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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 March 29, 2003 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 by the check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 May 8, 2003, 11,186,900
shares of its $.01 par value Common Stock.
1
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - March 29, 2003 and June 29, 2002 3
Consolidated Statements of Earnings - Thirteen weeks ended
March 29, 2003 and March 30, 2002 and Thirty-nine weeks ended
March 29, 2003 and March 30, 2002 4
Consolidated Statements of Cash Flows - Thirty-nine weeks ended
March 29, 2003 and March 30, 2002 5
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 3: Quantitative and Qualitative Disclosures About Market Risk 26
Item 4: Controls and Procedures 27
PART II OTHER INFORMATION
Item 1: Legal Proceedings 28
Item 4: Submission of Matters to a Vote of Security Holders 28
Item 6: Exhibits and Reports on Form 8-K 29
Signature 30
Certifications 31
2
SALTON, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA) MARCH 29, 2003 JUNE 29, 2002
---------------- ---------------
ASSETS
CURRENT ASSETS:
Cash $ 58,136 $ 31,055
Accounts receivable, net of allowances 189,915 217,468
Inventories 216,583 244,160
Prepaid expenses and other current assets 20,757 12,889
Prepaid income taxes -- 2,781
Deferred income taxes 6,715 7,906
-------------- --------------
Total Current Assets 492,106 516,259
Property, Plant and Equipment, net 63,480 56,550
Patents and Trademarks 182,989 182,538
Cash in Escrow for Pifco Loan Notes 4,975 18,676
Goodwill 30,149 29,976
Other Assets, net 20,112 21,569
-------------- --------------
TOTAL ASSETS $ 793,811 $ 825,568
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit and other current debt $ 121,538 $ 150,101
Accounts payable 34,977 25,364
Accrued expenses 58,288 60,994
Foreman guarantee -- 1,393
Income taxes payable 3,638 --
-------------- --------------
Total Current Liabilities 218,441 237,852
Non-Current Deferred Income Taxes 1,118 1,076
Senior Subordinated Notes Due 2005 125,000 125,000
Senior Subordinated Notes due 2008, including an
adjustment of $12,706 and $8,384, respectively, to
the carrying value related to interest rate
swap agreements 161,459 156,954
Loan Notes to Pifco Shareholders -- 4,908
Term Loan and Other Notes Payable 19,189 49,721
Other Long Term Liabilities -- 5,021
-------------- --------------
525,207 580,532
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, 2003-11,183,048
shares, 2002-10,992,582 shares 148 146
Treasury Stock - at cost (67,019) (67,019)
Additional Paid-In Capital 96,010 93,557
Accumulated Other Comprehensive Income 5,063 745
Retained Earnings 234,402 217,607
-------------- --------------
Total Stockholders' Equity 268,604 245,036
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 793,811 $ 825,568
============== ==============
See Notes to Consolidated Financial Statements.
3
SALTON, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA) 13 WEEKS ENDED 39 WEEKS ENDED
--------------------------------- -------------------------------
March 29, March 30, March 29, March 30,
2003 2002 2003 2002
-------------- -------------- ------------ ------------
NET SALES $ 166,364 $ 188,095 $ 705,668 $ 704,934
Cost of Goods Sold 115,688 106,579 446,151 410,005
Distribution Expenses 13,335 14,723 44,460 46,499
------------ ------------ ------------ ------------
GROSS PROFIT 37,341 66,793 215,057 248,430
Selling, General and Administrative Expenses 46,673 50,135 160,990 163,016
Impairment loss on intangible asset -- -- 800 --
------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (9,332) 16,658 53,267 85,414
Interest Expense, net 10,012 10,413 30,646 33,851
Fair market value adjustment on derivatives (1,516) -- (2,258) --
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (17,828) 6,245 24,879 51,563
Income Tax (Benefit) Expense (5,753) 2,312 8,084 19,079
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (12,075) $ 3,933 $ 16,795 $ 32,484
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,182,348 10,987,162 11,141,321 11,009,988
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 11,182,348 15,101,200 15,100,023 15,023,872
Net (Loss) Income per Common Share: Basic $ (1.08) $ 0.36 $ 1.51 $ 2.95
Net (Loss) Income per Common Share: Diluted $ (1.08) $ 0.26 $ 1.11 $ 2.16
See Notes to Consolidated Financial Statements.
4
SALTON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA) 39 WEEKS ENDED
---------------------------------
MARCH 29, 2003 MARCH 30, 2002
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ............................................................................. $ 16,795 $ 32,484
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Imputed interest on notes payable .................................................... 257 4,355
Deferred income tax provision ........................................................ 664 (228)
Gain on sale of investment ........................................................... -- (200)
Depreciation and amortization ........................................................ 12,494 22,655
Loss on disposal of equipment ........................................................ 384 --
Equity in net income of investee ..................................................... (910) (272)
Impairment loss on intangible asset .................................................. 800 --
Fair value adjustment for derivatives ................................................ (2,258) --
Foreign currency gains and losses .................................................... (474)
Changes in assets and liabilities:
Accounts receivable ............................................................... 28,461 (3,052)
Inventories ....................................................................... 28,215 (42,180)
Prepaid expenses and other current assets ......................................... (6,949) (1,750)
Accounts payable .................................................................. 9,535 (19,709)
Taxes payable ..................................................................... 6,364 13,613
Accrued expenses .................................................................. (4,767) 19,871
------------- -------------
NET CASH FROM OPERATING ACTIVITIES.............................................. 88,611 25,587
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................................... (16,316) (12,448)
Increase in other non-current assets .................................................. 156 (802)
Proceeds from sale of investment ...................................................... -- 501
Acquisition of business ................................................................ -- (7,314)
Additional payment for patents and trademarks .......................................... (23,748) (18,029)
Additions to intangibles, patents and trademarks ....................................... -- (20,564)
------------- -------------
NET CASH FROM INVESTING ACTIVITIES.............................................. (39,908) (58,656)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) proceeds from revolving line of credit and other debt ................. (20,000) 50,000
Repayment of long-term debt ............................................................ (9,791) (16,839)
Proceeds from termination of Swap transaction .......................................... 8,058 --
Costs associated with refinancing ...................................................... (345) (1,054)
Common stock issued .................................................................... 39 144
Purchase of treasury stock ............................................................. -- (1,125)
------------- -------------
NET CASH FROM FINANCING ACTIVITIES.............................................. (22,039) 31,126
------------- -------------
Effect of Exchange Rate Changes on Cash .................................................. 417 171
------------- -------------
Net Change in Cash ....................................................................... 27,081 (1,772)
Cash, Beginning of Period ................................................................ 31,055 30,097
------------- -------------
Cash, End of Period....................................................................... $ 58,136 $ 28,325
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Interest ............................................................................... $ 20,953 $ 21,970
Income taxes ........................................................................... $ 5,013 $ 9,308
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 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
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.
