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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934 For the Quarterly Period Ended September 27, 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 November 10, 2003,
11,187,291 shares of its $.01 par value Common Stock.
1
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - September 27, 2003
and June 28, 2003 3
Consolidated Statements of Income - Thirteen weeks
ended September 27, 2003 and September 28, 2002 4
Consolidated Statements of Cash Flows - Thirteen
weeks ended September 27, 2003 and September 28,
2002 5
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3: Quantitative and Qualitative Disclosures About Market Risk 20
Item 4: Controls and Procedures 20
PART II OTHER INFORMATION
Item 1: Legal Proceedings 21
Item 6: Exhibits and Reports on Form 8-K 21
Signature 22
Certifications 25
2
SALTON, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 27, 2003 JUNE 28, 2003
------------------ -------------
ASSETS
CURRENT ASSETS:
Cash $ 53,693 $ 53,102
Accounts receivable, net of allowances 242,742 198,511
Inventories 252,804 217,317
Prepaid expenses and other current assets 16,151 13,225
Prepaid income taxes 3,494 9,606
Deferred income taxes 12,874 12,825
---------- ----------
Total Current Assets 581,758 504,586
Property, Plant and Equipment, net 71,982 69,970
Patents and Trademarks 192,335 191,963
Cash in Escrow for Pifco Loan Notes 5,010 4,978
Goodwill 27,029 26,953
Other Assets, net 13,292 13,922
---------- ----------
TOTAL ASSETS $ 891,406 $ 812,372
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current debt $ 6,639 $ 27,911
Accounts payable 109,356 73,548
Accrued expenses 62,907 54,613
---------- ----------
Total Current Liabilities 178,902 156,072
Non-Current Deferred Income Taxes 8,618 8,311
Senior Subordinated Notes Due 2005 125,000 125,000
Senior Subordinated Notes due 2008, including an adjustment of
$11,456 and $12,081 to the carrying value related
to interest rate swap agreements, respectively 160,332 160,896
Long Term Debt-Revolving Credit Agreement 127,119 76,119
Other Notes Payable 768 873
Other Long Term Liabilities 17,204 16,240
---------- ----------
617,943 543,511
Minority Interest 16,172 14,957
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: 2004-11,187,291;
2003-11,186,905 148 148
Treasury Stock - at cost (67,019) (67,019)
Additional Paid-In Capital 96,197 96,179
Accumulated Other Comprehensive Income 1,646 (982)
Retained Earnings 226,319 225,578
---------- ----------
Total Stockholders' Equity 257,291 253,904
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 891,406 $ 812,372
========== ==========
See Notes to Consolidated Financial Statements.
3
SALTON, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
13 WEEKS ENDED
----------------------------------
September 27, September 28,
2003 2002
------------- -------------
NET SALES $ 238,539 $ 200,052
Cost of Goods Sold 157,956 119,811
Distribution Expenses 16,400 13,900
------------- ------------
GROSS PROFIT 64,183 66,341
Selling, General and Administrative Expenses 51,792 49,294
Impairment loss on intangible asset - 800
------------- ------------
OPERATING INCOME 12,391 16,247
Interest Expense, net 9,678 10,007
Fair market value adjustment on derivatives - 267
------------- ------------
INCOME BEFORE INCOME TAXES 2,713 5,973
Income Tax Expense 882 2,073
Minority Interest 1,090 -
------------- ------------
NET INCOME $ 741 $ 3,900
============= ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,187,155 11,062,162
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 15,099,949 14,876,165
Net Income per Common Share: Basic $ 0.07 $ 0.35
Net Income per Common Share: Diluted $ 0.05 $ 0.26
See Notes to Consolidated Financial Statements.
4
SALTON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
13 WEEKS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 28,
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 741 $ 3,900
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Imputed interest on notes payable and other non-cash items (447) 235
Deferred income tax provision 276 108
Depreciation and amortization 5,172 3,864
Loss on disposal of equipment 58 45
Equity in net income of investee - (92)
Impairment loss on intangible asset - 800
Fair value adjustment for derivatives - 267
Foreign currency gains and losses 551 -
Minority interest 1,090 -
Changes in assets and liabilities:
Accounts receivable (44,043) (12,395)
Inventories (34,698) (32,197)
Prepaid expenses and other current assets (2,367) 2,608
Accounts payable 35,016 14,691
Taxes payable 6,092 2,113
Accrued expenses 9,515 8,061
---------- ----------
NET CASH FROM OPERATING ACTIVITIES (23,044) (7,992)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,129) (4,218)
Increase in other non-current assets (328) (250)
Additional payment for patents and trademarks (21,500) (20,750)
---------- ----------
NET CASH FROM INVESTING ACTIVITIES (26,957) (25,218)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit and other debt 51,000 25,000
Repayment of long-term debt (121) (64)
Proceeds from termination of Swap transaction - 6,074
Costs associated with refinancing (347) -
Common stock issued 4 3
---------- ----------
NET CASH FROM FINANCING ACTIVITIES 50,536 31,013
---------- ----------
Effect of Exchange Rate Changes on Cash 56 (634)
---------- ----------
Net Change in Cash 591 (2,831)
Cash, Beginning of Period 53,102 31,055
---------- ----------
Cash, End of Period $ 53,693 $ 28,224
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid (Received) During the Period for:
Interest $ 929 $ 1,300
Income taxes, net of (refunds) $ (5,417) $ 337
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 income and cash flows
include all adjustments, consisting only of normal recurring items,
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. 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. 2003 Form 10-K. Certain
reclassifications have been made for consistent presentation.
