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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934 For the Quarterly Period Ended December 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 February 6, 2004,
11,218,232 shares of its $.01 par value Common Stock.
1
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - December 27, 2003 and June
28, 2003 3
Consolidated Statements of Income - Thirteen weeks ended
December 27, 2003 and December 28, 2002 and Twenty-six
weeks ended December 27, 2003 and December 28, 2002 4
Consolidated Statements of Cash Flows -Twenty-six weeks
ended December 27, 2003 and December 28, 2002 5
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3: Quantitative and Qualitative Disclosures About Market Risk 26
Item 4: Controls and Procedures 26
PART II OTHER INFORMATION
Item 1: Legal Proceedings 26
Item 6: Exhibits and Reports on Form 8-K 27
Signature 28
Certifications 31
2
SALTON, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 27, 2003 JUNE 28, 2003
----------------- -------------
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash $ 52,296 $ 53,102
Accounts receivable, net of allowances 342,142 198,511
Inventories 240,147 217,317
Prepaid expenses and other current assets 18,418 13,225
Prepaid income taxes - 9,606
Deferred income taxes 13,989 12,825
----------------- -------------
Total Current Assets 666,992 504,586
Property, Plant and Equipment, net 72,977 69,970
Patents and Trademarks 194,890 191,963
Cash in Escrow for Pifco Loan Notes 5,074 4,978
Goodwill 27,835 26,953
Other Assets, net 12,828 13,922
----------------- -------------
TOTAL ASSETS $ 980,596 $ 812,372
================= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit and other current debt $ 19,406 $ 27,911
Accounts payable 131,251 73,548
Accrued expenses 82,122 54,613
Income taxes payable 7,183 -
----------------- -------------
Total Current Liabilities 239,962 156,072
Non-Current Deferred Income Taxes 8,676 8,311
Senior Subordinated Notes Due 2005 125,000 125,000
Senior Subordinated Notes due 2008, including an adjustment of
$10,831 and $12,081 to the carrying value related
to interest rate swap agreements, respectively 159,769 160,896
Long Term Debt-Revolving Credit Agreement 135,119 76,119
Other Notes Payable 1,009 873
Other Long Term Liabilities 18,132 16,240
----------------- -------------
687,667 543,511
Minority Interest 20,150 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: 2004-11,194,542;
2003-11,186,905 148 148
Treasury Stock - at cost (67,019) (67,019)
Additional Paid-In Capital 96,235 96,179
Accumulated Other Comprehensive Income 4,750 (982)
Retained Earnings 238,665 225,578
----------------- -------------
Total Stockholders' Equity 272,779 253,904
----------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 980,596 $ 812,372
================= =============
See Notes to Consolidated Financial Statements.
3
SALTON, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
13 WEEKS ENDED 26 WEEKS ENDED
----------------------------- -----------------------------
December 27, December 28, December 27, December 28,
2003 2002 2003 2002
------------ ------------ ------------ ------------
(IN THOUSANDS EXCEPT SHARE DATA)
NET SALES $ 397,103 $ 339,252 $ 635,642 $ 539,304
Cost of Goods Sold 252,674 210,652 410,630 330,463
Distribution Expenses 21,051 17,225 37,451 31,125
------------ ------------ ------------ ------------
GROSS PROFIT 123,378 111,375 187,561 177,716
Selling, General and Administrative Expenses 90,514 65,023 142,306 114,317
Impairment loss on intangible asset - - - 800
------------ ------------ ------------ ------------
OPERATING INCOME 32,864 46,352 45,255 62,599
Interest Expense, net 10,333 10,627 20,011 20,634
Fair market value adjustment on derivatives - (1,009) - (742)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 22,531 36,734 25,244 42,707
Income Tax Expense 7,411 11,764 8,293 13,837
Minority Interest 2,774 - 3,864 -
------------ ------------ ------------ ------------
NET INCOME $ 12,346 $ 24,970 $ 13,087 $ 28,870
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,189,836 11,179,452 11,188,496 11,120,807
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 15,307,519 15,192,676 15,206,259 15,063,214
Net Income per Common Share: Basic $ 1.10 $ 2.23 $ 1.17 $ 2.60
Net Income per Common Share: Diluted $ 0.81 $ 1.64 $ 0.86 $ 1.92
See Notes to Consolidated Financial Statements.