Actual results of operations for the thirteen and thirty-nine weeks ended
March 29, 2003 and pro forma results of operations for the thirteen and
thirty-nine weeks ended March 30, 2002 had the Company applied the
nonamortization provisions of SFAS No. 142 in that period are as follows:
6
13 WEEKS ENDED 39 WEEKS ENDED
----------------------------- -----------------------------
MARCH 29, MARCH 30, MARCH 29, MARCH 30,
(In thousands except per share data) 2003 2002 2003 2002
------------- ------------- ------------- -------------
Net (loss) income:
Reported net (loss) income $ (12,075) $ 3,933 $ 16,795 $ 32,484
Goodwill amortization, net of tax -- 482 -- 1,452
Indefinite-life intangibles amortization, net of tax -- 2,798 -- 7,789
------------- ------------- ------------- -------------
ADJUSTED NET (LOSS) INCOME $ (12,075) $ 7,213 $ 16,795 $ 41,725
============= ============= ============= =============
Basic (loss) income per share:
Reported (loss) income per basic share $ (1.08) $ 0.36 $ 1.51 $ 2.95
Goodwill amortization, net of tax per basic share -- 0.04 -- 0.13
Indefinite-life intangibles amortization net of tax
per basic share -- 0.25 -- 0.71
------------- ------------- ------------- -------------
ADJUSTED BASIC (LOSS) INCOME PER SHARE $ (1.08) $ 0.65 $ 1.51 $ 3.79
============= ============= ============= =============
Diluted (loss) income per share:
Reported (loss) income per diluted share $ (1.08) $ 0.26 $ 1.11 $ 2.16
Goodwill amortization, net of tax per diluted share -- 0.03 -- 0.10
Indefinite-life intangibles amortization net of tax
per diluted share -- 0.19 -- 0.52
------------- ------------- ------------- -------------
ADJUSTED DILUTED (LOSS) INCOME PER SHARE $ (1.08) $ 0.48 $ 1.11 $ 2.78
============= ============= ============= =============
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 position or results of
operations.
The FASB's Emerging Issues Task Force ("EITF") Issue No. 02-16, "Accounting
By A Customer (Including A Reseller) For Cash Consideration Received From A
Vendor" addressed the accounting treatment for vendor allowances. The Company
receives allowances from certain vendors through a variety of arrangements.
Given the promotional nature of the Company's business, the allowances are
generally intended to offset the Company's costs of promoting, selling and
advertising the vendors' products. Vendor allowances are recognized as a
reduction of cost of sales when the purpose for which the vendor funds were
intended to be used has been fulfilled. The adoption of EITF Issue No. 02-16 in
2003 did not have a material impact on the Company's financial position 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
on the financial position or results of operations.
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 March 29, 2003 and March 30, 2002 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 1,241,606 shares of common stock at a price range of $10.44 to
$37.00 per share and 665,634 shares of common stock at a price range of $17.50
to $37.00 per share were outstanding at March 29, 2003 and March 30, 2002,
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. STOCK-BASED COMPENSATION
At March 29, 2003, the Company has various stock-based employee
compensation plans which are described more fully in Note 11 of the Notes to
Consolidated Financial Statements in the Company's 2002 Annual Report on Form
10-K. The Company accounts for those plans in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as no options granted under those plans had an exercise price
less than the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation".
13 WEEKS ENDED 39 WEEKS ENDED
-------------------------------- -----------------------------
MARCH 29, MARCH 30, MARCH 29, MARCH 30,
(In thousands except share data) 2003 2002 2003 2002
-------------------------------- -----------------------------
Net (loss) income - as reported $ (12,075) $ 3,933 $ 16,795 $ 32,484
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related taxes 468 682 1,403 2,046
-------------------------------- -----------------------------
Net (loss) income - pro forma $ (12,543) $ 3,251 $ 15,392 $ 30,438
================================ =============================
Earnings per share - basic
As reported $ (1.08) $ 0.36 $ 1.51 $ 2.95
Pro forma (1.12) 0.30 1.38 2.77
Earnings per share - diluted
As reported $ (1.08) $ 0.26 $ 1.11 $ 2.16
Pro forma (1.12) 0.22 1.02 2.03
6. 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 Great Britain pound.
8
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 third 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 effect as of March 29, 2003.
All foreign exchange contracts have been recorded on the balance sheet at
fair value of $0.6 million classified within other current assets. The change in
the fair value of contracts in the third quarter that qualify as foreign
currency cash flow hedges and are highly effective were $1.6 million. This
amount was recorded in other comprehensive income, net of tax. In the third
quarter, the changes in the fair value of contracts that do not qualify as
foreign currency cash flow hedges of $1.5 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 March 29, 2003, the Company's
European subsidiary had foreign exchange contracts for the purchase of 47.0
million U.S. dollars. Contracts for the purchase of 15.0 million U.S. dollars
were entered into during the third quarter of fiscal 2003.
7. COMPREHENSIVE INCOME
For the thirteen and thirty-nine weeks ended March 29, 2003 and March 30,
2002, components of other comprehensive (loss) income include foreign currency
translation adjustments and derivative liability adjustments.
13 Weeks Ended 39 Weeks Ended
----------------------------------- -----------------------------------
(In thousands) 3/29/2003 3/30/2002 3/29/2003 3/30/2002
---------------- ---------------- ---------------- ----------------
Net (Loss) Income $ (12,075) $ 3,933 $ 16,795 $ 32,484
Other Comprehensive (Loss) Income (4,266) (321) 4,318 862
---------------- ---------------- ---------------- ----------------
Comprehensive (Loss) Income $ (16,341) $ 3,612 $ 21,113 $ 33,346
================ ================ ================ =================
Accumulated other comprehensive income is comprised of minimum pension
liability of ($1.7) million as of March 29, 2003 and June 29, 2002, as well as
foreign currency translation adjustments of $6.2 million and $3.0 million as of
March 29, 2003 and June 29, 2002, respectively, and derivative asset (liability)
of $0.6 million and ($0.6) million as of March 29, 2003 and June 29, 2002,
respectively.
8. 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 and 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
9
independent manufacturers, primarily in the Far East and are distributed through
similar distribution channels.