2. ACQUISITION AND EXPANSION
On May 16, 2003, the Company increased its 30.8% ownership interest in
Amalgamated Appliance Holdings Limited (AMAP), a South African company, to
a 52.6% interest. The accounts of AMAP have been included in the
consolidated financial statements since that date. Prior to that date, the
Company's investment in AMAP was accounted for on the equity method and was
included in other assets.
The following pro forma information presents the results of operations of
the Company as if the increased ownership of AMAP had taken place at the
beginning of fiscal 2003.
(In thousands except share data)
13 WEEKS ENDED
SEPTEMBER 28, 2002
------------------
Revenues $ 226,185
Net income $ 4,038
Earnings per share:
Basic $ 0.37
Diluted $ 0.27
The pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of the results of operations that would
have occurred had the increase in ownership of AMAP actually occurred at
the beginning of fiscal 2003.
On July 1, 2003, the Company started Salton Brasil Limited (Brasil).
Brasil's results of operations are included in the fiscal 2004 consolidated
financial statements.
3. 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.
6
Options to purchase 270,000 shares at a price of $29.25 per share were
outstanding at September 27, 2003 and September 28, 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 and warrants to purchase 1,329,600 shares
of common stock at a price range of $10.44 to $37.00 per share and
1,392,463 shares of common stock at a price range of $9.84 to $37.00 per
share were outstanding at September 27, 2003 and September 28, 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.
4. STOCK-BASED COMPENSATION
At September 27, 2003, the Company had various stock-based employee
compensation plans which are described more fully in Note 10 of the Notes
to Consolidated Financial Statements in the Company's 2003 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."
(In thousands except share data)
13 WEEKS ENDED
-----------------------------
September 27, September 28,
2003 2002
------------- -------------
Net income - as reported $ 741 $ 3,900
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related taxes 427 499
------------------------
Net income - pro forma $ 314 $ 3,401
========================
Earnings per share - basic
As reported $ 0.07 $ 0.35
Pro forma 0.03 0.31
Earnings per share - diluted
As reported $ 0.05 $ 0.26
Pro forma 0.02 0.23
5. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to manage interest rate
and foreign currency risk. The Company does not enter into derivative
financial instruments for trading purposes. Interest rate swap agreements
are used as part of the Company's program to manage the fixed and floating
interest rate mix of the Company's total debt portfolio and related overall
cost of borrowing. The Company's European subsidiary uses forward exchange
contracts to hedge foreign currency payables for periods consistent with
the expected cash flow of the underlying transactions. The contracts
generally mature within one year and are designed to limit exposure to
exchange rate fluctuations, primarily related to the Great Britian pound.
All foreign exchange contracts have been recorded on the balance sheet
within accrued expenses at a fair value of $1.1 million. The change in the
fair value of contracts in the first quarter was de minimis. 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 September 27, 2003, the Company's
European subsidiary had foreign exchange contracts for the
7
purchase of 45.0 million U.S. dollars. No new contracts were entered into
during the first quarter of fiscal 2004.
On November 1, 2002, the existing interest rate swap contract was
terminated. No additional interest rate swap agreements have been executed
subsequently.
6. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME
For the thirteen weeks ended September 27, 2003 and September 28, 2002,
components of other comprehensive income include foreign currency
translation adjustments of $2.6 million and $0.9 million, respectively and
derivative liability adjustments of $0 million and $0.1 million,
respectively.
13 Weeks Ended
---------------------------
(In thousands) 9/27/2003 9/28/2002
--------- ---------
Net Income $ 741 $ 3,900
Other Comprehensive Income 2,628 1,016
------- -------
Comprehensive Income $ 3,369 $ 4,916
======= =======
Accumulated other comprehensive income is comprised of the following:
As Of
---------------------------
(In thousands) 9/27/2003 6/28/2003
--------- ---------
Minimum Pension Liability $ (12,125) $ (12,072)
Derivative Liability (697) (649)
Foreign Currency Translation 14,468 11,739
--------- ---------
$ 1,646 $ (982)
========= =========
7. OPERATING SEGMENTS AND MAJOR CUSTOMERS
Salton consists of a single operating segment which designs, sources,
markets and distributes a diversified product mix for use in the home. The
product mix consists of small kitchen and home appliances, home decor
(which includes tabletop products, time products, lighting products,
picture frames) and personal care and wellness products. The Company
believes this segmentation is appropriate based upon Management's operating
decisions and performance assessment. Nearly all of the Company's products
are consumer goods within the housewares market, procured through
independent manufacturers, primarily in the Far East. Salton's products are
distributed through similar distribution channels and customer base using
the marketing efforts of its Global Marketing Team.