4
SALTON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
26 WEEKS ENDED
------------------------------
DECEMBER 27, DECEMBER 28,
2003 2002
------------ ------------
(IN THOUSANDS EXCEPT SHARE DATA)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 13,087 $ 28,870
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Imputed interest on notes payable and other non-cash items (908) 289
Deferred income tax provision 134 281
Depreciation and amortization 10,877 8,234
Loss on disposal of equipment 63 45
Equity in net income of investee - (640)
Impairment loss on intangible asset - 800
Fair value adjustment for derivatives - (742)
Foreign currency gains and losses 344 -
Minority interest 3,864 -
Changes in assets and liabilities:
Accounts receivable (138,159) (67,603)
Inventories (18,911) (4,098)
Prepaid expenses and other current assets (4,333) (4,123)
Accounts payable 55,540 70,113
Taxes payable 16,440 13,471
Accrued expenses 21,900 14,037
------------ ------------
NET CASH FROM OPERATING ACTIVITIES (40,062) 58,934
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,058) (10,378)
Increase in other non-current assets (372) 160
Additional payment for patents and trademarks (21,666) (22,248)
------------ ------------
NET CASH FROM INVESTING ACTIVITIES (31,096) (32,466)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit and other debt 70,976 10,000
Repayment of long-term debt (429) (4,823)
Proceeds from termination of Swap transaction - 8,058
Costs associated with refinancing (575) (88)
Common stock issued 42 25
------------ ------------
NET CASH FROM FINANCING ACTIVITIES 70,014 13,172
------------ ------------
Effect of Exchange Rate Changes on Cash 338 (280)
------------ ------------
Net Change in Cash (806) 39,360
Cash, Beginning of Period 53,102 31,055
------------ ------------
Cash, End of Period $ 52,296 $ 70,415
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid (Received) During the Period for:
Interest $ 19,018 $ 19,087
Income taxes, net of (refunds) $ (8,376) $ 4,093
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In the quarter ended December 27, 2003, the Company incurred a capital lease
obligation of $705.
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.
13 WEEKS ENDED 26 WEEKS ENDED
DECEMBER 28, 2002 DECEMBER 28, 2002
----------------- -----------------
(In thousands except share data)
Revenues $ 377,199 $ 603,384
Net income $ 25,125 $ 29,163
Earnings per share:
Basic $ 2.25 $ 2.62
Diluted $ 1.65 $ 1.94
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 December 27, 2003 and December 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 1,155,070 shares
and 1,241,802 shares of common stock at a price range of $13.92 to $37.00
per share were outstanding at December 27, 2003 and December 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 December 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."
13 WEEKS ENDED 26 WEEKS ENDED
-------------------------- --------------------------
December 27, December 28, December 27, December 28,
2003 2002 2003 2002
------------ ------------ ------------ ------------
(In thousands except share data)
Net income - as reported $ 12,347 $ 24,970 $ 13,087 $ 28,870
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related taxes 427 499 854 998
------------ ------------ ------------ ------------
Net income - pro forma $ 11,920 $ 24,471 $ 12,233 $ 27,872
============ ============ ============ ============
Earnings per share - basic
As reported $ 1.10 $ 2.23 $ 1.17 $ 2.60
Pro forma 1.07 2.19 1.09 2.51
Earnings per share - diluted
As reported $ 0.81 $ 1.64 $ 0.86 $ 1.92
Pro forma 0.78 1.61 0.80 1.85
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 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 and the South Africa rand to
the U.S. dollar.
7
All foreign exchange contracts have been recorded on the balance sheet
within accrued expenses at a fair value of $7.1 million. The change in the
fair value of contracts in the second quarter was $6.1 million. This amount
was recorded in other comprehensive income net of tax. The Company
anticipates that all gains and losses in accumulated other comprehensive
income related to foreign exchange contracts will be reclassified into
earnings over the next twelve months. At December 27, 2003, the Company had
foreign exchange contracts for the purchase of 110.2 million U.S. dollars.
Contracts for the purchase of 82.6 million U.S. dollars were entered into
during the second 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 December 27, 2003 and December 28, 2002,
components of other comprehensive income include foreign currency
translation adjustments of $8.3 million and $7.4 million, respectively and
derivative liability adjustments of $(5.2) million and $0.2 million,
respectively. For the twenty-six weeks ended December 27, 2003 and December
28, 2002, components of other comprehensive income include foreign currency
translation adjustments of $10.9 million and $8.4 million, respectively and
derivative liability adjustments of $(5.2) million and $0.2 million,
respectively.
13 Weeks Ended 26 Weeks Ended
------------------------ ------------------------
12/27/2003 12/28/2002 12/27/2003 12/28/2002
---------- ---------- ---------- ----------
(In thousands)
Net Income $ 12,347 $ 24,970 $ 13,087 $ 28,870
Other Comprehensive Income 3,104 7,568 5,732 8,584
---------- ---------- ---------- ----------
Comprehensive Income $ 15,451 $ 32,538 $ 18,819 $ 37,454
========== ========== ========== ==========
Accumulated other comprehensive income is comprised of the following:
As Of
----------------------
12/27/2003 6/28/2003
---------- ---------
(In thousands)
Minimum Pension Liability $ (12,686) $ (12,072)
Derivative Liability (5,962) (649)
Foreign Currency Translation 23,398 11,739
---------- ---------
$ 4,750 $ (982)
========== =========
7. GOODWILL AND OTHER INTANGIBLE ASSETS
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
the Company discontinued the amortization of goodwill and indefinite lived
intangible assets. Goodwill and intangible assets that are not amortized
are subject to assessment for impairment by applying a fair-value based
test on an annual basis or more frequently if circumstances indicate a
potential impairment.
The Company had approximately $27.8 million of goodwill and $194.9 million
of intangible assets with indefinite lives recorded in its consolidated
balance sheet at the end of the second quarter. The intangible assets with
indefinite lives consist primarily of trademarks. The $0.8 million increase
in goodwill and the $2.9 million increase in patents and trademarks since
June 28, 2003 is primarily attributed to foreign currency translation.