Product Information - Net Sales
13 Weeks Ended 39 Weeks Ended
------------------------------- ----------------------------
(In thousands) 3/29/2003 3/30/2002 3/29/2003 3/30/2002
------------ ------------ ------------ ------------
Small Appliances $ 145,743 $ 162,498 $ 612,241 $ 619,641
Salton At Home 16,933 19,492 69,501 65,526
Personal Care and Wellness Products 3,688 6,105 23,926 19,767
------------ ------------ ------------ ------------
Total $ 166,364 $ 188,095 $ 705,668 $ 704,934
============ ============ ============ ============
Geographic Information
Net Sales Net Sales Long-Lived Assets
13 Weeks Ended 39 Weeks Ended As Of
------------------------- ------------------------ -----------------------
(In thousands) 3/29/2003 3/30/2002 3/29/2003 3/30/2002 3/29/2003 6/29/2002
---------- ---------- ---------- ---------- ---------- ----------
North America $ 110,791 $ 152,463 $ 504,862 $ 600,761 $ 215,945 $ 219,721
European Union 44,723 29,705 159,982 83,315 55,068 71,248
Other Foreign Regions 10,850 5,927 40,824 20,858 30,692 18,340
---------- ---------- ---------- ---------- ---------- ----------
Total $ 166,364 $ 188,095 $ 705,668 $ 704,934 $ 301,705 $ 309,309
========== ========== ========== ========== ========== ==========
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.
9. LEGAL PROCEEDINGS
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. Under the terms of this agreement, the Company made a payment of $4.5
million on March 1, 2003 and an additional payment of $3.5 million will be due
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.
10
10. 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 Salton,
Inc. (Parent), the Guarantor Subsidiaries, and the Company's Non-Guarantor
subsidiaries (Other Subsidiaries).
11
CONSOLIDATING BALANCE SHEET AS OF MARCH 29, 2003
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
--------- ------------ ------------ --------- ------------ ------------ ------------
ASSETS
Current Assets:
Cash $ (3) $ 12,087 $ - $ 12,084 $ 46,052 $ - $ 58,136
Accounts receivable, net of allowances 5,684 126,918 - 132,602 57,313 - 189,915
Inventories 8,948 214,722 (55,069) 168,601 47,982 - 216,583
Prepaid expenses and other current assets 4,287 5,065 - 9,352 11,405 - 20,757
Intercompany 227,504 (155,165) - 72,339 (72,339) - -
Deferred income taxes 3,435 3,846 - 7,281 (566) - 6,715
--------- --------- ----------- --------- --------- -------- ---------
Total Current Assets 249,855 207,473 (55,069) 402,259 89,847 - 492,106
Property, Plant and Equipment,
Net of Accumulated Depreciation 17,133 14,775 - 31,908 31,572 - 63,480
Investments in Subsidiaries 405,302 54,188 (459,490) - - - -
Patents and Trademarks 139,981 10,781 - 150,762 32,227 - 182,989
Cash in Escrow for Pifco Loan Notes - - - - 4,975 - 4,975
Goodwill - 23,671 - 23,671 6,478 - 30,149
Other Assets, net 10,891 (1,303) - 9,588 10,524 - 20,112
--------- --------- ----------- --------- --------- -------- ---------
Total Assets $ 823,162 $ 309,585 $ (514,559) $ 618,188 $ 175,623 $ - $ 793,811
========= ========= =========== ========= ========= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other
current debt $ 22,338 $ 94,339 $ - $ 116,677 $ 4,861 $ - $ 121,538
Accounts payable (8,991) 11,274 - 2,283 32,694 - 34,977
Accrued expenses 24,462 17,453 - 41,915 16,373 - 58,288
Income taxes payable (14,713) 9,318 - (5,395) 9,033 - 3,638
--------- --------- ----------- --------- --------- -------- ---------
Total current liabilities 23,096 132,384 - 155,480 62,961 - 218,441
Non-current Deferred Income Taxes 496 (906) - (410) 1,528 - 1,118
Senior subordinated notes due 2005 125,000 - - 125,000 - - 125,000
Senior subordinated notes due 2008,
including an adjustment of $12,706
to the carrying value related to
interest rate swap agreements 161,459 - - 161,459 - - 161,459
Other notes payable - 19,189 - 19,189 - - 19,189
Other Long Term Liability - - - - -
--------- --------- ----------- --------- --------- -------- ---------
Total liabilities 310,051 150,667 - 460,718 64,489 - 525,207
Stockholders' Equity 513,111 158,918 (514,559) 157,470 111,134 - 268,604
--------- --------- ----------- --------- --------- -------- ---------
Total Liabilities and Stockholders' Equity $ 823,162 $ 309,585 $ (514,559) $ 618,188 $ 175,623 $ - $ 793,811
========= ========= =========== ========= ========= ======== =========
12
CONSOLIDATING BALANCE SHEET AS OF JUNE 29, 2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
--------- ------------ ------------ --------- ------------ ------------ ------------
ASSETS
Current Assets:
Cash $ 2,797 $ 7,931 $ - $ 10,728 $ 20,327 $ - $ 31,055
Accounts receivable 773 165,446 - 166,219 51,249 - 217,468
Inventories 2,395 193,851 - 196,246 47,914 - 244,160
Prepaid expenses and other current assets 4,499 3,061 - 7,560 5,329 - 12,889
Intercompany 211,986 (135,451) - 76,535 (76,535) - -
Prepaid income taxes 22,299 (12,348) - 9,951 (7,170) - 2,781
Deferred income taxes 3,435 3,846 - 7,281 625 - 7,906
--------- --------- ---------- --------- --------- -------- ---------
Total Current Assets 248,184 226,336 - 474,520 41,739 - 516,259
Property, Plant and Equipment,
Net of Accumulated Depreciation 19,064 14,204 - 33,268 23,282 - 56,550
Investments in Subsidiaries 375,521 53,355 (428,876) - - - -
Patents and Trademarks 140,410 10,781 - 151,191 31,347 - 182,538
Cash in escrow for Pifco loan notes - - - - 18,676 - 18,676
Goodwill - 23,675 - 23,675 6,301 - 29,976
Other Assets, net 11,029 534 - 11,563 10,006 - 21,569
--------- --------- ---------- --------- --------- -------- ---------
Total Assets $ 794,208 $ 328,885 $ (428,876) $ 694,217 $ 131,351 $ - $ 825,568
========= ========= ========== ========= ========= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit and other
current debt $ 22,750 $ 114,026 $ - $ 136,776 $ 13,325 $ - $ 150,101
Accounts payable 8,403 3,457 - 11,860 13,504 - 25,364
Accrued expenses 21,003 18,789 - 39,792 21,202 - 60,994
Foreman guarantee 1,393 - - 1,393 - - 1,393
--------- --------- ---------- --------- --------- -------- ---------
Total Current Liabilities 53,549 136,272 - 189,821 48,031 - 237,852
Non-Current Deferred Income Taxes 495 (906) - (411) 1,487 - 1,076
Senior Subordinated Notes due 2005 125,000 - - 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 - - 156,954
Loan Notes to Pifco Shareholders - - - - 4,908 - 4,908
Other Notes Payable 26,125 28,617 - 54,742 - - 54,742