Major Customers - One customer accounted for 12.3%, 12.0% and 10.9% of
total net sales during the first quarter of fiscal 2003. No one customer
accounted for more than 10% of net sales in first quarter of fiscal 2004.
8. LEGAL PROCEEDINGS
The Company received a letter from Philips Domestic Appliances and Personal
Care B.V. (Philips) accusing Salton of interfering in a contractual
relationship between Philips and a manufacturing source for Salton,
Electrical & Electronics (E&E), misappropriating trade secrets and
infringing other unspecified intellectual property rights in connection
with our development and marketing of the One:One single serve coffee
maker. On August 14, 2003, the Company filed a complaint in the United
States District Court for the Northern District of Illinois seeking a
declaratory judgment that we
8
have not infringed the alleged trade secret rights of Philips and have not
tortiously interfered with the contractual relationship between Philips and
E&E.
On October 23, 2003, Philips filed a counterclaim reiterating the
allegations in its letter to the Company. The Company has denied each of
these allegations. Philips is seeking to enjoin the Company from further
importing, manufacturing, advertising, marketing or selling the One:One
coffee maker and any monetary damages that the Court deems proper. This
matter is set for hearing on December 16, 2003.
The Company is a party to various other actions and proceedings incident to
the Company's normal business operations. The Company believes that the
outcome of such litigation will not have a material adverse effect on the
Company's business, financial condition or results of operations. The
Company also has product liability and general liability insurance policies
in amounts the Company believes to be reasonable given the Company's
current level of business. Although historically the Company has not had to
pay any material product liability claims, it is conceivable that the
Company could incur claims for which the Company is not insured.
9. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The payment obligations of the Company under the 12 1/4% senior
subordinated notes are guaranteed by certain of the Company's wholly-owned
domestic subsidiaries (Subsidiary Guarantors). Such guarantees are full,
unconditional and joint and several. Separate financial statements of the
Subsidiary Guarantors are not presented because the Company's management
has determined that they would not be material to investors. The following
supplemental financial information sets forth, on a combined basis, balance
sheets, statements of income and statements of cash flows for Salton, Inc.
(Parent), the Guarantor Subsidiaries, and the Company's Non-Guarantor
subsidiaries (Other Subsidiaries).
9
CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 27, 2003
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
---------- ------------ ------------ ---------- ------------ ------------ -----------
ASSETS
Current Assets:
Cash $ 2 $ 4,463 $ - $ 4,465 $ 49,228 $ - $ 53,693
Accounts receivable, net of allowances 66 152,458 - 152,524 90,218 - 242,742
Inventories 10,534 208,273 (43,874) 174,933 77,871 - 252,804
Prepaid expenses and other current
assets 3,217 5,758 - 8,975 7,176 - 16,151
Intercompany 169,866 (154,955) (110) 14,801 (14,801) - -
Prepaid income taxes 21,431 (6,936) - 14,495 (11,001) 3,494
Deferred income taxes 1,938 6,773 - 8,711 4,163 - 12,874
--------- ---------- ---------- ---------- ---------- ---------- ----------
Total Current Assets 207,054 215,834 (43,984) 378,904 202,854 - 581,758
Property, Plant and Equipment, 15,040 17,725 - 32,765 39,217 71,982
Investments in Subsidiaries 450,773 52,200 (502,973) - 95,877 (95,877) -
Patents and Trademarks 140,231 16,362 - 156,593 35,742 - 192,335
Cash in Escrow for Pifco Loan Notes - - - - 5,010 - 5,010
Goodwill - 18,093 - 18,093 8,936 - 27,029
Other Assets, net 10,641 1,461 (1,087) 11,015 2,277 - 13,292
--------- ---------- ---------- ---------- ---------- ---------- ----------
Total Assets $ 823,739 $ 321,675 $ (548,044) $ 597,370 $ 389,913 $ (95,877) $ 891,406
========= ========== ========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current debt $ 1,375 $ 559 $ - $ 1,934 $ 4,705 $ - $ 6,639
Accounts payable 879 5,940 62 6,881 102,475 - 109,356
Accrued expenses 24,603 12,263 - 36,866 26,041 - 62,907
--------- ---------- ---------- ---------- ---------- ---------- ----------
Total current liabilities 26,857 18,762 62 45,681 133,221 - 178,902