8. 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.
8
Major Customers - One customer accounted for 11.5% of total net sales
during the second quarter of fiscal 2004. During the same period in fiscal
2003, one customer accounted for 16.9% of net sales while another customer
accounted for 11.5% of net sales. For the first half of fiscal 2004, no one
customer accounted for more than 10.0% of net sales. During the first half
of fiscal 2003, one customer accounted for 15.1% while another customer
accounted for 11.8% of net sales.
9. 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 had not infringed the alleged trade
secret rights of Philips and had 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 denied each of these
allegations. Philips sought 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. On January 5, 2004,
the Court dismissed the action for failure to join E&E and suggested that
the matter should be litigated in the courts of Hong Kong. Philips has
appealed the Court's decision to the United States Court of Appeals for the
Seventh Circuit. A decision on this appeal is not expected for a number of
months.
In view of the District Court's ruling, the Company sought and obtained the
consent of E&E to join in the action previously filed by Philips in Hong
Kong in May 2003, against E&E, alone. That Hong Kong suit alleges that E&E
misappropriated trade secrets, infringed intellectual property and breached
its contract with Philips in the process of developing and manufacturing
the One:One coffee maker for Salton. Although Salton sought the same
consent from Philips, on January 30, 2004, it refused to consent to the
Company's joinder. The Company is preparing papers to force intervention.
On January 6, 2004, Philips filed a new action in the United States
District Court for the Northern District of Illinois against the Company
alleging violations of U.S. Copyright Law seeking to enjoin the Company
from selling the One:One coffee maker and any monetary damages that the
Court deems proper. Contemporaneously, Philips sought a preliminary
injunction. On January 30, 2004, the Court dismissed Philips' new action on
the grounds that it was barred by the Court's dismissal decision in the
prior action.
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
10. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION
The payment obligations of the Company under the senior secured revolving
credit facility and the 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).
10
CONSOLIDATING BALANCE SHEET AS OF DECEMBER 27, 2003
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
-------- ------------ ------------ --------- ------------ ------------ ------------
ASSETS
Current Assets:
Cash $ 2 $ 13,294 $ - $ 13,296 $ 39,000 $ - $ 52,296
Accounts receivable, net of allowances 377 183,426 - 183,803 158,339 - 342,142
Inventories 9,153 190,530 (40,759) 158,924 81,923 (700) 240,147
Prepaid expenses and other current assets 3,855 4,553 - 8,408 10,010 - 18,418
Intercompany 177,146 (173,105) (422) 3,619 (3,619) - -
Deferred income taxes 1,939 6,773 - 8,712 5,277 - 13,989
-------- ------------ ------------ --------- ------------ ------------ ------------
Total Current Assets 192,472 225,471 (41,181) 376,762 290,930 (700) 666,992
Property, Plant and Equipment, 13,987 18,537 - 32,524 40,453 - 72,977
Investments in Subsidiaries 458,938 53,694 (512,632) - - -
Patents and Trademarks 140,398 16,362 - 156,760 38,130 - 194,890
Cash in Escrow for Pifco Loan Notes - - - - 5,074 - 5,074
Goodwill - 18,093 - 18,093 9,742 - 27,835
Other Assets, net 10,022 117 10,139 2,689 - 12,828
-------- ------------ ------------ --------- ------------ ------------ ------------
Total Assets $815,817 $ 332,274 $ (553,813) $ 594,278 $ 387,018 $ (700) $ 980,596
======== ============ ============ ========= ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current debt $ 1,375 $ 758 $ - $ 2,133 $ 17,273 $ - $ 19,406
Accounts payable 825 6,029 (250) 6,604 124,647 - 131,251
Accrued expenses 16,307 15,770 - 32,077 50,045 - 82,122
Income taxes payable (10,780) 5,366 - (5,414) 12,597 7,183
-------- ------------ ------------ --------- ------------ ------------ ------------
Total current liabilities 7,727 27,923 (250) 35,400 204,562 - 239,962
Non-current Deferred Income Taxes 3,899 (663) - 3,236 5,440 - 8,676
Senior subordinated notes due 2005 125,000 - - 125,000 - - 125,000
Senior subordinated notes due 2008,
including an adjustment of $10,831 to the
carrying value related to interest rate
swap agreements 159,769 - - 159,769 - - 159,769
Long Term Debt-Revolving Credit Agreement - 135,119 - 135,119 - - 135,119
Other Notes Payable - 392 - 392 617 - 1,009
Other Long Term Liability - 5,544 - 5,544 12,588 - 18,132
-------- ------------ ------------ --------- ------------ ------------ ------------
Total liabilities 296,395 168,315 (250) 464,460 223,207 - 687,667
Minority interest - - - - 20,150 - 20,150
Stockholders' Equity 519,422 163,959 (553,563) 129,818 143,661 (700) 272,779