--------- --------- ---------- --------- --------- -------- ---------
Total liabilities 362,123 163,983 - 526,106 54,426 - 580,532
Stockholders' Equity 432,085 164,902 (428,876) 168,111 76,925 - 245,036
--------- --------- ---------- --------- --------- -------- ---------
Total Liabilities and Stockholders' Equity $ 794,208 $ 328,885 $ (428,876) $ 694,217 $ 131,351 $ - $ 825,568
========= ========= ========== ========= ========= ======== =========
13
CONSOLIDATING STATEMENT OF EARNINGS FOR THE THIRTEEN WEEKS ENDED MARCH 29, 2003
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
-------- ------------ ------------ --------- ------------ ------------ ------------
Net Sales $ 57,534 $154,263 $(101,265) $110,532 $112,641 $(56,809) $166,364
Cost of Goods Sold 32,442 154,260 (105,127) 81,575 89,422 (55,309) 115,688
Distribution Expenses - 10,988 - 10,988 2,347 - 13,335
-------- -------- --------- -------- -------- -------- --------
Gross Profit 25,092 (10,985) 3,862 17,969 20,872 (1,500) 37,341
Selling, General and
Administrative expenses 12,138 20,464 - 32,602 15,571 (1,500) 46,673
Impairment Loss on Intangible
Asset - - - - - -
-------- -------- --------- -------- -------- -------- --------
Operating (Loss) Income 12,954 (31,449) 3,862 (14,633) 5,301 - (9,332)
Interest Expense, Net 7,586 1,254 - 8,840 1,172 - 10,012
Fair Market Value Adjustment on
Derivatives - - - - (1,516) - (1,516)
Equity in Earnings of
Subsidiaries 19,774 241 (20,015) - - - -
-------- -------- --------- -------- -------- -------- --------
(Loss) Income Before
Income Taxes (14,406) (32,944) 23,877 (23,473) 5,645 - (17,828)
Income Tax (Benefit) Expense 1,772 (8,540) - (6,768) 1,015 - (5,753)
-------- -------- --------- -------- -------- -------- --------
Net (Loss) Income $(16,178) $(24,404) $ 23,877 $(16,705) $ 4,630 $ - $(12,075)
======== ======== ========= ======== ======== ======== ========
CONSOLIDATING STATEMENT OF EARNINGS FOR THE THIRTEEN WEEKS ENDED MARCH 30, 2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
-------- ------------ ------------ --------- ------------ ------------ ------------
Net Sales $ 68,073 $203,092 $(119,084) $152,081 $88,035 $(52,021) $188,095
Cost of Goods Sold 45,641 163,498 (118,688) 90,451 66,649 (50,521) 106,579
Distribution Expenses 249 13,090 13,339 1,384 14,723
-------- -------- --------- -------- ------- -------- --------
Gross Profit 22,183 26,504 (396) 48,291 20,002 (1,500) 66,793
Selling, General and
Administrative expenses 23,422 20,472 (396) 43,498 8,137 (1,500) 50,135
-------- -------- --------- -------- ------- -------- --------
Operating (Loss) Income (1,239) 6,032 - 4,793 11,865 - 16,658
Interest Expense, Net 11,217 (903) - 10,314 99 - 10,413
Equity in Earnings of
Subsidiaries (14,414) 50 14,364 - - - -
-------- -------- --------- -------- ------- -------- --------
(Loss) Income Before
Income Taxes 1,958 6,885 (14,364) (5,521) 11,766 - 6,245
Income Tax (Benefit) Expense (1,976) 2,674 - 698 1,614 - 2,312
-------- -------- --------- -------- ------- -------- --------
Net(Loss) Income $ 3,934 $ 4,211 $ (14,364) $ (6,219) $10,152 $ - $ 3,933
======== ======== ========= ======== ======= ======== ========
14
CONSOLIDATING STATEMENT OF EARNINGS FOR THE THIRTY-NINE WEEKS ENDED MARCH 29,
2003 (IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
-------- ------------ ------------ --------- ------------ ------------ ------------
Net Sales $275,628 $715,508 $(487,036) $504,100 $452,335 $(250,767) $705,668
Cost of Goods Sold 157,494 605,081 (431,542) 331,033 361,385 (246,267) 446,151
Distribution Expenses 36,597 - 36,597 7,863 - 44,460
-------- -------- --------- -------- -------- --------- --------
Gross Profit 118,134 73,830 (55,494) 136,470 83,087 (4,500) 215,057
Selling, General and
Administrative expenses 42,182 77,026 (425) 118,783 46,707 (4,500) 160,990
Impairment Loss on
Intangible Asset 800 - - 800 - - 800
-------- -------- --------- -------- -------- --------- --------
Operating (Loss) Income 75,152 (3,196) (55,069) 16,887 36,380 - 53,267
Interest Expense, Net 22,558 4,665 - 27,223 3,423 - 30,646
Fair market value adjustment
on derivatives - - - - (2,258) - (2,258)
Equity in Earnings of
Subsidiaries 22,771 (689) (22,082) - - - -
-------- -------- --------- -------- -------- --------- --------
(Loss) Income Before
Income Taxes 75,365 (8,550) (77,151) (10,336) 35,215 - 24,879
Income Tax (Benefit)
Expense 4,189 (2,868) - 1,321 6,763 - 8,084
-------- -------- --------- -------- -------- --------- --------
Net (Loss) Income $ 71,176 $ (5,682) $ (77,151) $(11,657) $ 28,452 $ - $ 16,795
======== ======== ========= ======== ======== ========= ========
CONSOLIDATING STATEMENT OF EARNINGS FOR THE THIRTY-NINE WEEKS ENDED MARCH 30,
2002 (IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
-------- ------------ ------------ --------- ------------ ------------ ------------
Net Sales $303,993 $768,052 $(472,887) $599,158 $325,963 $(220,187) $704,934
Cost of Goods Sold 202,259 624,622 (472,491) 354,390 271,302 (215,687) 410,005
Distribution Expenses 676 42,106 42,782 3,717 - 46,499
-------- -------- --------- -------- -------- --------- --------
Gross Profit 101,058 101,324 (396) 201,986 50,944 (4,500) 248,430
Selling, General and
Administrative expenses 72,019 72,309 (396) 143,932 23,584 (4,500) 163,016
-------- -------- --------- -------- -------- --------- --------
Operating Income 29,039 29,015 - 58,054 27,360 - 85,414
Interest Expense, Net 28,918 4,343 - 33,261 590 - 33,851
Equity in Earnings
of Subsidiaries 36,288 (324) (35,964) - - - -
-------- -------- --------- -------- -------- --------- --------
Income Before Income
Taxes 36,409 24,348 (35,964) 24,793 26,770 - 51,563
Income Tax Expense 3,925 10,622 - 14,547 4,532 - 19,079
-------- -------- --------- -------- -------- --------- --------
Net Income $ 32,484 $ 13,726 $(35,964) $ 10,246 $ 22,238 $ - $ 32,484
======== ======== ========= ======== ======== ========= ========
15
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THIRTY-NINE WEEKS ENDED MARCH 29,
2003 (IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
-------- ------------ ------------ --------- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 71,176 $ (5,682) $(77,151) $(11,657) $ 28,452 $ - $ 16,795
Adjustments to reconcile net income
(loss) to net cash used in
operating activities: - -
Imputed interest on notes payable (49) - - (49) 306 - 257
Deferred income tax provision - - - - 664 - 664