Non-current Deferred Income Taxes 3,899 (662) - 3,237 5,381 - 8,618
Senior subordinated notes due 2005 125,000 - - 125,000 - - 125,000
Senior subordinated notes due 2008,
including an adjustment of $11,456 to
the carrying value related to interest
rate swap agreements 160,332 - - 160,332 - - 160,332
Long Term Debt-Revolving Credit Agreement - 127,119 - 127,119 - - 127,119
Other Notes Payable - 195 - 195 573 768
Other Long Term Liability - 5,417 - 5,417 11,787 17,204
--------- ---------- ---------- ---------- ---------- ---------- ----------
Total liabilities 316,088 150,831 62 466,981 150,962 - 617,943
Minority interest - - - - 16,172 16,172
Stockholders' Equity 507,651 170,844 (548,106) 130,389 222,779 (95,877) 257,291
--------- ---------- ---------- ---------- ---------- ---------- ----------
Total Liabilities and Stockholders' Equity $ 823,739 $ 321,675 $ (548,044) $ 597,370 $ 389,913 $ (95,877) $ 891,406
========= ========== ========== ========== ========== ========== ==========
10
CONSOLIDATING BALANCE SHEET AS OF JUNE 28, 2003
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
------ ------------ ------------ ----- ------------ ------------- -----------
ASSETS
Current Assets:
Cash $ - $ 8,972 $ - $ 8,972 $ 44,130 $ - $ 53,102
Accounts receivable, net of allowances 66 127,888 - 127,954 70,557 - 198,511
Inventories 2,110 187,078 (39,676) 149,512 67,805 - 217,317
Prepaid expenses and other current assets 3,358 3,958 - 7,316 5,909 - 13,225
Intercompany 184,039 (152,539) - 31,500 (31,500) - -
Prepaid income taxes 27,197 (10,494) - 16,703 (7,097) - 9,606
Deferred income taxes 1,938 6,774 - 8,712 4,113 - 12,825
--------- --------- ---------- --------- --------- --------- ----------
Total current assets 218,708 171,637 (39,676) 350,669 153,917 - 504,586
Property, Plant and Equipment,
Net of Accumulated Depreciation 15,547 16,854 32,401 37,569 - 69,970
Investments in Subsidiaries 441,521 52,585 (494,106) - - - -
Patents and Trademarks 140,106 16,359 156,465 35,498 - 191,963
Cash in escrow for Pifco loan notes - - - 4,978 - 4,978
Goodwill - 18,093 18,093 8,860 - 26,953
Other Assets, net 11,152 172 (11) 11,313 2,609 - 13,922
--------- --------- ---------- --------- --------- --------- ----------
Total Assets $ 827,034 $ 275,700 $ (533,793) $ 568,941 243,431 - $ 812,372
========= ========= ========== ========= ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current debt $ 22,750 $ 595 $ - $ 23,345 $ 4,566 - $ 27,911
Accounts payable (789) 5,272 - 4,483 69,065 - 73,548
Accrued expenses 16,246 11,862 - 28,108 26,505 - 54,613
--------- --------- ---------- --------- --------- --------- ----------
Total current liabilities 38,207 17,729 - 55,936 100,136 - 156,072
Non-current Deferred Income Taxes 3,899 (662) - 3,237 5,074 - 8,311
Senior subordinated notes due 2005 125,000 - - 125,000 - - 125,000
Senior subordinated notes due 2008,
including an adjustment of $12,081 to the
carrying value related to interest rate
swap agreements 160,896 - - 160,896 - - 160,896
Long-term debt-revolving credit agreement - 76,119 - 76,119 - - 76,119
Other notes payable - 281 - 281 592 - 873
Other long term liabilities - 4,528 - 4,528 11,712 - 16,240
--------- --------- ---------- --------- --------- --------- ----------
Total liabilities 328,002 97,995 - 425,997 117,514 - 543,511
Minority Interest - - - - 14,957 - 14,957
Stockholders' Equity 499,032 177,705 (533,793) 142,944 110,960 - 253,904
--------- --------- ---------- --------- --------- --------- ----------
Total Liabilities and Stockholders' Equity $ 827,034 $ 275,700 $ (533,793) $ 568,941 $ 243,431 $ - $ 812,372
========= ========= ========== ========= ========= ========= ==========
11
CONSOLIDATING STATEMENT OF INCOME FOR THE THIRTEEN WEEKS ENDED SEPTEMBER
27, 2003
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
------ ------------ ------------ ----- ------------ ------------ ------------
Net Sales $ 72,640 $ 175,878 $ (120,774) $ 127,744 $ 206,827 $ (96,032) $ 238,539
Cost of Goods Sold 55,898 151,057 (116,576) 90,379 162,109 (94,532) 157,956
Distribution Expenses - 10,981 - 10,981 5,419 - 16,400
-------- --------- ---------- ---------- --------- --------- ---------
Gross Profit 16,742 13,840 (4,198) 26,384 39,299 (1,500) 64,183
Selling, General and Administrative
Expenses 11,247 23,318 - 34,565 18,727 (1,500) 51,792
Impairment Loss on Intangible Asset - - - - - -
-------- --------- ---------- ---------- --------- --------- ---------
Operating Income (Loss) 5,495 (9,478) (4,198) (8,181) 20,572 - 12,391