-------- ------------ ------------ --------- ------------ ------------ ------------
Total Liabilities and Stockholders' Equity $815,817 $ 332,274 $ (553,813) $ 594,278 $ 387,018 $ (700) $ 980,596
======== ============ ============ ========= ============ ============ ============
11
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
======== ============ ============ ========= ============ ============ ============
12
CONSOLIDATING STATEMENT OF INCOME FOR THE THIRTEEN WEEKS ENDED DECEMBER 27, 2003
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
-------- ------------ ------------ --------- ------------ ------------ ------------
Net Sales $ 94,317 $ 265,320 $ (152,655) $ 206,982 $ 289,853 $ (99,732) $ 397,103
Cost of Goods Sold 72,454 221,949 (155,770) 138,633 211,573 (97,532) 252,674
Distribution Expenses - 12,859 - 12,858 8,192 - 21,051
-------- ------------ ------------ --------- ------------ ------------ ------------
Gross Profit 21,863 30,512 3,115 55,491 70,088 (2,200) 123,378
Selling, General and Administrative
expenses 14,139 37,508 - 51,648 40,367 (1,500) 90,514
-------- ------------ ------------ --------- ------------ ------------ ------------
Operating Income (Loss) 7,724 (6,996) 3,115 3,843 29,721 (700) 32,864
Interest Expense, Net 6,933 1,571 - 8,503 1,829 - 10,333
(Income) loss from subsidiary (10,177) 216 9,961 - - - -
-------- ------------ ------------ --------- ------------ ------------ ------------
Income (Loss) Before Income Taxes 10,968 (8,783) (6,846) (4,660) 27,892 (700) 22,531
Income Tax (Benefit) Expense 1,252 (1,274) - (22) 7,433 - 7,411
Minority interest - - 2,774 - 2,774
-------- ------------ ------------ --------- ------------ ------------ ------------
Net Income (Loss) $ 9,716 $ (7,508) $ (6,846) $ (4,638) $ 17,685 $ (700) $ 12,346
======== ============ ============ ========= ============ ============ ============
CONSOLIDATING STATEMENT OF INCOME FOR THE THIRTEEN WEEKS ENDED DECEMBER 28, 2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
-------- ------------ ------------ --------- ------------ ------------ ------------
Net Sales $ 90,612 $ 327,405 $ (167,059) $ 250,958 $ 176,765 $ (88,471) $ 339,252
Cost of Goods Sold 63,623 268,644 (178,799) 153,468 144,155 (86,971) 210,652
Distribution Expenses - 13,748 - 13,748 3,477 - 17,225
-------- ------------ ------------ --------- ------------ ------------ ------------
Gross Profit 26,989 45,013 11,740 83,742 29,133 (1,500) 111,375
Selling, General and Administrative
expenses 15,010 29,825 - 44,835 21,688 (1,500) 65,023
-------- ------------ ------------ --------- ------------ ------------ ------------
Operating Income 11,979 15,188 11,740 38,907 7,445 - 46,352
Interest Expense, Net 7,713 1,687 - 9,400 1,227 - 10,627
Fair Market Value Adjustment on
Derivatives - - - (1,009) (1,009)
(Income) Loss from Subsidiaries (10,176) 281 9,895 - - - -
-------- ------------ ------------ --------- ------------ ------------ ------------
Income Before Income Taxes 14,442 13,220 1,845 29,507 7,227 - 36,734
Income Tax Expense 1,493 5,766 - 7,259 4,505 - 11,764
-------- ------------ ------------ --------- ------------ ------------ ------------
Net Income $ 12,949 $ 7,454 $ 1,845 $ 22,248 $ 2,722 $ - $ 24,970
======== ============ ============ ========= ============ ============ ============
13
CONSOLIDATING STATEMENT OF INCOME FOR THE TWENTY-SIX WEEKS ENDED DECEMBER 27,
2003
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
-------- ------------ ------------ --------- ------------ ------------ ------------
Net Sales $166,957 $ 441,197 $ (273,429) $ 334,725 $ 496,680 $ (195,763) $ 635,642
Cost of Goods Sold 128,352 373,004 (272,346) 229,010 373,683 (192,063) 410,630
Distribution Expenses - 23,840 23,840 13,611 - 37,451
-------- ------------ ------------ --------- ------------ ------------ ------------
Gross Profit 38,605 44,353 (1,083) 81,875 109,386 (3,700) 187,561
Selling, General and Administrative
expenses 25,385 60,827 - 86,212 59,094 (3,000) 142,306
-------- ------------ ------------ --------- ------------ ------------ ------------
Operating Income (Loss) 13,220 (16,474) (1,083) (4,337) 50,292 (700) 45,255
Interest Expense, Net 14,166 2,486 - 16,652 3,359 - 20,011
(Income) loss from subsidiary (16,091) 608 15,483 - - - -
-------- ------------ ------------ --------- ------------ ------------ ------------
Income (Loss) Before Income Taxes 15,145 (19,568) (16,566) (20,989) 46,933 (700) 25,244
Income Tax (Benefit) Expense 883 (4,113) - (3,230) 11,523 8,293
Minority interest - - - - 3,864 3,864
-------- ------------ ------------ --------- ------------ ------------ ------------
Net Income (Loss) $ 14,262 $ (15,455) $ (16,566) $ (17,759) $ 31,546 $ (700) $ 13,087
======== ============ ============ ========= ============ ============ ============
CONSOLIDATING STATEMENT OF INCOME FOR THE TWENTY-SIX WEEKS ENDED DECEMBER 28,
2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
-------- ------------ ------------ --------- ------------ ------------ ------------