Depreciation and amortization 6,266 2,553 - 8,819 3,675 - 12,494
Loss on disposal of equipment - - - - 384 - 384
Equity in net income of
unconsolidated affiliate/ - -
consolidated subsidiaries (22,772) 690 22,082 - (910) - (910)
Impairment loss on intangible asset 800 - - 800 - - 800
Fair value adjustments for derivatives - - - - (2,258) - (2,258)
Foreign currency gains and losses - (474) - (474) - - (474)
Changes in assets and liabilities: -
Accounts receivable (4,910) 39,001 - 34,091 (5,630) - 28,461
Inventories (6,553) (20,871) 55,069 27,645 570 - 28,215
Prepaid expenses and other
current assets 213 (2,005) - (1,792) (5,157) - (6,949)
Intercompany (14,866) 19,714 - 4,848 (4,848) - -
Accounts payable (15,153) 7,817 - (7,336) 16,871 - 9,535
Taxes payable 7,586 (3,030) - 4,556 1,808 - 6,364
Accrued expenses (1,946) (1,334) - (3,280) (1,487) - (4,767)
-------- -------- -------- -------- -------- ------ --------
NET CASH FROM OPERATING ACTIVITIES 19,792 36,379 - 56,171 32,440 - 88,611
-------- -------- -------- -------- -------- ------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,257) (2,432) - (4,689) (11,627) - (16,316)
Increase in other non-current assets (250) - - (250) 406 - 156
Additional payment for patents and
trademarks (23,748) - - (23,748) - - (23,748)
-------- -------- -------- -------- -------- ------ --------
NET CASH FROM INVESTING ACTIVITIES (26,255) (2,432) - (28,687) (11,221) - (39,908)
-------- -------- -------- -------- -------- ------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of
credit and other debt - (20,000) - (20,000) - - (20,000)
Repayment of long-term debt - (9,791) - (9,791) - - (9,791)
Proceeds from termination of
Swap transaction 8,058 - - 8,058 - - 8,058
Costs associated with refinancing (345) - - (345) - - (345)
Common stock issued 39 - - 39 - - 39
-------- -------- -------- -------- -------- ------ --------
NET CASH FROM FINANCING ACTIVITIES 7,752 (29,791) - (22,039) - - (22,039)
-------- -------- -------- -------- -------- ------ --------
Effect of Exchange Rate Changes on Cash (4,089) - - (4,089) 4,506 - 417
Net Change in Cash (2,800) 4,156 - 1,356 25,725 - 27,081
Cash, Beginning of Period 2,797 7,931 - 10,728 20,327 - 31,055
-------- -------- -------- -------- -------- ------ --------
Cash, End of Period $ (3) $ 12,087 $ - $ 12,084 $ 46,052 $ - $ 58,136
======== ======== ======== ======== ======== ====== ========
16
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THIRTY-NINE WEEKS ENDED MARCH 30,
2002 (IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
-------- ------------ ------------ ----- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 32,484 $ 13,726 $(35,964) $ 10,246 $ 22,238 $ - $ 32,484
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Imputed interest on notes payable 3,390 - - 3,390 965 - 4,355
Gain on sale of investment - - - - (200) - (200)
Deferred income tax provision (228) - - (228) - - (228)
Depreciation and amortization 15,162 3,726 - 18,888 3,767 - 22,655
Loss on disposal of equipment - - - - - - -
Equity in net income of
unconsolidated affiliate/
consolidated subsidiaries (36,289) 325 35,964 - (272) - (272)
Impairment loss on intangible asset - - - - - - -
Fair value adjustments for
derivatives - - - - - - -
Foreign currency gains and losses - - - - - - -
Changes in assets and liabilities: - -
Accounts receivable 115,681 (108,084) - 7,597 (10,649) - (3,052)
Inventories (7,436) (26,826) - (34,262) (7,918) - (42,180)
Prepaid expenses and other current
assets (460) 510 - 50 (1,800) - (1,750)
Intercompany (82,860) 59,327 - (23,533) 23,533 - -
Accounts payable (1,466) (389) - (1,855) (17,854) - (19,709)
Taxes payable 408 11,031 - 11,439 2,174 - 13,613
Accrued expenses 14,200 7,308 - 21,508 (1,637) - 19,871
-------- --------- -------- -------- -------- ------ --------
NET CASH FROM OPERATING ACTIVITIES 52,586 (39,346) - 13,240 12,347 - 25,587
-------- --------- -------- -------- -------- ------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,968) (1,170) - (6,138) (6,310) - (12,448)
Increase in other non-current assets (988) - - (988) 186 - (802)
Proceeds from sale investment - - - - 501 - 501
Acquisition of business (5,300) - - (5,300) (2,014) - (7,314)
Additional payment for patents and
trademarks (18,029) - - (18,029) - - (18,029)
Additional to intangibles, patents
and trademarks (20,564) - - (20,564) - - (20,564)
-------- --------- -------- -------- -------- ------ --------
NET CASH FROM INVESTING ACTIVITIES (49,849) (1,170) - (51,019) (7,637) - (58,656)
-------- --------- -------- -------- -------- ------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of
credit and other debt - 50,000 - 50,000 50,000
Repayment of long-term debt (2,750) (14,089) - (16,839) - - (16,839)
Costs associated with refinancing (1,054) - - (1,054) - - (1,054)
Common stock issued 144 - - 144 - - 144
Treasury stock purchase (1,125) - - (1,125) - - (1,125)
-------- --------- -------- -------- -------- ------ --------
NET CASH FROM FINANCING ACTIVITIES (4,785) 35,911 - 31,126 - - 31,126
-------- --------- -------- -------- -------- ------ --------
Effect of Exchange Rate
Changes on Cash - - - - 171 - 171
Net Change in Cash (2,048) (4,605) - (6,653) 4,881 - (1,772)
Cash, Beginning of Period 6,240 8,242 - 14,482 15,615 - 30,097
-------- --------- -------- -------- -------- ------ --------
Cash, End of Period $ 4,192 $ 3,637 $ - $ 7,829 $ 20,496 $ - $ 28,325
======== ========= ======== ======== ======== ====== ========
17
11. SUBSEQUENT EVENTS
On May 9, 2003, the Company entered into a four-year senior secured
revolving credit facility which provides the ability to borrow up to $275.0
million (including $10.0 million for letters of credit). As of May 9, 2003, the
Company has borrowings of approximately $76.1 million outstanding under this
facility, which funds were used to repay in full our obligations relating to our
prior senior secured credit facility and pay expenses related to such
refinancing. Advances under the secured senior credit facility are primarily
based upon percentages of eligible accounts receivable and inventories. As of
May 9, 2003, we had approximately $64.1 million available to future cash
borrowings with $22.7 million reserved for the final payments on the Foreman
notes. Typically, given the seasonal nature of our business, borrowings and
availability tend to be highest in mid-Fall and early Winter.
