirteen weeks ended December 28, 2002
("second quarter of fiscal 2003") were $339.3 million, an increase of
approximately $20.8 million or 6.5%, compared to net sales of $318.5 million in
the thirteen weeks ended December 29, 2001 ("second quarter of fiscal 2002").
Worldwide sales increases from George Foreman(TM), Russell Hobbs(R), The Look
For acquisition, Breadman(R), Carmen(R), Pifco and Stiffel(R) brands offset
decreased sales of Toastmaster(R), White-Westinghouse(R) and Aircore(R) product
lines.
Gross Profit. Gross profit in the second quarter of fiscal 2003 was
$111.4 million or 32.8% of net sales as compared to $113.8 million or 35.7% of
net sales in the same period in fiscal 2002. Cost of goods sold during the
second quarter of fiscal 2003 increased to 62.1% of net sales compared to 58.5%
in the same period in fiscal 2002. Distribution expenses were $17.2 million or
5.1% of net sales in the second quarter of fiscal 2003 compared to $18.4 million
or 5.8% of net sales in the same period in fiscal 2002. Gross profit as a
percent of sales was lower in the second quarter of fiscal 2003 versus the same
period in fiscal 2002. This is a result of several factors. The work slow down
and bottleneck due to the West Coast dock strike created a number of additional
supply chain costs which impacted our margins. In a difficult retail
environment, our customers pursued a lower margin product mix. As a result,
there was an increase in the number of products sold at lower margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to 19.2% of net sales or $65.0 million in the
second quarter of fiscal 2003 compared to 21.4% of net sales or $68.3 million
for the same period in fiscal 2002. Expenditures for television, royalty
expenses, certain other media and cooperative advertising and trade show
expenses were 10.0% of net sales or $34.0 million in the second quarter of
fiscal 2003 when compared to 10.9% of net sales or $34.7 million in the same
period in fiscal 2002. The slight decrease in these expenses from the prior year
is primarily related to decreased infomercial advertising offset partially
17
by an increase in direct advertising. The remaining selling, general and
administrative costs decreased to 9.1% of net sales or $31.0 million in the
second quarter of fiscal 2003 compared to 10.5% of net sales or $33.6 million in
the second quarter of fiscal 2002. The remaining selling, general and
administrative costs include a $0.6 million charitable contribution related to
the exit of our Marilyn Monroe product line, a $0.5 million charge associated
with consultant fees to complete our ERP conversion and $1.0 million in legal
charges related to the litigation with Philips Oral Healthcare, Inc. regarding
the Ultrasonex toothbrush. However, there remains an ultimate reduction due to
the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" which
ceased the amortization of goodwill and certain intangible assets as of July 1,
2002. The provisions of this accounting standard cannot be applied retroactively
and prior period results have not been adjusted for this change in accounting
principle. Note 2, "Implementation of Accounting Standard," in our Notes to
Consolidated Financial Statements contain the pro forma results of the add-back
of this amortization expense to the Company's previously reported results.
Operating Income. As a result of the events described above, operating
income increased to $46.4 million in the second quarter of fiscal 2003 from
$45.5 million in the same period in fiscal 2002. Operating income as a
percentage of net sales decreased to 13.7% in the second quarter of fiscal 2003
from 14.3% in the same period of fiscal 2002.
Net Interest Expense. Net interest expense was approximately $10.6
million for the second quarter of fiscal 2003 compared to $11.8 million in the
second quarter of fiscal 2002. In the second quarter of fiscal 2003, interest
expense includes imputed interest of approximately $0.5 million related to the
note payable associated with the George Foreman name acquisition and the loan
notes issued to Pifco shareholders. In the second quarter of fiscal 2002,
interest expense includes imputed interest of approximately $1.5 million related
to the note payable associated with the George Foreman name acquisition and the
loan notes issued to Pifco shareholders. Our rate of interest on amounts
outstanding under the revolver, term loan and senior subordinated debt was a
weighted average annual rate of 8.1% in the second quarter of fiscal 2003
compared to 7.9% in the same period in fiscal 2002. The increase in our weighted
average annual interest rate is primarily due to a higher proportion of fixed
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 $470.8 million for the second quarter of fiscal 2003
compared to $545.1 million for the same period in fiscal 2002.