Interest Expense, Net 7,232 916 - 8,148 1,530 - 9,678
Fair Market Value Adjustment on
Derivatives - - - - - - -
(Income) loss from subsidiary (5,914) 392 5,522 - - - -
-------- --------- ---------- ---------- --------- --------- ---------
Income (Loss) Before Income Taxes 4,177 (10,786) (9,720) (16,329) 19,042 - 2,713
Income Tax (Benefit) Expense (370) (2,839) - (3,209) 4,091 - 882
Minority interest - - 1,090 1,090
-------- --------- ---------- ---------- --------- --------- ---------
Net Income (Loss) $ 4,547 $ (7,947) $ (9,720) $ (13,120) $ 13,861 $ - $ 741
======== ========= ========== ========== ========= ========= =========
CONSOLIDATING STATEMENT OF INCOME FOR THE THIRTEEN WEEKS ENDED SEPTEMBER
28, 2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
------ ------------ ------------ ----- ------------ ------------ ------------
Net Sales $ 127,482 $ 233,840 $(219,380) $ 141,942 $ 162,929 $ (104,819) $ 200,052
Cost of Goods Sold 61,429 182,179 (148,283) 95,325 127,805 (103,319) 119,811
Distribution Expenses - 11,861 - 11,861 2,039 13,900
--------- --------- --------- --------- --------- ---------- ---------
Gross Profit 66,053 39,800 (71,097) 34,756 33,085 (1,500) 66,341
Selling, General and Administrative
expenses 15,034 26,736 (425) 41,345 9,449 (1,500) 49,294
Intanbile impairment Loss 800 - - 800 - - 800
--------- --------- --------- --------- --------- ---------- ---------
Operating Income (Loss) 50,219 13,064 (70,672) (7,389) 23,636 - 16,247
Interest Expense, Net 7,259 1,725 - 8,984 1,023 - 10,007
Fair Market Value Adjustment on
Deriviatives - 267 267
(Income) Loss from Subsidiaries (32,369) 167 32,202 - - - -
--------- --------- --------- --------- --------- ---------- ---------
Income (Loss) Before Income Taxes 75,329 11,172 (102,874) (16,373) 22,346 - 5,973
Income Tax (Benefit) Expense 924 (95) - 829 1,244 - 2,073
Minority Interest - - - - - - -
--------- --------- --------- --------- --------- ---------- ---------
Net Income (Loss) $ 74,405 $ 11,267 $(102,874) $ (17,202) $ 21,102 $ - $ 3,900
========= ========= ========= ========= ========= ========== =========
12
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THIRTEEN WEEKS ENDED SEPTEMBER
27, 2003
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
------ ------------ ------------ ----- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,547 $ (7,947) $ (9,720) $ (13,120) 13,861 $ - $ 741
Adjustments to reconcile net income (loss) to -
net cash used in operating activities: -
Imputed interest on notes payable and other 118 - (447)
non-cash items (565) - - (565)
Deferred income tax provision 1 - - 1 275 - 276
Foreign currency gains and lossess - 551 - 551 - - 551
Depreciation and amortization 2,340 842 - 3,182 1,990 - 5,172
Loss on disposal of equipment - - - - 58 - 58
Equity in net income of unconsolidated
affilate/ consolidated subsidiaries (5,914) 392 5,522 - - - -
Minority interest - - - - 1,090 - 1,090
Changes in assets and liabilities:
Accounts receivable 0 (25,120) - (25,120) (18,923) - (44,043)
Inventories (8,426) (21,193) 4,198 (25,421) (9,277) - (34,698)
Prepaid expenses and other current assets 140 (1,800) - (1,660) (707) - (2,367)
Accounts payable 1,223 684 - 1,907 33,109 - 35,016
Taxes payable 5,765 (3,558) - 2,207 3,885 - 6,092
Accrued expenses 23,762 2,859 - 26,621 (17,106) - 9,515
---------- ---------- --------- ---------- ---------- ------- ----------
NET CASH FROM OPERATING ACTIVITIES 22,873 (54,290) - (31,417) 8,373 - (23,044)
---------- ---------- --------- ---------- ---------- ------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (957) (841) - (1,798) (3,331) - (5,129)
Increase in other non-current assets (71) (257) - (328) - - (328)
Additional payment for patents and trademarks (21,500) - - (21,500) - - (21,500)
---------- ---------- --------- ---------- ---------- ------- ----------
NET CASH FROM INVESTING ACTIVITIES (22,528) (1,098) - (23,626) (3,331) - (26,957)
---------- ---------- --------- ---------- ---------- ------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit - 51,000 - 51,000 - - 51,000
and other debt
Repayment of long-term debt - (121) - (121) - - (121)
Costs associated with refinancing (347) - - (347) - - (347)
Common stock issued 4 - - 4 - - 4
---------- ---------- --------- ---------- ---------- ------- ----------
NET CASH FROM FINANCING ACTIVITIES (343) 50,879 - 50,536 - - 50,536
---------- ---------- --------- ---------- ---------- ------- ----------
Effect of Exchange Rate Changes on Cash - - - - 56 - 56
---------- ---------- --------- ---------- ---------- ------- ----------