Borrowings under this credit facility are secured by the assets of our
domestic entities and 65.0% of the capital stock of certain of our foreign
subsidiaries.
18
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), Starck(R) and Andrew Collinge.
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 thirty-nine weeks of fiscal 2003 ("first nine months
of fiscal 2003"), we faced a work slowdown in West Coast ports, a disappointing
holiday shopping season, overstocked retailers and a war driven economic
environment. While it is difficult to provide an outlook during challenging
times, we believe the progress with the war in Iraq and our innovative products
and marketing programs position us to benefit from a return to more normal
economic and consumer spending patterns.
During the third quarter of fiscal 2003, we offered to increase our
current 30.8% interest in Amalgamated Appliance Holdings Limited (AMAP) to an
approximated 52.0% stake. This acquisition is expected to finalize in the fourth
quarter of fiscal 2003. This acquisition is expected to enable us to consolidate
AMAP's results in accordance with Generally Accepted Accounting Principles
(GAAP).
THIRTEEN WEEKS ENDED MARCH 29, 2003 COMPARED WITH THIRTEEN WEEKS ENDED MARCH 30,
2002.
Net Sales. Net sales in the thirteen weeks ended March 29, 2003 ("third
quarter of fiscal 2003") were $166.4 million, a decrease of approximately $21.7
million or 11.5%, compared to net sales of $188.1 million in the thirteen weeks
ended March 30, 2002 ("third quarter of fiscal 2002"). Sales decreased as a
result of the reduced retail activity associated with the anticipation of war
and the war itself and higher inventory levels at our customers, resulting from
the slow holiday season. In addition, sales decreased as a result of price
reductions in an effort to gain long term market presence in conjunction with an
initiative to reduce inventory levels and rationalize SKUs. Worldwide sales
decreased proportionally across all brands.
Gross Profit. Gross profit in the third quarter of fiscal 2003 was
$37.3 million or 22.4% of net sales as compared to $66.8 million or 35.5% of net
sales in the same period in fiscal 2002. Cost of goods sold during the third
quarter of fiscal 2003 increased to 69.5% of net sales compared to 56.7% in the
same period in fiscal 2002. The decrease in gross profit was primarily a result
of certain price reductions implemented in advance of an anticipated reduction
in acquisition costs from our suppliers and closeouts in an effort to reduce
inventory levels and rationalize SKUs. Our margins were approximately $16.0
million lower than normal levels. We estimate that approximately half of this
was due to SKU rationalization and inventory reduction initiatives and the other
half was a result of price decreases for market share gains in advance of
19
cost reductions. Distribution expenses were $13.3 million or 8.0% of net sales
in the third quarter of fiscal 2003 compared to $14.7 million or 7.8% of net
sales in the same period in fiscal 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were 28.1% of net sales or $46.7 million in the third
quarter of fiscal 2003 compared to 26.6% of net sales or $50.1 million for the
same period in fiscal 2002. Expenditures for television, royalty expenses,
certain other media and co-operative advertising and trade show expenses were
11.2% of net sales or $18.7 million in the third quarter of fiscal 2003 when
compared to 10.6% of net sales or $20.0 million in the same period in fiscal
2002. Fluctuations of these expenses from the prior year are primarily related
to decreased infomercial and direct advertising offset by an increase in
co-operative advertising. The remaining selling, general and administrative
costs as a percent of net sales increased slightly to 16.8% of net sales or
$28.0 million in the third quarter of fiscal 2003 compared to 16.0% of net sales
or $30.1 million in the third quarter of fiscal 2002. The remaining selling,
general and administrative costs include additional salaries and rent expense
offset by 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 contains the pro forma results of the
add-back of this amortization expense to the Company's previously reported
results.
Operating (Loss) Income. As a result of the events described above,
operating income decreased to a loss of $9.3 million in the third quarter of
fiscal 2003 from income of $16.7 million in the same period in fiscal 2002.
Operating (loss) income as a percentage of net sales decreased to (5.6)% in the
third quarter of fiscal 2003 from 8.9% in the same period of fiscal 2002.
Net Interest Expense. Net interest expense was approximately $10.0
million for the third quarter of fiscal 2003 compared to $10.4 million in the
third quarter of fiscal 2002. Our rate of interest on amounts outstanding under
the revolver, term loan and senior subordinated debt was a weighted average
annual rate of 9.5% in the third quarter of fiscal 2003 compared to 8.0% 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 $406.5 million for the third quarter of fiscal 2003 compared to $479.8
million for the same period in fiscal 2002.
Income Tax (Benefit) Expense. Tax benefit was $5.8 million in the third
quarter of fiscal 2003 as compared to tax expense of $2.3 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 (Loss) Income. Net income decreased to a loss of $12.1 million in
the third quarter of fiscal 2003, compared to income of $3.9 million in the
third quarter of fiscal 2002.
Earnings per Share. Basic earnings per common share were $(1.08) per
share on weighted average common shares outstanding of 11,182,348 in the third
quarter of fiscal 2003 compared to earnings of $0.36 per share on weighted
average common shares outstanding of 10,987,162 in the same period in fiscal
2002. Diluted earnings per common share were $(1.08) per share in the third
quarter of fiscal 2003 compared to diluted earnings per common share of $0.26
per share on weighted average common shares outstanding, including dilutive
common stock equivalents, of 15,101,200 in the same period in fiscal 2002.