Net Sales $218,094 $ 561,244 $ (386,439) $ 392,899 $ 339,695 $ (193,290) $ 539,304
Cost of Goods Sold 125,052 450,821 (327,083) 248,790 271,963 (190,290) 330,463
Distribution Expenses - 25,608 - 25,608 5,517 - 31,125
-------- ------------ ------------ --------- ------------ ------------ ------------
Gross Profit 93,042 84,815 (59,356) 118,501 62,215 (3,000) 177,716
Selling, General and Administrative
expenses 30,044 56,562 (425) 86,181 31,136 (3,000) 114,317
Intangible impairment Loss 800 - - 800 - - 800
-------- ------------ ------------ --------- ------------ ------------ ------------
Operating Income 62,198 28,253 (58,931) 31,520 31,079 - 62,599
Interest Expense, Net 14,972 3,412 - 18,384 2,250 - 20,634
Fair Market Value Adjustment on
Derivatives - - - (742) (742)
(Income) Loss from Subsidiaries (42,545) 448 42,097 - - - -
-------- ------------ ------------ --------- ------------ ------------ ------------
Income (Loss) Before Income Taxes 89,771 24,393 (101,028) 13,136 29,571 - 42,707
Income Tax Expense 2,417 5,672 - 8,089 5,748 - 13,837
-------- ------------ ------------ --------- ------------ ------------ ------------
Net Income (Loss) $ 87,354 $ 18,721 $ (101,028) $ 5,047 $ 23,823 $ - $ 28,870
======== ============ ============ ========= ============ ============ ============
14
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED DECEMBER
27, 2003
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
-------- ------------ ------------ --------- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 14,262 $ (15,455) $ (16,566) $ (17,759) $ 31,546 $ (700) $ 13,087
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Imputed interest on notes payable and
other non-cash items (1,127) - - (1,127) 219 - (908)
Deferred income tax provision - - - - 134 - 134
Foreign currency gains and losses - 344 - 344 - - 344
Depreciation and amortization 4,805 1,877 - 6,682 4,195 10,877
Loss on disposal of equipment - - - - 63 - 63
Equity in net income of unconsolidated
affiliate/consolidated subsidiaries (16,090) 607 15,483 - - - -
Minority interest - - - - 3,864 - 3,864
Changes in assets and liabilities: -
Accounts receivable (312) (55,881) - (56,193) (81,966) - (138,159)
Inventories (7,046) (3,449) 1,083 (9,412) (10,199) 700 (18,911)
Prepaid expenses and other current
assets (496) (596) - (1,092) (3,241) - (4,333)
Accounts payable 878 795 - 1,673 53,867 - 55,540
Taxes payable 16,417 (5,127) - 11,290 5,150 - 16,440
Accrued expenses 12,382 24,614 - 36,996 (15,096) - 21,900
-------- ------------ ------------ --------- ------------ ------------ ------------
NET CASH FROM OPERATING ACTIVITIES 23,673 (52,271) - (28,598) (11,464) - (40,062)
-------- ------------ ------------ --------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,472) (1,983) - (3,455) (5,603) - (9,058)
Increase in other non-current assets - 6 - 6 (378) - (372)
Additional payment for patents and
trademarks (21,666) - - (21,666) - - (21,666)
-------- ------------ ------------ --------- ------------ ------------ ------------
NET CASH FROM INVESTING ACTIVITIES (23,138) (1,977) - (25,115) (5,981) - (31,096)
-------- ------------ ------------ --------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of
credit and other debt - 59,000 - 59,000 11,976 - 70,976
Repayment of long-term debt - (429) - (429) - - (429)
Costs associated with refinancing (575) - - (575) - - (575)
Common stock issued 42 - - 42 - - 42
-------- ------------ ------------ --------- ------------ ------------ ------------
NET CASH FROM FINANCING ACTIVITIES (533) 58,571 - 58,038 11,976 - 70,014
-------- ------------ ------------ --------- ------------ ------------ ------------
Effect of Exchange Rate Changes on Cash - - - - 338 - 338
-------- ------------ ------------ --------- ------------ ------------ ------------
Net Change in Cash 2 4,323 - 4,325 (5,131) - (806)
Cash, Beginning of Period - 8,971 - 8,971 44,131 - 53,102
-------- ------------ ------------ --------- ------------ ------------ ------------
Cash, End of Period $ 2 $ 13,294 $ - $ 13,296 $ 39,000 $ - $ 52,296
======== ============ ============ ========= ============ ============ ============
15
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED DECEMBER
28, 2002
(IN THOUSANDS)
GUARANTOR OTHER CONSOLIDATED CONSOLIDATED
PARENT SUBSIDIARIES ELIMINATIONS TOTAL SUBSIDIARIES ELIMINATIONS TOTALS
-------- ------------ ------------ --------- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 87,354 $ 18,721 $ (101,028) $ 5,047 $ 23,823 $ - $ 28,870
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Imputed interest on notes payable and
other non-cash items 61 - - 61 228 - 289
Deferred income tax provision - - - - 281 281
Depreciation and amortization 4,238 1,773 - 6,011 2,223 - 8,234
Loss on disposal of equipment - - - - 45 - 45
Equity in net income of unconsolidated
affiliate/consolidated subsidiaries (42,545) 448 42,097 - (640) - (640)
Impairment loss on intangible asset 800 - - 800 - - 800
Fair value adjustment for derivatives - - - - (742) (742)