Net Change in Cash 2 (4,509) - (4,507) 5,098 - 591
Cash, Beginning of Period - 8,972 - 8,972 44,130 - 53,102
---------- ---------- --------- ---------- ---------- ------- ----------
Cash, End of Period $ 2 $ 4,463 $ - $ 4,465 $ 49,228 $ - $ 53,693
========== ========== ========= ========== ========== ======= ==========
13
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THIRTEEN WEEKS ENDED SEPTEMBER
28 ,2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ----- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 74,405 $ 11,267 $ (102,874) $ (17,202) $ 21,102 $ - $ 3,900
Adjustments to reconcile net income (loss) to -
net cash used in operating activities: - - -
Imputed interest on notes payable and other
non-cash items 123 - - 123 112 - 235
Deferred income tax provision 108 108
Depreciation and amortization 2,066 890 - 2,956 908 - 3,864
Loss on disposal of equipment - - - - 45 - 45
Equity in net income of unconsolidated -
affilate/ consolidated subsidiaries (32,367) 167 32,200 - (92) - (92)
Impairment loss on intangible asset 800 - - 800 - - 800
Fair value adjustment for derivatives - - - - 267 267
Changes in assets and liabilities: - -
Accounts receivable 774 875 - 1,649 (14,044) - (12,395)
Inventories (13,744) (91,368) 70,674 (34,438) 2,241 - (32,197)
Prepaid expenses and other current assets 2,105 (977) - 1,128 1,480 - 2,608
Intercompany (12,004) 39,076 - 27,072 (27,072) - -
Accounts payable (12,183) 7,652 - (4,531) 19,222 - 14,691
Taxes payable 1,164 (250) - 914 1,199 - 2,113
Accrued expenses 6,582 4,603 - 11,185 (3,124) - 8,061
-------- ---------- ---------- --------- ---------- -------- ----------
NET CASH FROM OPERATING ACTIVITIES 17,721 (28,065) - (10,344) 2,352 - (7,992)
-------- ---------- ---------- --------- ---------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (741) (1,368) - (2,109) (2,109) - (4,218)
Increase in other non-current assets (250) - - (250) - - (250)
Additional payment for patents and trademarks 20,750) - - (20,750) - - (20,750)
-------- ---------- ---------- --------- ---------- -------- ----------
NET CASH FROM INVESTING ACTIVITIES 21,741) (1,368) - (23,109) (2,109) - (25,218)
-------- ---------- ---------- --------- ---------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit
and other debt - 25,000 - 25,000 - - 25,000
Repayment of long-term debt - (64) - (64) - - (64)
Common stock issued 3 - - 3 - - 3
Proceeds from termination of swap transaction 6,074 - - 6,074 - - 6,074
-------- ---------- ---------- --------- ---------- -------- ----------
NET CASH FROM FINANCING ACTIVITIES 6,077 24,936 - 31,013 - - 31,013
-------- ---------- ---------- --------- ---------- -------- ----------
Effect of Exchange Rate Changes on Cash (4,854) - - (4,854) 4,220 - (634)
-------- ---------- ---------- --------- ---------- -------- ----------
Net Change in Cash (2,797) (4,497) - (7,294) 4,463 - (2,831)
Cash, Beginning of Period 2,797 7,931 - 10,728 20,327 - 31,055
-------- ---------- ---------- --------- ---------- -------- ----------
Cash, End of Period $ - $ 3,434 $ - $ 3,434 $ 24,790 $ - $ 28,224
======== ========== ========== ========= ========== ======== ==========
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As used in this quarterly report on Form 10-Q, "we," "us," "our," "Salton"
and "the Company" refer to Salton, Inc and our subsidiaries, unless the
context otherwise requires.
INTRODUCTION
Salton designs, sources, markets and distributes small home appliances,
home decor and personal care products under recognized brand names in the
International Housewares Industry. Our product mix consists of kitchen and
home appliances, tabletop products, time products, lighting products,
picture frames and personal care and wellness products. In recent years, we
have expanded our international presence in Western Europe, South Africa,
Australia and Brazil through strategic acquisitions, alliances and
internally developed start-up organizations. In addition, we have managed
to generate organic international growth and strengthen our domestic
product offerings through these acquisitions, alliances and start-ups.
ACQUISITIONS & EXPANSIONS
On July 1, 2003, we started Salton Brasil Limited. Salton Brasil plans to
begin shipments in the second quarter of fiscal 2004.
BASIS FOR PRESENTATION
The consolidated financial statements for the quarter ended September 27,
2003 include the accounts of Amalgamated Appliances Limited (AMAP),
reflecting the controlling ownership interest acquired on May 16, 2003.