Income Tax Expense. Tax expense was $11.8 million in the second quarter
of fiscal 2003 as compared to tax expense of $12.4 million in the same period in
fiscal 2002. The overall effective tax rate decreased as a result of an increase
in foreign income taxed at lower rates as well as, the implementation of SFAS
No. 142, which eliminated the amortization of goodwill and certain intangible
assets as of July 1, 2002.
Net Income. Net income increased 17.9% to $25.0 million in the second
quarter of fiscal 2003, compared to $21.2 million in the second quarter of
fiscal 2002.
Earnings per Share. Basic earnings per common share were $2.23 per
share on weighted average common shares outstanding of 11,179,452 in the second
quarter of fiscal 2003 compared to earnings of $1.93 per share on weighted
average common shares outstanding of 10,983,074 in the same period in fiscal
2002. Diluted earnings per common share were $1.64 per share on weighted average
common shares outstanding, including dilutive common stock equivalents, of
15,192,676 in the second quarter of fiscal 2003 compared to diluted earnings per
common share of $1.42 per share on weighted average common shares outstanding,
including dilutive common stock equivalents, of 14,910,745 in the same period in
fiscal 2002.
TWENTY-SIX WEEKS ENDED DECEMBER 28, 2002 COMPARED WITH TWENTY-SIX WEEKS ENDED
DECEMBER 29, 2001.
Net Sales. Net sales in the twenty-six weeks ended December 28, 2002
("first half of fiscal 2003") were $539.3 million, an increase of approximately
$22.5 million or 4.4%, compared to net sales of $516.8 million in the quarter
ended December 29, 2001 ("first half of fiscal 2002"). Worldwide sales increases
from George Foreman(TM), The
18
Look For acquisition, Russell Hobbs(R) Westclox(R), Stiffel(R) and Carmen(R)
brands more than offset decreased sales of Toastmaster(R), White-Westinghouse(R)
and Aircore(R) product lines.
Gross Profit. Gross profit in the first half of fiscal 2003 was $177.7
million or 33.0% of net sales as compared to $181.6 million or 35.1% of net
sales in the same period in fiscal 2002. Cost of goods sold during the first
half of fiscal 2003 increased to 61.3% of net sales compared to 58.7% in the
same period in fiscal 2002. Distribution expenses were $31.1 million or 5.8% of
net sales in the first half of fiscal 2003 compared to $31.8 million or 6.2% of
net sales in the same period in fiscal 2002. Gross profit as a percent of sales
was lower in the second quarter of fiscal 2003 versus the same period in fiscal
2002. This is a result of several factors. The work slow down and bottleneck due
to the West Coast dock strike created a number of additional supply chain costs
which impacted our margins. In a difficult retail environment, our customers
pursued a lower margin product mix. As a result, there was an increase in the
number of products sold at lower margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to 21.2% of net sales or $114.3 million in the
first half of fiscal 2003 compared to 21.8% of net sales or $112.9 million for
the same period in fiscal 2002. Expenditures for television, royalty expenses,
certain other media and cooperative advertising and trade show expenses were
10.0% of net sales or $53.7 million in the first half of fiscal 2003 when
compared to 10.5% of net sales or $54.2 million in the same period in fiscal
2002. The slight decrease in these expenses from the prior year is primarily
related to decreased infomercial advertising offset partially by an increase in
direct advertising. The remaining selling, general and administrative costs
increased to 11.2% of net sales or $60.6 million in the first half of fiscal
2003 compared to 11.4% of net sales or $58.7 million in the first half of fiscal
2002. These costs include a $0.6 million charitable contribution related to the
exit of our Marilyn Monroe product line, a $0.5 million charge associated with
consultant fees to complete our ERP conversion and $2.0 million in legal charges
related to the litigation with Philips Oral Healthcare, Inc. regarding the
Ultrasonex(TM) toothbrush. Additionally, increases in salaries, other legal and
professional expenses, domestic corporate restructuring for improved reporting
purposes and increases in certain other administrative expenses to support the
Company were offset by a reduction in amortization expense under adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets" which ceased the
amortization of most intangible assets as of July 1, 2002. The provisions of
this accounting standard cannot be applied retroactively and prior period
results have not been adjusted for this change in accounting principle. Note 2,
"Implementation of New Accounting Standards," in our Notes to Consolidated
Financial Statements contain the pro forma results of the add-back of this
amortization expense to the Company's previously reported results.