20
THIRTY-NINE WEEKS ENDED MARCH 29, 2003 COMPARED WITH THIRTY-NINE WEEKS ENDED
MARCH 30, 2002.
Net Sales. Net sales in the thirty-nine weeks ended March 29, 2003
("first nine months of fiscal 2003") were $705.7 million, an increase of
approximately $0.8 million, compared to net sales of $704.9 million in the nine
months ended March 30, 2002 ("first nine months of fiscal 2002"). Higher
worldwide sales in the first twenty-six weeks ("first half of fiscal 2003") were
offset by decreased sales in the last thirteen weeks as a result of the
difficult war-driven economic environment as well as higher levels of inventory
at our customers from the slow holiday season. Additionally, sales declined as a
result of price reductions launched in the third quarter of fiscal 2003 in an
effort to gain long term market presence, reduce inventory levels and
rationalize SKUs.
Gross Profit. Gross profit in the first nine months of fiscal 2003 was
$215.1 million or 30.5% of net sales as compared to $248.4 million or 35.2% of
net sales in the same period in fiscal 2002. Cost of goods sold during the first
nine months of fiscal 2003 increased to 63.2% of net sales compared to 58.2% in
the same period in fiscal 2002. This is a result of several factors. In an
effort to continue our market presence, we introduced certain price reductions
in the third quarter prior to receiving an anticipated reduction in acquisition
costs from our suppliers. In the third quarter, our margins were approximately
$16.0 million lower than normal levels. We estimate that approximately half of
this was due to SKU rationalization and inventory reduction initiatives and the
other half was a result of price decreases for market share gains in advance of
cost reductions. Additionally, in a difficult retail environment, consumers
purchased fewer higher-priced, higher margin products and more lower-priced,
lower margin products. Distribution expenses were $44.5 million or 6.3% of net
sales in the first nine months of fiscal 2003 compared to $46.5 million or 6.6%
of net sales in the same period in fiscal 2002. The work slow down and
bottleneck due to the West Coast dock strike created a number of additional
supply chain costs which increased distribution expense and impacted our
margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to 22.8% of net sales or $161.0 million in the
first nine months of fiscal 2003 compared to 23.1% of net sales or $163.0
million for the same period in fiscal 2002. Expenditures for television, royalty
expenses, certain other media and co-operative advertising and trade show
expenses were 10.3% of net sales or $72.4 million in the first nine months of
fiscal 2003 when compared to 10.5% of net sales or $74.3 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 by an increase
in direct and co-operative advertising. The remaining selling, general and
administrative costs were relatively constant at $88.6 million in the first nine
months of fiscal 2003 compared to $88.7 million in the first nine months of
fiscal 2002. These 2003 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 contains 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 nine months of fiscal 2003 to record an impairment
charge related to the abandonment of the Welbilt tradename.
21
Operating Income. As a result of the events described above, operating
income decreased by $32.1 million or 37.6%, to $53.3 million in the first nine
months of fiscal 2003 from $85.4 million in the same period in fiscal 2002.
Operating income as a percentage of net sales decreased to 7.6% in the first
nine months of fiscal 2003 from 12.1% in the same period of fiscal 2002.
Net Interest Expense. Net interest expense was approximately $30.6
million for the first nine months of fiscal 2003 compared to $33.9 million in
the first nine months of fiscal 2002. Our rate of interest on amounts
outstanding under the revolver, term loan and senior subordinated debt was a
weighted average annual rate of 8.7% in the first nine months of fiscal 2003
compared to 8.3% 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 $443.6 million for the first nine months of fiscal
2003 compared to $507.7 million for the same period in fiscal 2002.
Income Tax Expense. Tax expense was $8.1 million in the first nine
months of fiscal 2003 as compared to tax expense of $19.1 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 June 29, 2002.
Net Income. Net income decreased 48.3% to $16.8 million in the first
nine months of fiscal 2003, compared to $32.5 million in the first nine months
of fiscal 2002.
Earnings per Share. Basic earnings per common share were $1.51 per
share on weighted average common shares outstanding of 11,141,321 in the first
nine months of fiscal 2003 compared to earnings of $2.95 per share on weighted
average common shares outstanding of 11,009,988 in the same period in fiscal
2002. Diluted earnings per common share were $1.11 per share on weighted average
common shares outstanding, including dilutive common stock equivalents, of
15,100,023 in the first nine months of fiscal 2003 compared to diluted earnings
per common share of $2.16 per share on weighted average common shares
outstanding, including dilutive common stock equivalents, of 15,023,872 in the
same period in fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of fiscal 2003, we generated net cash of
$88.6 million from operating activities and used net cash of $39.9 million in
investing activities. The cash provided by operating activities was primarily
due to improved inventory and trade payables management. Accounts receivable
decreased consistent with sales volume. 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.
On May 9, 2003, we entered into a four-year senior secured revolving
credit facility which provides us with the ability to borrow up to $275.0
million (including $10.0 million for letters of credit). As of May 9, 2003, we
have borrowings of approximately $76.1 million outstanding under this facility,
which funds were used to repay in full our obligations relating to our prior
senior secured credit facility and pay expenses related to such refinancing.
Advances under the senior secured credit facility are primarily based upon
percentages of eligible accounts receivable and inventories. As of May 9, 2003,
we had approximately $64.1 million available for future cash borrowings with
$22.7 million reserved for the final payments on the Foreman notes. Typically,
given the seasonal nature of our business, borrowings and availability tend to
be highest in mid-Fall and early Winter.
22
Borrowings under our senior secured credit facility accrue interest, at
our option, at either: LIBOR, plus a specified margin which is determined by our
consolidated fixed charge coverage ratio and is currently set at 2.25% (3.56% at
May 9, 2003); or the Base Rate, plus a specified margin which is determined by
our consolidated fixed charge coverage ratio and is currently set at 0.0% which
is Wachovia Bank's prime rate (4.3% at May 9, 2003).
Borrowings under this credit facility are secured by the assets of our
domestic entities and 65.0% of the capital stock of certain of our foreign
subsidiaries.
In addition to borrowings under our senior secured revolving credit
facility, at May 9, 2003, we had $125.0 million of 10-3/4% senior subordinated
notes due 2005 outstanding and $148.8 million of 12-1/4% senior subordinated
notes due 2008 outstanding (excluding $12.7 million related to the fair value of
interest rate swap agreements that have been monetized).
Our primary sources of liquidity are our cash flow from operations and
borrowings under our senior secured revolving credit facility. 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 2.0% of net sales. We
incurred approximately $16.3 million for capital expenditures during the first
nine months of fiscal 2003.