Changes in assets and liabilities: - -
Accounts receivable 774 (41,854) - (41,080) (26,523) - (67,603)
Inventories (9,967) (48,060) 58,931 904 (5,002) - (4,098)
Prepaid expenses and other current
assets 2,071 (3,904) - (1,833) (2,290) - (4,123)
Intercompany (16,817) 47,081 - 30,264 (30,264) - -
Accounts payable (14,704) 20,340 - 5,636 64,477 - 70,113
Taxes payable 6,215 5,514 - 11,729 1,742 - 13,471
Accrued expenses (1,731) 4,731 - 3,000 11,037 - 14,037
-------- ------------ ------------ --------- ------------ ------------ ------------
NET CASH FROM OPERATING ACTIVITIES 15,749 4,790 - 20,539 38,395 - 58,934
-------- ------------ ------------ --------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (989) (1,737) - (2,726) (7,652) - (10,378)
Increase in other non-current assets (250) - - (250) 410 - 160
Additional payment for patents and
trademarks (22,248) - - (22,248) - - (22,248)
-------- ------------ ------------ --------- ------------ ------------ ------------
NET CASH FROM INVESTING ACTIVITIES (23,487) (1,737) - (25,224) (7,242) - (32,466)
-------- ------------ ------------ --------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of
credit and other debt - 10,000 - 10,000 - - 10,000
Repayment of long-term debt - (4,823) - (4,823) - - (4,823)
Proceeds from termination of swap
transaction 8,058 - - 8,058 - - 8,058
Costs associated with refinancing (88) - - (88) - - (88)
Common stock issuance 25 - - 25 - - 25
-------- ------------ ------------ --------- ------------ ------------ ------------
NET CASH FROM FINANCING ACTIVITIES 7,995 5,177 - 13,172 - - 13,172
-------- ------------ ------------ --------- ------------ ------------ ------------
Effect of Exchange Rate Changes on Cash (3,059) - - (3,059) 2,779 - (280)
-------- ------------ ------------ --------- ------------ ------------ ------------
Net Change in Cash (2,802) 8,230 - 5,428 33,932 - 39,360
Cash, Beginning of Period 2,797 7,931 - 10,728 20,327 - 31,055
-------- ------------ ------------ --------- ------------ ------------ ------------
Cash, End of Period $ (5) $ 16,161 $ - $ 16,156 $ 54,259 $ - $ 70,415
======== ============ ============ ========= ============ ============ ============
16
11. SUBSEQUENT EVENT
The Company entered into an amendment, dated as of February 4, 2004, to the
senior revolving credit facility, which among other things waived the
Company's compliance with a consolidated fixed charge coverage ratio for
the fiscal months ending December 27, 2003 and January 31, 2004.
17
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 began
shipping in the second quarter of fiscal 2004.
BASIS FOR PRESENTATION
The consolidated financial statements for the thirteen weeks ended December
27, 2003 ("second quarter of 2004") and twenty-six weeks ended December 27,
2003 ("first half of 2004") 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
December 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 second quarter of 2003 and first half 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.
18
The following critical accounting policies required 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 December 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.
19
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
$27.8 million of goodwill.
QUARTER IN REVIEW
Salton revenues were up due to the continued expansion of the Company's
international operations. Planned product acquisition cost improvements
increased profitability from the prior trended quarter while new product
launches and geographic expansion pushed selling, general and
administrative expenses up.
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
----------------------------
DECEMBER 27, DECEMBER 28,
2003 2002
------------ ------------
Net sales 100.0% 100.0%
Cost of goods sold 63.6 62.1
Distribution expenses 5.3 5.1
------------ ------------
Gross profit 31.1% 32.8%
Selling, general and administrative expense 22.8 19.2
------------ ------------
Operating income 8.3% 13.6%
============ ============
SECOND QUARTER FISCAL 2004 COMPARED TO SECOND QUARTER FISCAL 2003
NET SALES AND GROSS PROFIT
Salton's net sales for the thirteen weeks ended December 27, 2003 were
$397.1 million. This represented an increase in revenues of 17.0% compared
to $339.3 million in the same period in 2003. This increase was primarily
from the Company's inclusion of AMAP as a result of our increased ownership
interest, as well as approximately $11.3 million of increased sales in the
international market and $10.0 million in exchange rate fluctuations. While
sales of George Foreman products declined in the domestic market, sales of
George Foreman have shown increases internationally. During the calendar
year 2004, the Company expects to launch several new products domestically
and overseas. Globally, sales were negatively impacted by shortages from
our key suppliers as a result of their transition to new factories which
drove lower product costs. The circumstances surrounding the product
shortages have subsequently been resolved.