Impairment Loss on Intangible Asset. A $0.8 million charge was
recognized in the first half of fiscal 2003 to record an impairment charge
related to the abandonment of the Welbilt tradename.
Operating Income. As a result of the events described above, operating
income decreased by $6.2 million or 9.0%, to $62.6 million in the first half of
fiscal 2003 from $68.8 million in the same period in fiscal 2002. Operating
income as a percentage of net sales decreased to 11.6% in the first half of
fiscal 2003 from 13.3% in the same period of fiscal 2002.
Net Interest Expense. Net interest expense was approximately $20.6
million for the first half of fiscal 2003 compared to $23.4 million in the first
half of fiscal 2002. In the first half of fiscal 2003, interest expense includes
imputed interest of approximately $1.0 million related to the note payable
associated with the George Foreman name acquisition and the loan notes issued to
Pifco shareholders. In the first half of fiscal 2002, interest expense includes
imputed interest of approximately $2.9 million related to the note payable
associated with the George Foreman name acquisition and the loan notes issued to
Pifco shareholders. Our rate of interest on amounts outstanding under the
revolver, term loan and senior subordinated debt was a weighted average annual
rate of 8.3% in the first half of fiscal 2003 compared to 8.5% in the same
period in fiscal 2002. The decrease in our weighted average annual interest rate
is primarily due to lower interest rates. 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 $468.1
million for the first half of fiscal 2003 compared to $521.7 million for the
same period in fiscal 2002.
Income Tax Expense. Tax expense was $13.8 million in the first half of
fiscal 2003 as compared to tax expense of $16.8 million in the same period in
fiscal 2002. The overall effective tax rate decreased as a result of an increase
in foreign income taxed at lower rates as well as, the implementation of SFAS
No. 142, which eliminated the amortization of goodwill and certain intangible
assets as of July 1, 2002.
19
Net Income. Net income increased 1.0% to $28.9 million in the first
half of fiscal 2003, compared to $28.6 million in the first half of fiscal 2002.
Earnings per Share. Basic earnings per common share were $2.60 per
share on weighted average common shares outstanding of 11,120,807 in the first
half of fiscal 2003 compared to earnings of $2.59 per share on weighted average
common shares outstanding of 11,021,401 in the same period in fiscal 2002.
Diluted earnings per common share were $1.92 per share on weighted average
common shares outstanding, including dilutive common stock equivalents, of
15,063,214 in the first half of fiscal 2003 compared to diluted earnings per
common share of $1.91 per share on weighted average common shares outstanding,
including dilutive common stock equivalents, of 14,985,409 in the same period in
fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of fiscal 2003, we generated net cash of $58.9
million from operating activities and used net cash of $32.5 million in
investing activities. The cash provided by operating activities was primarily
due to improved cash management of trade payables, offset by seasonal increases
in accounts receivable and inventory. The cash used in investing activities was
primarily related to the payments to George Foreman and other venture
participants in connection with the obligation under the note payable due to
them, as well as, capital expenditures.
At December 28, 2002, we had debt outstanding of $147.2 million under
the Third Amended and Restated Credit Agreement ("Credit Agreement") and had the
ability to borrow up to an additional $53.6 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 December 28,
2002, we had $125.0 million of 10 3/4% senior subordinated notes due 2005 and
$148.7 million of 12 1/4% senior subordinated notes due 2008 (excluding $13.3
million related to the fair value of interest rate swap agreements that have
been 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 on an ongoing basis to be
approximately 2% of net sales. We incurred approximately $10.4 million for
capital expenditures during the first half 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
20
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 December 28, 2002, the Company is in compliance with all debt
covenants.
21
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,
amortization of goodwill and certain other intangible assets ceased. Goodwill
and certain other intangible assets are now subject to fair-value based
impairment tests performed, at a minimum, on an annual basis. In addition, a
transitional goodwill and other intangible assets impairment test is required as
of the adoption date. These impairment tests are conducted on each business of
the Company where goodwill and other intangible assets are recorded, and may
require two steps. The initial step is designed to identify potential 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 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 half of 2003. As of the beginning of fiscal year
2003, we determined that no impairment of goodwill or intangible assets with
indefinite lives has occurred.