Accounting principles generally accepted in the United States of America
(GAAP) require results for the periods ended prior to May 16, 2003,
including results of operations and cash flows for the quarter ended
September 28, 2002 be presented on a historical basis with Salton's
investment in AMAP accounted for under the equity method of accounting. Pro
forma results for the first quarter of 2003, as if the increase in
ownership of AMAP had taken place at the beginning of 2003, are presented
in Note 2 of the Financial Statements.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America, 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, reserve for inventory valuation, commitments and contingencies,
reserve for returns and allowances, valuation of reporting units with
goodwill, valuation of intangible assets having indefinite lives,
cooperative advertising accruals, pension benefits and depreciation and
amortization. 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 required the most significant
estimates used in the preparation of our consolidated financial statements:
15
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 September 27, 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 identify 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 through transactions and
acquisitions. 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
June 30, 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. 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.
As of June 28, 2003, the Company prepared estimates of the fair values of
those reporting units having recorded goodwill amounts. Such estimates
exceeded the carrying values of the reporting units, however, shortfalls in
future operating results and/or application of more conservative market
assumptions could have an adverse impact on the comparison of fair value to
carrying value. If these conditions arise, and a shortfall in fair value
versus carrying value results, further analysis of intangibles at the unit
level could result in an impairment charge of a material portion of the
$27.0 million of goodwill.
16
QUARTER IN REVIEW
Salton's international expansion increased net sales by 19.2% despite a
10.0% decline in domestic revenues. Planned product acquisition cost
improvements were also a key driver in Salton's return to profitability
from the prior trended quarter.
RESULTS OF OPERATIONS
The following table sets forth our results of operations as a percentage of
net sales for the periods indicated:
13 WEEKS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 28,
2003 2002
------------- -------------
Net sales 100.0% 100.0%
Cost of goods sold 66.2 59.9
Distribution expenses 6.9 6.9
----- -----
Gross profit 26.9 33.2
Selling, general and administrative expense 21.7 24.6
Impairment loss on intangible asset 0.0 0.4
----- -----
Operating income 5.2% 8.2%
===== =====
2004 COMPARED TO 2003
NET SALES AND GROSS PROFIT
Salton's net sales for the thirteen weeks ended September 27, 2003 were
$238.5 million. This represented an increase in revenues of 19.2% compared
to the same period in 2003. This increase was primarily from the Company's
inclusion of sales of AMAP as a result of our increased ownership interest.
Worldwide sales of George Foreman are down, primarily in the domestic
market partially offset by an increase in the international market.
Russell Hobbs sales were up in comparison to prior year due to its
introduction in Australia and increased recognition in the domestic market.
In addition, our strong portfolio of brand names contributed to our success
internationally with sales in Australia nearly triple that of the thirteen
weeks ended September 28, 2002. The effect of foreign exchange fluctuations
accounted for nearly $2.8 million of the increases in net sales during the
first thirteen weeks.
Gross profit in first quarter of 2004 decreased to $64.2 million or 26.9%
of net sales as compared to $66.3 million or 33.2% of net sales in first
quarter of 2003. The gross profit decrease was primarily a result of
ongoing price reductions across brands introduced in advance of cost
reductions in the domestic market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to 21.7% of net
sales or $51.8 million in first quarter of 2004 compared to 24.6% of net
sales or $49.3 million for first quarter of 2003. The increase in dollars
is primarily due to the inclusion of AMAP while as a percent of sales,
selling, general and administrative expenses declined.
NET INTEREST EXPENSE
Net interest expense was $9.7 million for the first quarter of fiscal 2004
compared to $10.0 million in the first quarter of fiscal 2003. 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 first
quarter of fiscal 2004 compared to 8.5% in the same period in fiscal 2003.
The increase in our weighted average annual interest rate is primarily due
to a higher proportion of fixed rate debt. The average
17
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 $390.9 million for the first quarter of fiscal 2004
compared to $465.5 million for the same period in fiscal 2003.
INCOME TAXES
Income tax expense was $0.9 million in the first quarter of fiscal 2004 as
compared to income tax expense of $2.1 million in the same period in fiscal
2003. The effective tax rate for federal, state and foreign income taxes
was approximately 32.5% for the first quarter of fiscal 2004 versus
approximately 34.7% for the first quarter of fiscal 2003. The Company's
income tax rate for 2004 was favorably impacted due to a disproportionately
greater amount of income subject to lower foreign tax rates and a taxable
loss in the domestic entities.
NET INCOME
The Company reported net income of $0.7 million or basic earnings per
common share of $0.07 per share for the first quarter of 2004 compared with
net income of $3.9 million or basic earnings per common share of $0.35 per
share for the first quarter of 2003.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Our primary sources of liquidity are our cash flow from operations and
borrowings under our senior secured revolving credit facility. During the
first quarter of fiscal 2004, we used net cash of $23.0 million in
operating activities and $27.0 million in investing activities. The cash
used in operating activities was primarily due to seasonal increases in
accounts receivable and inventory, net of increases in trade payables. The
cash used in investing activities was primarily related to the final
payment to George Foreman in connection with the obligation under the note
payable to him, as well as, capital expenditures.
Our 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.