Our senior indebtedness 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 our senior
secured revolving credit facility, we are required to comply with a minimum
fixed domestic and consolidated charge coverage 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 senior secured revolving credit facility 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.
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
23
maintain sufficient working capital to finance product purchases and customer
receivables for the seasonal period.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, which require us
to make estimates and judgments that significantly affect the reported amounts
of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. We regularly evaluate these estimates,
including those related to our allowance for doubtful accounts, inventory
reserves and intangible assets. We base these estimates on historical experience
and on assumptions that are believed by management to be reasonable under the
circumstances. Actual results may differ from these estimates, which may impact
the carrying value of assets and liabilities.
The following critical accounting policies affect the most significant
estimates used in the preparation of our consolidated financial statements:
Allowance for Doubtful Accounts. We record allowances for estimated
losses resulting from the inability of our customers to make required payments.
We assess the credit worthiness of our customers based on multiple sources of
information and analyze such factors as our historical bad debt experiences,
publicly available information regarding our customers and the inherent credit
risk related to them, information from subscription based credit reporting
companies, trade association data and reports, current economic trends and
changes in customer payment terms or payment patterns. This assessment requires
significant judgment. If the financial condition of our customers were to
worsen, additional write-offs may be required, resulting in write-offs that are
not included in the allowance for doubtful accounts at March 29, 2003.
Inventory Valuation. Our inventories are generally determined using the
last-in, first-out (LIFO) cost method. We value our inventory at the lower of
cost or market, and regularly review the book value of discontinued product
lines and stock keeping units (SKUs) to determine if these items are properly
valued. If market value is less than cost, we write down the related inventory
to the lower of market or net realizable value. We regularly evaluate the
composition of our inventory to determine slow-moving and obsolete inventories
to determine if additional write-offs are required. Changes in consumer
purchasing patterns, however, could result in the need for additional
write-offs.
Commitments and Contingencies. We are subject to lawsuits and other claims
related to product and other matters that are being defended and handled in the
ordinary course of business. We maintain reserves and or accruals for such costs
that may be incurred, which are determined on a case-by-case basis, taking into
consideration the likelihood of adverse judgments or outcomes, as well as the
potential range of probable loss. The reserves and accruals are monitored on an
ongoing basis and are updated for new developments or new information as
appropriate.
Intangible Assets. We record intangible assets when we acquire other
companies. The cost of acquisition is allocated to the assets and liabilities
acquired, including identifiable intangible assets, with the remaining amount
being classified as goodwill. Under current accounting guidelines that became
effective on July 1, 2001, goodwill arising from transactions occurring after
July 1, 2001 and any existing goodwill as of February 1, 2002 are not amortized
to expense but rather periodically assessed for impairment. Intangible assets
that have an indefinite life are also periodically assessed for impairment.
The allocation of the acquisition cost to intangible assets and goodwill
therefore has a significant impact on our future operating results. The
allocation process requires the extensive use of estimates and assumptions,
including estimates of future cash flows expected to be generated by the
acquired assets. Independent valuation consultants are employed by us to assist
in determining if and when intangible
24
assets might be impaired. Further, when impairment indicators are identified
with respect to previously recorded intangible assets, the values of the assets
are determined using discounted future cash flow techniques, which are based on
estimated future operating results. Significant management judgment is required
in the forecasting of future operating results which are used in the preparation
of projected discounted cash flows and should different conditions prevail,
material write downs of net intangible assets and/or goodwill could occur.
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 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 nine months of 2003. As of the beginning of the first
nine months of fiscal year 2003, we determined that no impairment of goodwill or
intangible assets with indefinite lives has occurred.
During the first nine months of fiscal year 2003, we recorded an
impairment charge of $0.8 million related to our decision to abandon the Welbilt
tradename and discontinued the related product line.
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 position 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 on the financial
position or results of operations.
25
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
26
indebtedness. This contract was terminated in the third 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 effect as of March 29, 2003. 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.
All foreign exchange contracts have been recorded on the balance sheet
at fair value of $0.6 million classified within other current assets. The change
in the fair value of contracts in the third quarter that qualify as foreign
currency cash flow hedges and are highly effective was $1.6 million. This amount
was recorded in other comprehensive income, net of tax. In the third quarter,
the changes in the fair value of contracts that do not qualify as foreign
currency cash flow hedges of $1.5 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 March 29, 2003, our European subsidiary had foreign
exchange contracts for the purchase of 47.0 million U.S. dollars. Contracts for
the purchase of 15.0 million U.S. dollars were entered into during the third
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.
27
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On September 5, 2002, we entered into an agreement with the Attorney
Generals of New York and Illinois governing our future conduct with retailers
relating to our indoor electric grills. Forty-seven states, Puerto Rico and the
District of Columbia have joined this agreement. Under the terms of this
agreement, we made a payment of $4.5 million on March 1, 2003 and an additional
payment of $3.5 million will be due 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
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
28
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 February 5, 2003 reporting,
under Item 5, Other Events, the Company's announcement of its fiscal 2003 second
quarter financial results.
A current report on Form 8-K was filed on May 13, 2003 reporting under
Item 9, Regulation FD Disclosure and Item 12, Results of Operations and
Financial Condition, our results of operations for the third quarter of fiscal
2003.
29
SIGNATURE
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: May 13, 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)
30
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: May 13, 2003
By: /s/ Leonhard Dreimann
---------------------------------
LEONHARD DREIMANN
CHIEF EXECUTIVE OFFICER
31
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: May 13, 2003
By: /s/ David M. Mulder
---------------------------------
DAVID M. MULDER
EXECUTIVE VICE PRESIDENT,
CHIEF ADMINISTRATIVE OFFICER AND
SENIOR FINANCIAL OFFICER
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
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10.39 Credit Agreement, dated as of May 9, 2003, among the lenders
thereto, Wachovia Bank, National Association, as
administrative agent and collateral agent and as a co-agent,
Bank of America, N.A., as syndication agent and co-
documentation agent and as a co-agent, Banc of America
Securities LLC, as co- arranger and co-book runner and
Wachovia Securities, Inc, as co-arranger and co-book runner,
Bank One, N.A. and Fleet Capital Corporation each as co-
documentation agents, Salton, Inc., each of Salton's
subsidiaries listed on the signature pages thereto and each of
Salton's other subsidiaries listed on the signature pages
thereto as guarantors.
12(A) Computation of Ratio of Earnings to Fixed Charges
99.1 Certification of Principal Executive Officer Pursuant to
18 U.S.C. 1350
99.2 Certification of Principal Financial Officer Pursuant to
18. U.S.C. 1350
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