During the first half of fiscal year 2003, we recorded an impairment
charge of $0.8 million related to our decision to abandon the Welbilt tradename
and discontinue the related product line. A $0.8 million charge was recognized
in the first half of 2003 to record this impairment.
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 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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB
Statement No. 123." This Statement amends FASB Statement No. 123, Accounting
for Stock-Based Compensation, to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
This statement is effective for annual periods ending after December 15, 2002
and for interim periods beginning after December 15, 2002. The Company does not
expect the adoption of this statement to have a material impact to the
financial statements.
22
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.
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. This contract was terminated in the second quarter of fiscal 2003,
resulting in the receipt of $2.0 million. A gain of $1.8 million from 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 did not have an interest rate swap agreement
in affect as of December 28, 2002. We terminated the interest rate swap as we
are currently reviewing our financing options and will evaluate the need for
future interest rate hedging instruments in accordance with our risk management
policies.
23
All foreign exchange contracts have been recorded on the balance sheet
at fair value of ($2.6) million classified within accrued expenses. The change
in the fair value of contracts in the second quarter that qualify as foreign
currency cash flow hedges and are highly effective was $0.3 million. This amount
was recorded in other comprehensive income, net of tax. In the second quarter,
the changes in the fair value of contracts that do not qualify as foreign
currency cash flow hedges of $1.0 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 over
the next twelve months. At December 28, 2002, our European subsidiary had
foreign exchange contracts for the purchase of 74.0 million U.S. dollars.
Contracts for the purchase of 45.0 million U.S. dollars were entered into during
the second quarter of fiscal 2003.
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.
24
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 challenged various advertising claims made by us about the
Ultrasonex(TM) electric toothbrush. Philips alleged causes of action for false
advertising and sought 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.
The parties have agreed to settle subject to completion of a formal
settlement agreement. Once the settlement agreement is finalized, the lawsuit
will be dismissed with prejudice with each party paying its own legal fees and
expenses.
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 $4.5 million on March 1, 2003 and an additional payment of
$3.5 million on March 1, 2004. The settlement agreement has been filed in the
United States District Court for the Southern District of New York, which
entered an order dated January 13, 2003 preliminarily approving the settlement.
A hearing is scheduled for May 30, 2003 at which time the court will determine
whether to grant final approval of the settlement.
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 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on December 4, 2002.
The following proposal was adopted by the margins indicated:
1. To elect a Board of Directors to hold office until their successors
are elected and qualified.
Number of Shares
----------------------------------------
For Withheld
------------ --------------------
Bert Doornmalen 13,405,115 202,880
Bruce G. Pollack 13,407,652 200,343
Bruce J. Walker 13,415,989 192,006
25
The following proposal was adopted by the margins indicated:
2. Salton, Inc. 2003 Management Incentive Plan.
For 8,574,881
Against 585,281
Abstain 36,806
The following proposal was adopted by the margins indicated:
3. The appointment of Deloitte & Touche LLP as the auditors for the
2003 fiscal year.
For 13,447,074
Against 135,058
Abstain 25,863
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
A current report on Form 8-K was filed on November 11, 2002 reporting,
under Item 5 Other Events, the Company's announcement of its fiscal 2003 first
quarter earnings results.
A current report on Form 8-K was filed on October 23, 2002 reporting,
under Item 5, Other Events, the Company entered into employment agreements with
David C. Sabin, Leonhard Dreimann, William B. Rue and David M. Mulder.
A current report on Form 8-K was filed on October 7, 2002 reporting,
under Item 5, Other Events, the Company announced the appointment of David M.
Mulder to the additional post of Senior Financial Officer and the retirement of
John E. Thompson, Senior Vice President and Chief Financial Officer.
26
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: February 11, 2003 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)
27
CERTIFICATIONS
I, Leonhard Deimann, 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: February 11, 2003
By: /s/ Leonhard Dreimann
------------------------
LEONHARD DREIMANN
CHIEF EXECUTIVE OFFICER
28
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: February 11, 2003
By: /s/ David M. Mulder
------------------------
DAVID M. MULDER
EXECUTIVE VICE PRESIDENT, CHIEF
ADMINISTRATIVE OFFICER AND SENIOR
FINANCIAL OFFICER
29
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
12(A) Computation of Ratio of Earnings to Fixed Charges
30