We incurred approximately $5.1 million for capital expenditures during the
first quarter of 2004.
REVOLVING CREDIT FACILITY
Our senior indebtedness contains 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 domestic and consolidated fixed charge
coverage ratio. In addition to the above, the
18
Company is required to maintain a minimum level of availability of $25.0
million for the period July 1st - December 31st and $35.0 million for the
period January 1st - June 30th of any given year. If the Company fails to
maintain these minimum availability levels, all proceeds from the sale of
collateral (including working capital) must be deposited for the benefit of
the Agent and released to the Company at the discretion and consent of the
Required Lenders.
As of September 27, 2003, we had borrowings of approximately $127.1 million
outstanding under our senior secured revolving credit facility. Advances
under the senior secured credit facility are primarily based upon
percentages of eligible accounts receivable and inventories. As of
September 27, 2003, we had approximately $41.0 million available for future
cash borrowings. Typically, given the seasonal nature of our business,
borrowings and availability tend to be highest in mid-Fall and early
Winter.
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 totals approximately 3.4%
at September 27, 2003; or the Base Rate (Wachovia Bank's prime rate), plus
a specified margin, which is determined by our consolidated fixed charge
coverage ratio, and is currently set at 0.0%, and totals 4.0% at September
27, 2003.
SENIOR SUBORDINATED NOTES
In addition to borrowings under our senior secured revolving credit
facility, we had $125.0 million of 10 3/4% senior subordinated notes due
2005 outstanding and $150.0 million of 12 1/4% senior subordinated notes
due 2008 outstanding (excluding $11.5 million related to the fair value of
interest rate swap agreements that have been monetized).
The indenture governing our 12 1/4% senior subordinated notes due 2008 and
10 3/4% senior subordinated notes due 2005 contains covenants that, among
other things, limit our ability and the ability of our restricted
subsidiaries to incur additional indebtedness and issue preferred stock,
pay dividends or make certain other restricted payments, create certain
liens, enter into certain transactions with affiliates, enter into sale and
lease-back transactions, sell assets or enter into certain mergers and
consolidations.
OTHER CREDIT FACILITIES
We maintain credit facilities out of the United States that locally support
our foreign subsidiaries operations and working capital requirements. These
facilities are at current market rates in those localities and at certain
peak periods of the year, are secured by various assets.
19
FORWARD LOOKING
We anticipate capital expenditures on an ongoing basis to be approximately
2.0% of net sales.
We believe that future cash flow from operations based on our current level
of operations and anticipated growth, together with our strengthened
balance sheet and available borrowings under our senior secured revolving
credit facility and other sources of debt funding, will be adequate to meet
our anticipated requirements for current capital expenditures, potential
acquisitions and alliances, working capital requirements, interest and
income tax payments and scheduled debt payments. Our anticipated earnings
and growth are subject to general economic, financial, competitive and
other factors that are beyond our control. 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.
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.
All foreign exchange contracts have been recorded on the balance sheet at
fair value of $1.1 million classified within accrued expenses. The change
in the fair value of contracts in the first quarter that qualify as foreign
currency cash flow hedges and are highly effective was de minimis. 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 September 27,
2003, the Company's European subsidiary had foreign exchange contracts for
the purchase of 45.0 million U.S. dollars. No new contracts were entered
into during the first quarter of fiscal 2004.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
as of a date within 90 days of the filing date of this Quarterly Report on
Form 10-Q, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act")) are effective to
ensure that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
20
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company received a letter from Philips Domestic Appliances and Personal
Care B.V. (Philips) accusing Salton of interfering in a contractual
relationship between Philips and a manufacturing source for Salton,
Electrical & Electronics (E&E), misappropriating trade secrets and
infringing other unspecified intellectual property rights in connection
with its development and marketing of the One:One single serve coffee
maker. On August 14, 2003, the Company filed a complaint in the United
States District Court for the Northern District of Illinois seeking a
declaratory judgment that the Company has not infringed the alleged trade
secret rights of Philips and have not tortiously interfered with the
contractual relationship between Philips and E&E.
On October 23, 2003, Philips filed a counterclaim reiterating the
allegations in its letter to the Company. The Company has denied each of
these allegations. Philips is seeking to enjoin the Company from further
importing, manufacturing, advertising, marketing or selling the One:One
coffee maker and any monetary damages that the Court deems proper. This
matter is set for hearing on December 16, 2003.
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 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
A current report on Form 8-K was filed on November 6, 2003 reporting under
Item 9, Regulation FD Disclosure and Item 12, Results of Operations and
Financial Condition, our results of operations for the first quarter of
fiscal 2004.
21
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: November 12, 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)
22
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
12(A) Computation of Ratio of Earnings to Fixed Charges
31.1 Certification By The Chief Executive Officer Pursuant To
Section 302 Of The Sarbanes-Oxley Act Of 2002
31.2 Certification By The Chief Financial Officer Pursuant To
Section 302 Of The Sarbanes-Oxley Act Of 2002
32.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18.
U.S.C. 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
23