20
Gross profit, as a percent of net sales, was 31.1% in second quarter of
2004 as compared to 32.8% in second quarter of 2003. Gross profit has
approached normalized levels as a result of ongoing price reductions across
brands introduced in advance of cost reductions. However, the inclusion of
AMAP brings substantially lower margins due to the nature of their business
in the electronics industry.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to 22.8% of net
sales or $90.5 million in the second quarter of 2004 compared to 19.2% of
net sales or $65.0 million for the second quarter of 2003. The increase was
global with nearly $17.0 million of increases driven primarily by
advertising and other promotions for new product initiatives, as well as
the expansion into new territories for products including George Foreman,
Westinghouse Unplugged and One:One single-cup pod-operated coffee maker. In
addition, the inclusion of AMAP also contributed to the increases.
NET INTEREST EXPENSE
Net interest expense was $10.3 million for the second quarter of 2004
compared to $10.6 million in the second quarter of 2003. Our rate of
interest on amounts outstanding under the revolver, term loan and senior
subordinated debt was a weighted average annual rate of 9.0% in the second
quarter of 2004 compared to 8.1% in the same period in 2003. 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 $427.7 million
for the second quarter of 2004 compared to $470.8 million for the same
period in 2003.
INCOME TAXES
Income tax expense was $7.4 million in the second quarter of 2004 as
compared to income tax expense of $11.8 million in the same period in 2003.
The effective tax rate for federal, state and foreign income taxes was
approximately 32.9% for the second quarter of 2004 versus approximately
32.0% for the second quarter of 2003.
21
FIRST HALF IN REVIEW
Salton's international expansion increased net sales by 17.9% despite a
14.8% decline in domestic revenues. Planned product acquisition cost
improvements were also a key driver in Salton's return to more normalized
margins.
RESULTS OF OPERATIONS
The following table sets forth our results of operations as a percentage of
net sales for the periods indicated:
26 WEEKS ENDED
----------------------------
DECEMBER 27, DECEMBER 28,
2003 2002
------------ ------------
Net sales 100.0% 100.0%
Cost of goods sold 64.6 61.3
Distribution expenses 5.9 5.8
------------ ------------
Gross profit 29.5% 32.9%
Selling, general and administrative expense 22.4 21.2
------------ ------------
Operating income 7.1% 11.7%
============ ============
FIRST HALF FISCAL 2004 COMPARED TO FIRST HALF FISCAL 2003
NET SALES AND GROSS PROFIT
Salton's net sales for the twenty-six weeks ended December 27, 2003 were
$635.6 million. This represented an increase in revenues of 17.9% compared
to $539.3 million for the same period in 2003. This increase was primarily
from the Company's inclusion of sales from AMAP as a result of our
increased ownership interest. The effect of foreign exchange rate
fluctuations accounted for nearly $12.8 million of the increases in net
sales during the first half of 2004. In addition, our strong portfolio of
brand names contributed to our success internationally with $11.5 million
in increased sales overseas.
Gross profit in first half of 2004 increased to $187.6 million compared to
$177.7 million. As a percent of net sales, gross profit decreased from
32.9% in the first half of 2003 to 29.5% of net sales in the first half of
2004. The percentage decline 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 increased to 22.4% of net
sales or $142.3 million in first half of 2004 compared to 21.2% of net
sales or $114.3 million for first half of 2003. The increase in dollars is
primarily due to global advertising increases for the launch of several new
product lines and the entry into new territories and the inclusion of AMAP.
NET INTEREST EXPENSE
Net interest expense was $20.0 million for the first half of fiscal 2004
compared to $20.6 million in the first half 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 9.2% in the first
half of fiscal 2004 compared to 8.3% 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 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
$409.3 million for the first half of fiscal 2004 compared to $468.1 million
for the same period in fiscal 2003.
22
INCOME TAXES
Income tax expense was $8.3 million in the first half of fiscal 2004 as
compared to income tax expense of $13.8 million in the same period in
fiscal 2003. The effective tax rate for federal, state and foreign income
taxes was approximately 32.9% for the first half of fiscal 2004 versus
approximately 32.4% for the first half of fiscal 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 half of fiscal 2004, we used net cash of $40.1 million in operating
activities and $31.1 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. 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. Foreign currency fluctuations between exchange rates
used for local financial reporting and the U.S. dollar have had a favorable
impact on our results of operations in the first half of fiscal 2004.
Salton Europe and AMAP currently use 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 and the South Africa Rand against United States dollars.
We incurred approximately $9.1 million for capital expenditures during the
first half of 2004, and we expect to incur an aggregate of approximately
$20.0 million for fiscal 2004.
REVOLVING CREDIT FACILITY
Our senior secured revolving credit facility is provided by a syndicate of
banks and other financial institutions, including Wachovia Bank, National
Association, as agent, Bank of America, N.A., as the syndication agent and
documentation agent, and Bank of America Securities LLC and Wachovia
Securities, Inc., as co-arrangers and co-book runners. The senior secured
revolving credit facility, which has a final maturity date of April 30,
2007, provides us with the ability to borrow up to $275.0 million
(including $10.0 million for letters of credit).
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.
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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 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.
If we fail to comply with various operational and other covenants under our
senior secured revolving facility or any of our other debt instruments,
including our senior subordinated notes discussed below, the holders of the
defaulted debt could cause all amounts outstanding with respect to that
debt to be due and payable immediately. We cannot assure you that our
assets or cash flow would be sufficient to fully repay borrowings under our
outstanding debt instruments, either upon maturity or if accelerated upon
an event of default. If we are unable to do so, we may be required to
refinance all or a portion of our existing debt, sell assets or obtain
additional financing. We cannot assure that any refinancing would be
available or that any sales of assets or additional financing could be
obtained.
We entered into an amendment dated as of February 4, 2004 to our senior
secured revolving credit facility, which among other things, waived our
compliance with a consolidated fixed charge coverage ratio for the fiscal
months ending December 27, 2003 and January 31, 2004. If, in the future, we
are required to obtain similar amendments, we cannot assure you that those
amendments would be available on commercially reasonable terms, or at all.
As of December 27, 2003, we had borrowings of approximately $135.1 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 December
27, 2003, we had approximately $43.0 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 3.9%
at December 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 0.5%, and totals 4.5% at December
27, 2003.
The senior secured revolving credit facility is secured by all of our
tangible and intangible assets and all of the tangible and intangible
assets of our domestic subsidiaries and a pledge of the capital stock of
our domestic subsidiaries and 65.0% of the capital stock of certain of our
foreign subsidiaries. The senior secured revolving credit facility is
unconditionally guaranteed by each of our direct and indirect domestic
subsidiaries.
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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 $10.8 million related to the fair value of
interest rate swap agreements that have been monetized).
Our senior subordinated notes are general unsecured obligations and are
subordinated to all our current and future senior debt, including all
borrowings under our senior secured revolving credit facility. The
subordinated notes rank equally with all our other existing and future
senior subordinated indebtedness.
Our current and future domestic restricted subsidiaries jointly and
severally guarantee our payment obligations under the senior subordinated
notes on a senior subordinated basis. The guarantees rank junior to all
senior debt of the guarantors (including guarantees under our senior
secured revolving credit facility) and equally with all other senior
subordinated indebtedness of the guarantors.
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.
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 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. In addition, we may incur
additional debt, or may issue debt or equity securities, to finance our
operations and/or repay or refinance our senior subordinated notes due
2005. The availability and attractiveness of any outside sources of
financing will depend on a number of factors, some of which relate to our
financial conditions and performance, and some of which are beyond our
control, such as prevailing interest rates and general economic conditions.
We cannot assure you additional financing will be available, or if
available, that it will be on terms we find acceptable.
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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 $7.1 million classified within accrued expenses. The change
in the fair value of contracts in the second quarter that qualify as
foreign currency cash flow hedges and are highly effective was $6.1
million. The Company anticipates that all gains and losses in accumulated
other comprehensive income related to foreign exchange contracts will be
reclassified into earnings over the next twelve months. At December 27,
2003, the Company had foreign exchange contracts for the purchase of 110.2
million U.S. dollars. Contracts for the purchase of 82.6 million U.S.
dollars were entered into during the second 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.
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 had not infringed the alleged trade
secret rights of Philips and had not tortiously interfered with the
contractual relationship between Philips and E&E.
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On October 23, 2003, Philips filed a counterclaim reiterating the
allegations in its letter to the Company. The Company denied each of these
allegations. Philips sought 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. On January 5, 2004,
the Court dismissed the action for failure to join E&E and suggested that
the matter should be litigated in the courts of Hong Kong. Philips has
appealed the Court's decision to the United States Court of Appeals for the
Seventh Circuit. A decision on this appeal is not expected for a number of
months.
In view of the District Court's ruling, the Company sought and obtained the
consent of E&E to join in the action previously filed by Philips in Hong
Kong in May 2003, against E&E, alone. That Hong Kong suit alleges that E&E
misappropriated trade secrets, infringed intellectual property and breached
its contract with Philips in the process of developing and manufacturing
the One:One coffee maker for Salton. Although Salton sought the same
consent from Philips, on January 30, 2004, it refused to consent to the
Company's joinder. The Company is preparing papers to force intervention.
On January 6, 2004, Philips filed a new action in the United States
District Court for the Northern District of Illinois against the Company
alleging violations of US Copyright Law seeking to enjoin the Company from
selling the One:One coffee maker and any monetary damages that the Court
deems proper. Contemporaneously, Philips sought a preliminary injunction.
On January 30, 2004, the Court dismissed Philips' new action on the grounds
that it was barred by the Court's dismissal decision in the prior action.
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 February 10, 2004 reporting under
Item 12, Results of Operations and Financial Condition, our results of
operations for the second quarter of fiscal 2004 and an amendment to the
senior secured credit facility.
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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: February 10, 2004 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)
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
10.40 First Amendment to Credit Agreement dated as of February 4,
2004 by and among Salton, Inc., Toastmaster Inc., Salton
Toastmaster Logistics LLC, each of Salton's Subsidiaries
that are signatories thereto as Guarantors, the Lenders
that are signatories thereto and Wachovia Bank, National
Association in its capacity as Administrative Agent for the
Lenders (incorporated by reference in the Registrant's
Current Report on Form 8-K, dated February 10, 2004).
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 Senior Financial Officer Pursuant To
Section 302 Of The Sarbanes-Oxley Act Of 2002
32.1 Certification of Principal 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 The Senior Financial Officer Pursuant to
18. U.S.C. 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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